Ukraine's second largest investor has a large presence in Ukraine's promising market of 46 million people.
Ukraine is closely linked to Germany, its second largest investor and trade partner, but the connection mostly goes one-way: from Berlin to Kyiv, with lots of potential wasted. Businesses from Germany, which has Europe’s largest economy, have a strong presence on Ukraine’s promising market of 46 million citizens.
The cumulative foreign direct investment from Germany to Ukraine stands at about $7.3 billion.
But most of this amount is not inherently German investment. About $4.8 billion is accounted for by a single transaction which by chance was conducted through a German subsidiary of the world’s largest steel company: Luxembourg-registered Mittal Steel’s 2005 privatization purchase of Ukraine’s largest steel mill, Kryvorizhstal.
However, when you look at exports and imports, German companies clearly dominate. Their exports of goods and services to Ukraine account for the lion’s share of bilateral trade, which has hovered at almost $7 billion levels in recent years.
Ukraine’s emerging market and close proximity have made it attractive for Germany. There are more than 1,000 German companies working in the nation, employing thousands.
The biggest German employer in Ukraine is Leoni. At factories in western Ukraine, this global supplier of auto wiring and cables employs as many as 6,000 local citizens.
German businesses also operate in trade, finance, machinery, chemical products, logistics and construction materials industries.
But for Germany “it is peanuts,” said Wolfram Rehbock, a partner at Arzinger law firm. He believes up to 90 percent of Ukraine’s potential in investment is not used because of the nation’s poor business climate.
This comes as no surprise, with Ukraine holding 145th place in the World Bank’s ease of doing business ranking.
Among Ukraine’s already traditional impediments for foreign businessmen and investors are political instability, bureaucracy, legal issues and corruption.
In 2009 and 2010 I talked to clients mostly about how to leave the country as soon as possible. And now the companies come to us asking how to invest and to be safe doing business.– Sven Henniger, head of Ukraine Consulting.
“Foreigners start to joke about Ukraine [being] a country of eternal opportunities,” said Rehbock, since foreign investors have a hard time complying with Ukraine’s byzantine laws. Consequently, money bypasses Ukraine and ends up in friendlier investment climates.
Rehbock and Sven Henniger, both members of the German Economic Club in Kyiv, believe that Russia has a much more business-friendly environment than Ukraine. Germany enjoys much better results doing business in Russia, not only because it’s a bigger market, but also because it is easier.
“In Russia doing business is not perfect, but it’s much better,” Henniger said.
Germany is famous for its mid-sized companies that thrive, and account for the majority of the country’s economy, serving as a stabilizing pillar of growth. In contrast, Ukraine’s economy – still largely in the shadows – is known for giant-sized companies owned by the state or billionaire tycoons.
Notwithstanding lost opportunities, German businesses did expand in Ukraine after the world economic crisis. “In 2009 and 2010 I talked to clients mostly about how to leave the country as soon as possible,” recalled Henniger, also head of Ukraine Consulting. “And now the companies come to us asking how to invest and to be safe doing business.”
Henniger said that “in 2006, 2007, and [the first half of] 2008, there was a gold rush in Ukraine.” Bilateral trade reached its high point in 2008, at $10 billion, but fell almost by half during the 2009 crisis year. The figures seem to be getting back on track, with more than $7 billion anticipated in 2011.
The much-anticipated association and free trade agreements with the European Union can potentially boost investments into the country, portraying Ukraine to investors as a nation on a path of convergence with the West and its standards.
But this potentially huge achievement is in jeopardy, EU diplomats and experts say, because of the criminal charges against ex-Prime Minister Yulia Tymoshenko, seen in the West as politically motivated.
“There were clear hints by several ministers and representatives of the EU that the trial against Tymoshenko poses a danger for ratification of this agreement, even if it will be signed,” said Nico Lange, the German head of the Ukrainian office of the Konrad Adenauer Foundation.
Not only is the Yanukovych administration alienating the EU, Germany also has its hands full in saving the euro and helping bail out the weakest members of the 27-nation bloc. Most of the recent $157 billion bailout for debt-laden Greece came from German banks.
German taxpayers were not happy about it and Chancellor Angela Merkel’s party suffered at the polls during the recent Sept. 18 regional election.
Ukraine’s slow and pothole-laden road to the EU is getting even harder as time goes by. Lange said that Ukraine faces even harder times than when the EU had only 15 member nations. “You have to do more on your own and you will get less help,” Lange said.
With so many financially troubled nations within the EU, no one needs one more in Ukraine. Lange notes that the recent “membership of Romania and Bulgaria was not the best experience, and I think that the German government and population has a big interest in not repeating mistakes.”
Moreover, Germany appears to be more interested in serious relations with authoritarian but energy-rich Russia than with more democratic but energy-poor Ukraine. As a close partner of Russia’s Gazprom and the Nord Stream gas pipeline that bypasses Ukraine, many think that Germany will always choose Russia first between the two nations.
But Lange says that Ukraine can easily counter this preference by focusing on its internal development.
Kyiv Post staff writer Maryna Irkliyenko can be reached at [email protected].
