Should the Russia Georgia conflict impact your offshore outsourcing location decision?

The recent Russia Georgia conflict reminds us that political risk is not some theoretical element to an offshore outsourcing location decision. Political risk remains a real factor than needs to be included in the offshore planning process.

We don’t mean to imply that Georgia is an important offshore hub for US and European companies. It is not. Georgia did not make the make the recent A.T. Kearney list of Top 50 Global Services Locations and our search for offshore services firms have only turned up a handful of small software and web development firms and BPO companies. What is important, however are the implications for offshoring decisions to Russia and other former Soviet republics.

Without further escalation or broadening of hostilities by Russia, this past 2 weeks events will have limited if any long-term impact on offshoring to the region. This assumes Russia limits future actions to the breakaway regions Abkhazia and South Ossetia. However, two other scenarios could have a meaningful impact to offshore location decisions.

Scenario A: Russia Escalates Action in Georgia & US Responds with Sanctions

It is highly unlikely that any Russian action in Georgia will lead to a direct military confrontation between the US and Russia, but there will be some form of US sanctions. Russian stated objectives in Georgia are to provide security in the 2 breakaway regions. If Russia shows restraint and limits actions to this objective, US sanctions will be limited and will not impact offshoring to Russia.

However, many analysts believe Russia has several secondary objectives including regime change in Georgia (i.e. the removal of President Mikheil Saakashvili). If Russia escalates action in Georgia to pursue these secondary objectives, the US response would include a broader set of sanctions. This could include trade and technology transfer constraints and seriously impact the attractiveness of Russia as an offshore location.

Scenario B: Russian Action in Georgia is the Start of Broader Muscle Flexing in the Near-abroad

Many analysts view the current Russia Georgia conflict in a much broader context. It is about a resurgent, nationalist Russia which is addressing a number of perceived humiliations since the end of the cold war. Georgia is a US ally and aspiring member of NATO. Russia is sending a broader message that Georgia is in their back yard and they are the key power broker, not the West.

If this is the case, the military conflict in Georgia just the start of a series of military moves by Russia? The leaders of several former Soviet republics recognize the risk and joined the Georgian president at a rally last week to protest the Russian action. The big offshoring location under this broader Russian threat is Ukraine.

Ukraine is one of the top Eastern European offshoring locations. There is a Soviet legacy of strong science training and a large pool of skilled labor. At the same time, the lack of integration with the EU limits emigration and thus keeps down wage inflation. The offshore industry in Ukraine currently exceeds $300 million.

We are not arguing to remove Russia or Ukraine from future offshore location options. However, if you are considering either location you should factor political stability into the overall location decision and monitor further Russian actions in the region.