Russia's Invasion Threatens Ukraine's IT Industry

[Update: This post has been updated to reflect the changing nature of events in Ukraine. Furthermore, a representative from EPAM says that CNews' claim that there are development centers in Crimea is false: "Specifically, the statement regarding Crimea office locations is untrue, as shown by a publicly available record … As stated in the company’s 8-K filing, none of our delivery centers are located in Crimea."]

Russia's military intervention in Ukraine sent shockwaves through a somewhat unlikely sector: the nation's IT industry. Russia completed live-fire exercises over the weekend, and began moving troops into the Ukrainian-held autonomous region of Crimea. On Monday, the two biggest IT companies operating in Ukraine saw $750 million worth of their valuation disappear in a single trading day.

According to Russia's CNews, shares of the software developer Luxoft plunged by 23 percent on the New York Stock Exchange; an estimated $330 million in value was lost. Meanwhile, its competitor, EPAM, lost the same percentage of its shares, amounting to a $420 million dollar hit. Combined, the two companies lost three-quarters of a billion dollars. That's a remarkable loss for a nation with one of the biggest IT sectors in the world—outranked only by the US, India, and Russia—according to a 2013 report, it's worth $3.6 billion in total.

Here's EPAM's stock activity documented over the last month on Google Finance:

Neither company is Ukraine-owned, however: EPAM, which Reuters says is "considered the Eastern European equivalent to offshore outsourcing companies such as India's Infosys," is based in Pennsylvania, and Luxoft is Russia-owned. The next day, both companies immediately saw a rebound, and began recovering most of the lost valuation.

While protests escalated in Kiev in the previous months, both companies allegedly allowed their employees to work from home, and avoided much of a hit to their valuation. But according to CNews, EPAM has development centers in Crimea, the region currently most threatened with conflict. It is reportedly considering moving its staff, according to CNews.

The Ukraine-based AIN news points out that the companies employ 6,400 people, but that the impact is rippling through Russia-owned IT companies too. Reuters ticks off the potential detriments to the sector nationwide:

• "The interim Ukrainian government's national call-up for military service could remove key staff from essential projects, while any deepening of the conflict would put overseas travel by engineers to customer sites on hold, potentially delaying or derailing projects.
• "Meanwhile, the risk of communications or electrical utility outages - Ukraine is dependent on Russia for gas supplies for electricity - could disrupt the industry's connections to the outside world.
• "Another unknown is whether ethnic divisions could emerge between office workers with clashing Ukrainian and Russian loyalties."

Even the most globalized industries are at the whims of localized conflicts, though the capacity for decentrality makes the IT sector less so: today, shares of the two firms' stock were steadily climbing again, ostensibly after satisfactorily demonstrating to investors that even military standoffs didn't much disrupt service.