Beset by war and economic turmoil, Ukraine still has problems attracting foreign investment. Add to that endemic corruption, shaky rule of law and burdensome bureaucracy, and the problems swell.
Foreign direct investment, or FDI, in Ukraine in 2013, the last year that the country was at peace, was $4.5 billion. In 2014, FDI shrank to $410 million. It started to rise again in 2015, when it was $2.96 billion, and in 2016 it was back up to about $4 billion. However, the amount was still less than half of the $8.4 billion that arrived in 2012, the last pre-crisis year.
Moreover, most of this FDI probably isn’t “foreign” at all — much of it (25 percent in 2016) comes from Cyprus, and represents money that has been sent out of Ukraine by Ukrainians and then invested back in Ukraine. The money goes to Cyprus and other tax havens to evade taxes, benefit from foreign investment incentives and obscure ownership of assets.
As for “real” foreign investment, despite promises from Ukrainian President Petro Poroshenko, Prime Minister Volodymyr Groysman and other top government officials, the country is seeing little progress in bringing in more FDI. It had been hoped that investors would return after Russia’s war on Ukraine stabilized somewhat in 2015.
But former investors have been in no rush to return. New ones still hesitate to enter.
Some international businesses closed their Ukrainian offices when Russian launched its war in the Donbas. In the ensuing economic turmoil and high political uncertainty, big companies relocated to more stable economies.
But recent cases show that investors are easily discouraged. The reason isn’t war or the poor economy, but a bad business climate.
Irish low-cost airline company Ryanair canceled its planned entry to the Ukrainian market via Boryspil and Lviv International airports in July after failing to agree to terms at Boryspil International Airport. Austrian pharmaceutical companies Lannacher Heilmittel and Gerot Pharmazeutika left the market in 2017 as well.
There have been some success stories of foreign companies expanding production in the west. German automotive wiring producer Leoni launched another production site in Ivano-Frankivsk Oblast’s Kolomyia, while Japanese company Fujikura, also an automobile wiring producer, plans to open its second plant in Vinnytsia in December. Such businesses are lured by Ukraine’s close proximity to their European Union customers and low-cost, yet skilled, workforce.
The biggest obstacles to new FDI are Ukraine’s unreformed judicial system and poor law enforcement.
Ukraine’s slow rise in international ease of doing business rankings shows improvements on the way, reflected in a modest rise in FDI. The government expects more investment to come.
“We cannot yet rely on large domestic demand and increase in state spending being the main drivers of growth in gross domestic product,” Boris Lozhkin, the secretary of the National Investment Council, said in a recent interview with online media company RBC. “So what we’re left with is investment.”
‘Preserving status quo’
Gregory Fishman, director of business development at Deloitte audit company, sees factors such as a weak hryvnia and relative political and macroeconomic stabilization as reasons for investors to enter Ukraine.
In some ways, Ukraine’s inability to attract more foreign investment is difficult to understand, given higher investment in Africa, Eastern Europe and other countries with greater political instability and fewer reforms than Ukraine.
“Ukraine is doing really a great job of being an exception, as usual,” Fishman said.
While Ukraine’s government keeps telling investors to put their money in Ukraine, lawmakers are delaying key reforms that are necessary for providing a fair business climate.
Fishman said recent improvements include automatic value-added tax refunds and new open-data registers. But the economy has yet to undergo a major institutional transformation. In fact, nearly four years after the EuroMaidan Revolution drove President Viktor Yanukovych from power on Feb. 22, 2014, it’s back to business as usual for the government.
And that’s not good for business, said Fishman.
“The people who have been entrusted with the public sector in this country have again proven themselves to be more interested in preserving the status quo than being interested in helping people,” he said. “It’s really difficult to fool foreign investors now with a lot of promises.”
He said that the most critical issues are judicial reform, formation of an anti-corruption court and prosecutorial reform.
“In terms of foreign investors, that’s something I’m hearing literally coming from people’s mouths all the time,” he said.
Kateryna Gupalo also hears investors’ complaints as a lawyer for Arzinger, where she specializes in dispute resolution. About 80 percent of her clients are companies with foreign investment.
She recalls numerous cases of businesses struggling to protect their rights, mostly because of bureaucracy, the slow pace of court hearings, lack of protection from raider attacks, pressure from law enforcement and other problems.
Even when cases get to court, there’s not much chance of a win, she said.
“When company headquarters learn about these issues … Ukraine immediately goes on the map of risky countries,” Gupalo said. “They will tend to invest in countries without such kind of pressure.”
In one recent case, police came to search a company, only to confiscate one mobile phone.
“There wasn’t much damage, but the fact that they searched the company stressed people out,” she said. “Something like that is enough for people to feel they are being put under pressure.”
For foreign CEOs used to a stable business culture, it’s hard for to understand why law enforcers would put such pressure on business, she said.
Russia’s four-year war against Ukraine is not helping either. One of Gupalo’s clients, a company with assets in Russian-occupied Donbas, lost its factory.
Local problems
Ukraine’s local producers face similar risks. Regulation barriers, such as complicated taxes, inspections, bureaucracy and frequent changes in legislation complicate the situation, said Iryna Fedets, a senior research fellow at the Institute for Economic Research and Policy Consulting, a Kyiv-based think tank.
After polling 1,800 businesses, one survey showed that Ukraine’s western and some central oblasts are the best at attracting investment. But even in Vinnytsia Oblast, where the investment index is the highest, it is only 0.25 points out of 1.
Three out of four managers of small and medium-sized businesses complained of unequal treatment.
“This shows that entrepreneurs feel they are treated with selectivity, as pressure or limitations are put disproportionately on certain categories of businesses, while others are exempt from it,” she said. “This encourages corruption.”
