Ukraine’s foreign investment collapse: Failures and opportunities

WNU Photos/Andriy Semenyuk

WNU Photos/Andriy Semenyuk 

2015/05/29 • Analysis & Opinion, Politics

One predictable and damaging consequence of Russia’s marauding in Donbas and the general uncertainty in Kyiv has been a near total collapse in foreign direct investment (FDI) to Ukraine. According to recent UN estimates, net FDI into Ukraine amounted to negative $300 million in 2014, signalling that more investment money left Ukraine than entered. Among emerging economies in 2012 and 2013, only Yemen, Angola and Papua New Guinea had the inglorious distinction of recording negative net FDI flows. Even under Viktor Yanukovych’s kleptocracy, Ukrainian net FDI ranged from 4 to 8 billion dollars annually. These statistics are not just economic abstractions: The number of announced “greenfield” foreign investment projects – actual new facilities funded by outside investment – plunged to 25 in 2014 from 69 in 2013, meaning fewer new factories, offices, and jobs.

What is the Ukrainian state doing about foreign investment?

While many investors have certainly been scared away by Putin’s tanks, it’s appropriate to ask whether the government is creating an attractive environment for investment and intelligently promoting Ukraine to potential investors.

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Ukraine’s new online property registry: an important step toward transparency

Some reforms demanded by Western benefactors are also designed to improve the investment climate – rooting out corruption, simplifying the tax code and ending arbitrary regulatory enforcement. Progress on these fronts is noticeable but limited. In other more mundane areas, the government in Kyiv has taken steps forward. Since early 2015, property records are accessible through an online registry. Not coincidentally, Ukraine jumped from 88th to 59th place internationally for ease of registering property, according to the World Bank’s 2015 Doing Business rankings. Ukrainians can now also look up business entities and individuals through an online corporate registry. While these services have been available in Western countries for many years, they are important tools for both doing business and promoting legal transparency in Ukraine, and the government is committed to offering more e-government services in 2015 and the coming years. Despite these small successes, Ukraine remains a largely unfriendly place for investors. The World Bank ranked it 96th overall for ease of doing business, behind Mongolia (among others), 22nd out of 26 low- to medium-income countries in Europe and Central Asia, and awarded particularly low scores to Ukraine’s legal system, with minority investor protection occupying 106th place and bankruptcy resolution 142nd.

On the promotion side, a potential investor looking for information on Ukraine is not confronted with a wealth of helpful resources. Many of Ukraine’s neighbors have made attracting foreign businesses a priority, offering comprehensive online information and services through investment promotion authorities, like the slick and content-rich site of the Estonian Investment Agency. Poland’s wide-ranging and effective FDI strategy led the international consultancy KPMG to name the “network of institutions supporting investors” as one of the main drivers of investment in the country. Turning back to Ukraine, the website of the Ukrainian Investment Agency has been down for months. Far from offering a one-stop shop for interested investors, the central government appears unable to provide basic information for foreign investors. Clearly the government has many concerns, but a well-designed, -resourced, and -staffed agency for investment and trade promotion would seem to be a top priority given Ukraine’s desired economic re-orientation toward the EU and other Western (or simply non-Russian) markets.

Are there reasons for optimism?

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Dnipropetrovsk’s regional investment agency: a model for Ukraine

As usual, regional governments are out in front of Kyiv’s plodding bureaucracies. The Lviv and Dnipropetrovsk administrations operate user-friendly and frequently updated investor portals that list current projects, highlight assistance available to potential investors, including navigating bureaucratic hurdles, and do a bit of basic advertising for their regions. Looking ahead, the Ukrainian government will likely seek to privatize hundreds of non-strategic state-owned enterprises, ideally to foreign investors, as explained to Hromadske in February 2015 by the Minister for Economic Development and Trade, Aivaras Abromavičius. Putting Ukraine back on the map for foreign investors is a necessary step for finding qualified buyers for these entities, and a national investment promotion strategy along the lines of Dnipropetrovsk’s would be a good starting point.

Despite the obvious challenges, Ukraine has a number of selling points for foreign investors. Wages have always been modest, but adjustment of the Hryvnia from its prior artificially-high exchange rate has further depressed the cost of investing and operating in Ukraine. The Association Agreement with the EU is bringing European standards and a free trade regime. Western development banks and other institutions are committing financing for projects in Ukraine. Government is becoming more professional, even if the progress is painfully slow.

In sum, Ukraine’s FDI situation, like its economy, has essentially hit rock bottom. Foreign investors willing to stomach some risk will find a situation in flux, but also one offering opportunities, particularly in regions that have bypassed Kyiv and taken their own measures to pursue outside capital. The central government would be well advised to play catch up.

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  • puttypants

    Interesting article, I don’t know if you’re aware how many people have been involved helping Ukraine trying to fix the investment. You’re talking process here and I’d say they’ve been working on just cleaning up the government. The Chamber of Commerce for Ukraine ended up being run by an American with pro-Russian sympathies. They’ve been trying during a war to do everything.

    • Andrew Kinder

      This is certainly true, and I don’t mean to insult the no doubt talented people working on the situation. And I understand the government has its hands full, so this is admittedly a bit of a stone-throwing exercise. Nevertheless, from an somewhat of an outsider’s perspective, it’s hard to discern a great deal of progress, and we’re now over 15 months from the end of the Yanukovych regime. It’s also just a matter of appearance — most people say that change has been slow in the bureaucracies and legal system (to be expected), which makes the presentation of the situation even more important (and the lack of, say, a functioning, somewhat professional online presence particularly curious). More generally, there has not been a great deal of (English-language) press coverage of FDI in Ukraine, so I hoped to at least help get the issue back on people’s radars.

      • puttypants

        I don’t know if you’ve been reading everything that’s been happening in Ukraine? It’s not they haven’t tried. Even George Soros has stepped up to the plate and offered to invest 1 billion if others would too..There were no takers!.. I’ve asked several times who’s responsible for sending out news releases from the government. No answer. They can’t afford any such thing at the moment. All they have are mostly volunteers. Have you seen the barrage of horrific propaganda being thrown at Ukraine and the government? It’s been mostly a few volunteers doing the best they can against it. No doubt Ukraine is in a churn. First, they have to get competent people in place in government. Poroshenko is trying to deal with PR with other countries and that’s been more than a handful just in constant meetings. It seem Yat’s is trying to get loans and financial asst. from other countries and that’s been an enormous challenge. I don’t know who’s trying to re- organize the government. But, until they ca get it better things will continue to improve slowly and maybe that’s as it should be. Everyone expects miracles to happen overnight. Remember this is a huge country of over 46 million people many with very differing views about the future of their country. They haven’t even been better in educating their own people and with Putin’s constant divisive anti-Ukrainian propaganda causing fear and doubt in the population. The government also needs to capture the hearts and minds of all the people. They’re between a hammer and an anvil. It’s obvious they have a lot of very bright people already helping them. They’ve tried to put together investment meetings and no body came. Maybe they could do better but, I just think the reformers have too much on their plate. This situation would have been difficult enough without a war going on. The Marshall plan would have been the most sensible thing to happen in Ukraine but for some reason that hasn’t happened. I don’t know the mechanization involved in it but, it helped Germany back up on its feet after WW2. It seems to me if you know what needs to be done in that area you should offer your service in return for salary in the future or you get a commission for every business you can commit! It’s so easy to be an arm chair expert but much harder to implement. Even in the USA where business and government have huge amounts of experience in running decent government and business have their share of challenges. I would dare any government to do better in this unrelenting situation. Just when Putin says he wants peace in eastern Ukraine he re-starts the war again. The situation is insane. I’d probably make it easier by bombing the Kremlin that would either stop Putin or cause and all out war where hopefully all of europe would get up off their cowardly, self-interest beehinds and help Ukraine put this monster to rest once and for all.

        • Andrew Kinder

          I read quite a bit and am in contact with a good number of people on the ground in Kyiv. The government is no doubt in a pinch and is being (literally) bombarded, but I get the sense that there are still significant resources available. If nothing else, there is no shortage of people working in the ministries. I think the general challenge has been to 1) get the people already there, many of whom are holdovers from the old system, to start being part of the solution and stop being part of the problem; and 2) where the government is grossly failing or corrupt, as it is with, for example, supplying the army and providing other basic social services, for volunteers to step in and fill this void. Unfortunately, for something like FDI promotion, volunteers can only do so much — the government has to be able to execute projects like this in its official capacity, and citizens have a right to expect (and enforce) progress.

  • Murf

    I have said it before.
    NAME NAMES!
    If some one is in charge of selling Ukraine (and getting paid for the privilege) give there name job and what they have done or not done and why?
    If nobody is in charge, find out who can create the job and find why it has not been done.
    These do nothing, petty bureaucrats are literally killing Ukraine. They are a far greater threat then a GRAD rocket launcher aimed at you.
    When ordered to do something they ignore the order and go back to doing nothing. When finally forced to do something they claim they can’t because of some piddling rule. Once the rule is changed they claim they have to check if it is possible with other departments. Then go back and ignore the order.
    It is insane to act like this in war time.
    Lead follow or stay the hell out of the way.
    If the government won’t change the slackers in the government then the press and the internet watch dogs must expose them.
    Cockroaches only flourish in the dark. Shine a light on them an they scatter.