The Ukraine: Cyberspace Periphery or Rich Ground for Investment?

Sergey Y. YURISH <>
Institute of Computer Technologies


This paper analyzes the Internet situation and investment climate in the Ukraine. Objective and subjective obstacles in Internet growth are considered. Ways to overcome obstacles in developing the Internet in the Ukraine are offered. It is shown that the guarantee of successful investments in information technologies and development of the Internet in the Ukraine consists in allowing for concrete features of the national economy.


1. Introduction

Integration of the New Independent State (NIS) -- the Ukraine -- into the world community is fundamental to progress toward developing strong democratic institutions. Appropriate information and communications infrastructures are the key to this process. In the near future, the Internet will make a significant contribution to the quality of life in the Ukraine as well as to the integration process of the Ukraine into the European Community. This is the reason why the progress of the Net in this country deserves careful study and consideration. Growth of the Internet in a nation depends upon determining factors, including the availability of a telecommunication infrastructure; networking technicians and trained, demanding users; networking and end-user hardware; and an interested, supportive government [1].

It is known that investments in information technologies, especially in the Internet, have great benefit. As it was considered in [2] "... Investments in the Internet-related companies had the highest rate of growth of any industry segment. The Internet dollar investments increased 103 percent, versus 27 percent for all other industries including other high technology investments. In terms of number of companies, the Internet segment was up 61 percent compared to 26 percent for all other industries. Clearly, the Internet is one of the key drivers of investment growth overall."

However, the investment processes in the Internet in the Ukraine are developing slowly because of objective and subjective reasons. Unfortunately, the Internet in the Ukraine is still not attractive to foreign investors in comparison with others sectors of the Ukrainian economy. Therefore, objective analysis of the investment climate for Internet development in the Ukraine, objective and subjective obstacles to its growth, and ways of overcoming it are the guarantee of successful investments.

2. The realities

The Internet in the Ukraine formed spontaneously and chaotically under self-organizing laws. It was developed by young enthusiasts who now head well-known Ukrainian Internet service companies. Today they are officially recognized, registered in 1998 by ISP RIPE NCC, the large Internet service provider (ISP): Lucky Net, working in the Internet service market from 1994; six companies having the "medium" status; and nine having the "small" status [3]. In less than two years, the total number of ISPs has approximately doubled (107 ISPs in March 1998). Today, there are about 200 subproviders directly operating through the channels, lend by the Ukrainian large, mentioned above. The hierarchy structure of the Internet in the Ukraine is shown in figure 1.

Figure 1. Hierarchy structure of the Internet in the Ukraine

Consequently, the price for Internet services given by such subproviders is 1.5 to 2 times higher than in large and medium ISPs.

Is this enough for a country with an area and population approximately equal to France? Certainly, it is not sufficient. In comparison, in the United Kingdom alone, there are now over 100 large and medium the Internet service providers [4]. On the basis of the marketing investigations carried out by the Ukrainian Marketing Group (UMG) [5], it was ascertained that there are 130,000 to 150,000 Internet users in the Ukraine. The major portion of them are corporative users (90,000 to 100,000); the minority part are private users (40,000 to 50,000). If one takes into account that one connection to the Internet is used by several persons, the number of the users is much higher than 850,000 to 950,000; of that 770,000 to 840,000 are corporative users, and 80,000 to 110,000 are private users (figure 2). Thirty to forty percent of all users are concentrated in the capital of the Ukraine, Kiev; outside the large cities, there are a few Internet users. The overwhelming majority of the companies (88.5 percent) use the Internet for operation in the on-line mode; the remaining11.5 percent us it in the off-line mode.

Figure 2. Market segments of Internet users in the Ukraine

Thus, one third of companies working in the off-line mode plan to be redirected to the on-line mode. On average, users put in about 15 to 20 hours per week in the Internet.

The optimal combination of cost, connection quality, and data rate is the determining factor in ISP choice [5,6] (figure 3).

Figure 3. Main determining factors at ISP choice (Published in World of Communication and Informatics, No. 4, December 1999)

What does the Ukrainian Internet user have today? First of all, they pay very high prices for Internet services. The monthly payment for the 2 MB/s channel is 50 times the cost of similar services in the United States. The dial-up service at maximum possible speed is 33.6 bps (telephone lines in the Ukraine are mainly analog, and there is also a problem of "last mile") costs at different providers from U.S.$0.50 up to $1.50 per hour, plus U.S.$0.60 per hour for the phone line connection. A few ISPs give unlimited dial-up service for U.S.$50 to $60 per month. By the way, the average monthly salary in the Ukraine does not exceed U.S.$40 today. In comparison, in the Western United States region the price for unlimited dial-up service at 56 bps is from U.S.$5.95 up to $35 per month [7,8]. In Europe, for example, the French pay U.S.$12 to $15 per month. Besides, free Internet service is spreading like wildfire across Europe. Free Internet service also now is available in France (15 free ISPs in 1999), Spain, the United Kingdom, and Germany. The market leader and most successful provider is Freeserve [4]. But all these exist in Western Europe. Let us go to the Eastern part.

The high prices prejudice not only the financial wealth of ISPs, which are obliged to limit their profit margins to offer the Internet services at a price acceptable to the consumers, but also the financial wealth of universities and other nonprofit entities, which cannot afford the international bandwidth necessary for their purposes. Now, looking back, it is already possible to analyze some mistakes. As it is known, the Internet has followed similar phases in every country where it has been introduced. In some countries, these steps have happened in very quick succession, while in others there are discrete intervals of some years between each step. As a rule, the development phase of the academic Internet will precede to the phase of the commercial Internet. However, there was an attempt to artificially speed up the commercial Internet in the Ukraine, not having finished the first phase of the Internet development at monopolization of telecommunications.

Initially, the Internet in the Ukraine was oriented for the usage of expensive European satellite channels. The first satellite antenna was set up in 1993 in the Western part of the Ukraine. It remains the only one in the city of Lviv (the capital of the Western Ukraine) and oriented to operation with the Swedish satellite. The time of financial supports and grants for the young democratic country is finished. Also, the financing of the Internet Programme in frame of George Soros Foundation was unexpectedly terminated in 1999.

Despite today's difficulties, the Ukraine has enough high-qualified personnel and human resources. Because of the specific situation in the Ukrainian software market, the prevalence of English-language content in the Internet is not a barrier to increased Internet usage in the Ukraine. Today it is an objective reality. For the last two years, the number of home computers connected to the Internet has increased considerably. The cybercafe network is growing. In the last two years the Internet phone was started its development in the Ukraine; the fiber optic trunks are established. The Internet service market in the Ukraine becomes more favorable for investments.

The Internet development in the Ukraine predominatingly depends on commercial investments because the government does not give financial assets; however, as was shown in [9], economic and social benefits in this case can be obtained. In comparison with others countries, the annual costs per capita for development of information technologies in the Ukraine are very little and do not exceed 3 EURO [10] (figure 4).

The current and likely impact of the Internet in the Ukraine is in education, business, and research (40 to 50 percent of Internet users are connected through academic institutions). We are continuing to develop a global Internet project -- the first in the Ukraine (and also in the former Soviet Union in the whole) -- the system for Creation and Dissemination of Current Research Information (CRIS) [11], which will have worldwide impact by stimulating high-technological research in modern sensors and microsystems. It is a dynamic, interactive information resource for technology transfer, inter-institutional collaboration, and public access to research information. The statistics show more than 13,000 page views during the first five months of existence.

Figure 4. Annual costs per capita for development of information technologies

If in education and research there is constantly increasing Internet usage, then it is not possible to expect the rapid development of electronic commerce in the Ukraine (at least in the Western region). Internet services of this kind are rather new in the Ukraine. A majority of users (79.3 percent) are aware of such services, and 56.3 percent of users are interested in similar services. However, one of the restrictive factors of electronic commerce development in the Ukraine is that the majority of the companies (63.5 percent) do not have their own Web site, and 33.1 percent of the companies are not even interested in creating one.

In spite of the fact that some companies spend about 10 percent of their profits on advertising, only a few have spent any money for Web sites and Web page creation.

A different situation exists in the Eastern part of the Ukraine. It is the region with more developed electronic commerce; a virtual shopping street was created in Zaporozhye [12]. The information providers attempted to create a virtual reflection of the market in the Eastern region of the Ukraine. The basic idea of the Web site is to collect in one place the information about different goods, prices, and services to allow users the possibility of placing orders and receiving invoices.

Two main barriers impair development of the Internet in the Ukraine. The first obstacle is the high price of Internet access. The second set of obstacles is lack of infrastructure and efforts to monopolize the Internet service. As a result, prices are well above those market prices available in competitive systems. There is another objective reason: The barriers are not just technological but economical and institutional. The rate of unemployment is high, and the external public debt of the country still strongly limits the government's budgetary freedom. In order to truly understand the obstacles that indirectly affect growth of the Internet in the Ukraine, one must take into account both the absence of a developed Ukrainian capital market and the high cost of credit, both of which limit growth of technology start-ups.

3. How to encourage growth of the Internet?

3.1. Organizational measures

What is necessary for successful investments in Internet development in the Ukraine?

In our opinion, it is necessary to address the following issues first of all.

Do not be oriented toward the state or large companies that have worked for a long time in the Internet service market. Focus on the small or medium enterprises (countries in Western Europe have had postive experiences in developing and supporting the SMEs). It is the most prosperous sector of the Ukrainian economy, numbering about 150,000 different companies. It is actively developing enterprises. The alternative solution is to create small and medium joint ventures.

Do not mix economics and politics. European and American investors "are intimidated" by the so-called unstable political situation in the Ukraine. It is a typical subjective reason constraining the investment process. As a new independent country, the Ukraine purposefully adopted a policy of democracy more than eight years ago, with the aim of being integrated into the European Community. The foreign mass media until now have scared away potential investors by referring to the "unstable situation."

The actual objective reason is in the initial wrong intention to suspend from "outside" by artificial means the development of high technologies in the Ukraine and to convert the country into a primitive consumer of already existing high information technologies. If it is possible with the "fourth world," such a strategy toward to one of the more highly developed countries in the former republic of the Soviet Union was an obvious mistake. Fortunately, many foreign investors have understood it and started to invest in the development of information technologies in the Ukraine. The evidence of this is the expanding network of different American and Australian companies in the Ukraine investing in the field of information technologies (mainly, software development). Positive experiences already exist.

Now, how to avoid others' mistakes? Experience shows that it is enough to follow the simple rules of business, taking into account some particular features of the national economy. The main features include the following:

  1. Personal supervision of investments by the investor itself. Fortunately, there is a network of reliable commercial banks in the Ukraine.
  2. Investment of small rather than large sums for the long-lived terms, for example, monthly "injections," in concrete SME. This way, it is easier to avoid business risk.
  3. Constant presence of the representative (manager) from the investor in the invested company with the purpose of supervising enterprise activity and monetary resources.

The development of electronic commerce is also essential in the Ukraine, because e-commerce can prompt economic growth and welfare and has the potential to attract new foreign investment.

3.2. Technological measures

Just now, the Ukrainian market is in a condition of global jump. It is able to gate through intermediate stages, for example ISDN.

The broad use of radio modem communication lines as alternatives to the allocated phone lines will promote successful development of the Internet in the Ukraine. (The current price for allocated phone line in the Ukraine is U.S.$200 per month.)

With the aim to provide faster Internet access, the use of cable modems is also a hot technical topic in the Ukraine. Cable modems offer transfer speeds up to 500 times faster than modems working on traditional phone lines, allowing users to access the Internet via TV cable. Cable TV providers are going to connect all the houses in the city of Lviv (population 1 million) at the end of 2000 year. The next move to Internet connection through cable modems rests with ISPs and investors. The implication is that users do not have to block their regular telephone lines while they remain connected to the Internet at all times. The lack of telephone lines suited to the needs of citizens and businesses, along with their high price, is another objective reason braking the Internet growth as well as the investment processes in the Ukraine.

3.3. Legislative basis

The successful accomplishment of the practice of organizational and technological measures must rest on a reliable legal basis.

The Ukrainian parliament has already passed a series of measures designed to encourage and protect foreign investment. These include the following:

The foreign investment law provides liberal tax holidays, exemptions from import and export taxes, security clauses, and many other investment incentives.

The law "On the Regime of Foreign Investment" was accepted in 1996 (N 93/96-VR). This law stipulates the terms and conditions for foreign investment within the territory of the Ukraine, based on the aims, principles, and provisions of the legislation of the Ukraine.

The following facts and figures are proof of the sufficiently developed legislative base in the Ukraine in the area of foreign investments. In 1997 foreign investments in the Ukraine amounted to U.S.$759.2 million, an increase of 42.9 percent over 1996. According to the State Committee of Ukraine for Statistics, direct investments from NIS countries and the Baltic states totalled U.S.$67.7 million (a decrease of 40 percent); investments from other countries amounted to U.S.$691.5 million (a 65.3 percent increase). Investments in assets constituted U.S.$378 million (49.8 percent), while monetary investments amounted to U.S.$298.8 million (39.4 percent). At the same time, some U.S.$124.9 million of capital, or 16.5 percent of the total sum of investments in Ukraine, was taken out of the country by nonresidents. As of 1 January 1998, the total amount of direct foreign investments in the Ukraine was U.S.$2,053.8 million. The largest investments by nonresidents are shown in figure 5.

Figure 5. Largest investments in 1998

The premise of successful investments will be future changes in the Ukrainian tax laws. The tax pressure on businesses will be attenuated, which immediately promotes business improvement: faster achievement of the break-even point.

The proposed measures and investments can overcome the aforementioned obstacles in the way of growth of the Internet. Doing otherwise presents a threat to the integration of Ukrainian into the new global information society.

4. Conclusions

The economic and social aspects of successful investment in Internet development in the Ukraine are described in this paper. The subjective and objective obstacles and ways of overcoming them are also considered.

The main constraining factors of Internet growth in the Ukraine are high prices for Internet service, an insufficiently developed infrastructure, a monopoly on telecommunications, and attempts, periodical undertaken, to monopolize the Internet.

Despite some objective difficulties, the Ukraine today is rich ground for investments, especially in the field of information technologies. The legislative base guaranteeing successful investment and protection of investments is sufficiently developed. To guarantee of the success of investments in information technologies and development of the Internet in the Ukraine, one must allow for concrete features of the national economy.


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pp. 66 - 71.

[2] Internet Venture Capital Investments Explode, Price Waterhouse:

[3] Azarov S. Internet Problems and the Ukraine, PC World Ukraine, 1999, No. 6 (36), pp.68-69.

[4] ISPs Turn Europe Into Land of the Free, European Sources & News (ESN), Vol.4, No.9, September 1999,
pp. 30 - 32.

[5] Corporative Internet in the Ukraine, World of Communication and Informatics, No.4, December 1999, pp. 20-22

[6] Zubok V. Gate to the Internet: ISP choice, CHIP (Ukrainian Edition), No.1, January 2000,

[7] Computer Currents, 1999, June 15, 1999.

[8] Micro Times, 1999, June 23, Issue No. 194.

[9] Juan A. Zapardiel, Fernando Garcia, Why Should Government Invest in the Internet ? Book of Abstracts of The Internet Global Summit, the 9th Annual Internet Society Conference, 22-25 June, 1999, San Jose, USA, pp.3.

[10] CHIP (Ukrainian Edition), No.9, September 1999, p.79.