Ukraine looked headed for slumdog billionaire status following the international acclaim it gained from its 2004 Orange Revolution, which put the country on the radar screen of foreign investors. Now, in the light of a punishing recession, depressed export markets and a global credit crunch, foreign direct investment is harder to come by.
Investors still brave enough to see the upside are sniffing around different sectors. But with the recession exposing deep economic vulnerabilities, large foreign investment now hangs more than ever on Ukraine’s ability to adopt reforms – especially cutting corruption, bureaucracy and other barriers to ensure long lasting and more sustained prosperity than seen in the brief economic growth spurt of the past five years.
The Orange Revolution led by ex-President Viktor Yushchenko and former Prime Minister Yulia Tymoshenko promised democracy and ended up promoting a more open and consumer-minded society. Their reign was marked by one big competitive privatization and an influx of foreign banks eager to lend.
Of the $40 billion in foreign direct investment that Ukraine has received since independence, nearly 80 percent came during the Yushchenko years. But much of this came from state tenders in which prized industrial assets were finally sold at competitive prices. The 2005 re-privatization of the country’s flagship steel mill,Kryvorizhstal, to the world’s largest steel producer,ArcelorMittal, for example, fetched $4.8 billion in a nationally televised auction.
At the same time, major European banks eager to finance pent up consumer demand were moving into Ukraine in a flurry of billion-dollar bank buyups. Aval Bank (for $1.1 billion), Ukrsotsbank ($2.1 billion.) and Ukrsibbank ($700 million) were shed by their oligarch owners. When it was over, foreign capital comprised 40 percent of the country’s banking capital.
The rest of the foreign investment boom during the Yushchenko years, which came to $30 billion, went into Ukraine’s retail sector, real estate and other private companies that sold equity on European stock exchanges.
Now, with the bad guys of the Orange Revolution, Viktor Yanukovych and Mykola Azarov, installed as president and prime minister, the picture looks different.
Yuriy Belinsky, head of research atAstrum Investment Management, said foreign investment into the financial sector will continue – as in 2009 – to consist largely of European banks refinancing their shaky bank subsidiaries.
“For now, we can expect mostly so-called anti-crisis inflows,” he said.
As for the fate of privatization, Yanukovych has a majority in parliament and his own man as prime minister, and thus the ability to break the deadlock created between Yushchenko and Tymoshenko. But that doesn’t mean the new team in Kyiv will have the political will to prevent a return to the shady state auctions characteristic of pre-Orange Ukraine, on which well-heeled insiders gorged themselves on lucrative industrial assets.
“If privatization is resumed, the first on the list of foreign investors [and domestic oligarchs] will be Odessa Portside Plant and energy companies. But even if sold, they would bring not more than $1 billion in 2010, out of the $5.5 billion that is expected,” said Belinsky.
Ukraine’s State Statistics Committee reported that foreign direct investment flowing into Ukraine decreased from $6.2 billion in 2008 to $4.4 billion in 2009, a 27.4 percent decline.
So, what does the future hold?
To some extent, investors will continue looking at pre-crisis favorites with an eye toward higher yields from higher risks.
Real estate, which enjoyed speculative growth until 2008, will probably remain a sector with an acute risk profile, and although the banking sector is improving from recapitalization injections, it also lingers in the risk zone, according to Roman Zakharov, head of research at investment company Troika Dialog Ukraine.
“The chemical sector also remains a risky one due to the lack of access to cheap natural gas and uncertainty as to the pace of domestic gas market liberalization,” he said.
However, the Yanukovych team has already said it would try to renegotiate the gas deal that the Tymoshenko government signed with Russia’s Gazprom, lowering import prices in return for a management stake in Ukraine’s vast gas transportation pipeline system.
Foreign investors will also be interested in buying Ukrainian retail companies, even with their existing debts, because the domestic demand in a modern retail space is still unsatisfied, according to Belinsky, who said that an annual retail turnover per capita in Ukraine totals only $1,000, while the Eastern Europe average is at $5,000.
Myroslav Rabenko, vice president of corporate finance at Foyil Securities, said the most high-risk sectors in Ukraine are banking due to stalled credit, low profit margins in the food and machine-building sectors, due to high cost and old-fashioned production.
“However, other consumer-oriented sectors such as food production, pharmaceuticals and fast moving consumer goods are less risky,” he said.
Agriculture was one of three economic sectors showing modest growth of 0.2 percent, according to Dragon Capital.
Meanwhile, merger and acquisition activity in Ukraine’s promising agriculture sector has already hit the ground running this year with the sale of a 93 percent stake in Ukrainian agro major Allseeds Group to compatriot company Kernel Group for over $200 million.
“We definitely can count on huge interest in agriculture investment projects, as well as the food industry on the whole, over the next few years,” said Petro Koshukov, president of ProInvest, a Ukrainian investment promotion professional association.
Once known as the breadbasket of Europe, Ukraine is well placed, in terms of its famous black earth and proximity to export markets to take advantage of a rising world population and thus higher food demand.
According to industry experts, investment inflow to Ukraine will only recover completely by 2014, but the first high risk money will come back in 2011. For more strategic sectors, more time is needed and recovery will coincide with general global economic activity. But to speed up the process, more political stability is needed, along with overall macroeconomic improvement and solidity of currency exchange rates.
In the meantime, what became record foreign direct investment inflows for Ukraine in recent years are modest figures for its neighbors in Central Europe. Over the last two decades, Poland has managed to get nearly $110 billion in foreign direct investment; Romania – $60 billion; and Hungary with almost $50 billion.
“We have slightly benefited only from a short-term “stream of investments, but it never became a flow on a global scale capable of significantly boosting the country’s economic development,” Koshukov said.
And so, if Ukraine plays its cards right, larger waves of investment are ahead. And this equates to strong upside for investors smart and daring enough to make a move into Ukraine.
Kyiv Post staff writer Olga Gnativ can be reached at [email protected]
