Software contractor EPAM hit by Ukraine-Russia standoff

VIENNA Mon Mar 3, 2014 1:39pm EST

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VIENNA (Reuters) - Eastern and Central Europe's top information technology services firm, EPAM Systems (EPAM.N), warned on Monday of mounting and unquantifiable risks to its operations in Ukraine and Russia, sending the U.S.-listed company's shares down 14 percent.

Ukraine's burgeoning software services industry, once insulated by a blue-chip international client base from the divided country's ailing economy, now finds itself caught up in the escalating military and political standoff with neighboring Russia.

Thousands of engineers work for dozens of companies across Ukraine developing software, typically on a contract basis, for European, Asian and American companies. Eastern Europe has emerged over the past decade as a low-cost alternative to India.

Major customers of the Ukrainian industry include Samsung Electronics (005930.KS), which employs more than 1,000 engineers at its R&D Institute in the country.

Others active in Kiev and other Ukrainian cities include Siemens (SIEGn.DE), European video game makers Gameloft (GLFT.PA) and Crytek, China's Huawei HWT.UL and Serena Software SILAKS.UL of the United States, each employing between 100 to 300 engineering contractors.

In a regulatory statement, Newton, Pennsylvania-based EPAM said that although its software development centers are running normally it feared that its business could be hurt by the escalating tensions between Ukraine and Russia.

We have no way to predict the progress or outcome of the situation, as the political and civil unrest and reported military activities are fluid and beyond our control," EPAM said in a U.S. securities filing.

"Prolonged unrest, military activities, or broad-based sanctions, should they be implemented, could have a material adverse effect on our operations," the company said.

EPAM employs around 2,600 engineers in Ukraine and another 1,300 in Russian cities, out of a global workforce of 9,3000. The company posted revenue growth of 28 percent in 2013 to $555.1 million earlier this month.

Shares of EPAM had fallen 14.7 percent to $35.76 on the New York Stock Exchange.

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.

(Reporting by Eric Auchard, editing by Louise Heavens)

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