To do this requires three initiatives, being (1) identifying sectors where significant economic growth is presently feasible and facilitating foreign, as well as domestic, investment in these sectors, (2) providing for political risk insurance for such investment (apart from investment already covered by US OPIC’s political risk insurance for investments having at least 25 per cent. US participation) and (3) better rule of law protection for investment in Ukraine, principally by creating Ukrainian legal ombudsman to stop abuses of law and allow investors to feel much more secure legally.
1. Economic areas for immediate investment
The
recent Black Sea Economic Forum (the “Forum”) focused on identifying the
following areas for immediate economic
development in Ukraine, and developed ideas to finance and otherwise facilitate
such investment:
(1)
Irrigation Farming. Ukrainian agricultural production, especially in the
southern half of Ukraine, can be greatly
expanded, despite the increasingly dry conditions in Ukraine due to climate
change, by building out irrigation
facilities. Southern Ukraine should become the “Southern California of Europe”,
because the dry conditions
are actually ideal for farming many important crops, so long as there is
adequate water from irrigation.
Unlike for southern California, Ukraine has many massive rivers providing
essentially unlimited water that
could be used for irrigation, so that Ukraine could, by itself, feed all of the
Middle East and North America, resolving
their currently developing future food security problems. However, this
requires much more irrigation infrastructure.
The irrigation system that was begun in Soviet times needs to be modernized and
greatly extended.
(2) Port
and Freight Railway Development: By eliminating customs delays, as Odessa
Governor Saakashvili has proposed,
Odessa and the other Black Sea ports can today become the quickest transit
point for container shipping
between Asia and central and eastern Europe, which should result in greatly
expanded shipping through Odessa
and other Ukrainian ports (provided that, with the greater volume of trade,
Ukrainian port fees are reduced
to a level comparable with those at Turkish, Bulgarian and Romanian ports –
especially due to the decline
in world trade, Ukraine’s port tariffs must be competitive). These ports should
also benefit from greatly increased
shipments due to increased agricultural production assuming irrigation farming
is expanded as suggested
above. Odessa and the other Ukrainian ports can thereby again become among
Europe’s leading ports.
Likewise,
as these ports handle more cargo, Ukrainian freight rail capacity needs to be
correspondingly increased.
In Ukraine’s current difficult financial circumstances, this can best be
achieved by developing private freight
rail capacity between Ukraine’s ports and central and eastern Europe, as well
as projects for more facilities
to move containers and produce between Ukrainian and western European guage
rail cars.
(3) Tourism. Kyiv, Odessa and Lviv, in particular, have world class tourism potential. Kyiv is the largest city in Europe between Paris and Moscow, with many UNESCO world heritage sites, but has largely been ignored by western
tourism agencies. Odessa has sunny beaches and an historic city centre. Lviv
has an intact medieval city centre,
very rare in Europe, and a first class airport, which should attract much
greater direct tourism, just as nearby
Krakow, Poland, has realised its similar potential to experience explosive
tourism growth, rising over 10 years
from 250,000 visitors passing through its airport to over 3,000,000 today.
In
addition to direct tourism, Odessa should be able, working with the northern Aegean
Sea and Black Sea cities, like
Istanbul and Trezebond in Turkey (the last city of the Roman Empire), Batumi in
Georgia, Varna in Bulgaria
and Constanta in Romania, to attract the international cruise line industry
that looks for routes where their
passengers can change cultures to sightsee in a new environment every several
days. To accommodate such increased
tourism, hotels and resorts need to be built. Regulated gaming can help finance
such hotel and resort development,
as Batumi, Georgia, has done.
(4) IT /
Software Development. There is currently a great need by Ukraine’s world-class
software development sector
for many more IT software programmers in Ukraine. Special IT education
institutions need to be created to
provide courses to train many more programmers, and in this way, provide needed
employment.
(5)
Energy. It remains the case that Ukraine can develop its oil and gas, solar
(especially the cost of solar panels continues
to drop dramatically) and wind energy production, and invest in projects for
the reduction of energy consumption,
to make Ukraine energy independent.
B.
Financing this Development.
At the
Forum, “Alfa-Bank” Ukraine, ING Bank Ukraine, Credit
Agricole Ukraine, BNP Paribas and Horizon Capital,
among others, expressed interest in financing such development. However, due to
the economic difficulties
and increased risk resulting from the Russian invasion of Ukraine, for such
investment to proceed, investment
risk needs to be mitigated, and the interest rates being charged need to be
reduced. For this, much more
support is urgently needed from international financial institutions, such as
the European Bank for Reconstruction
and Development (EBRD), the International Finance Corporation (IFC) of the
World Bank and the
European Investment Bank (EIB), as co-lenders and, where possible,
co-investors. With such support, Ukraine
should prosper.
2. Increased political risk insurance
Investors generally need more political risk insurance at reasonable rates in order to proceed presently. The leading chambers of commerce and business associations in Ukraine have issued a joint statement on the urgent need for such increased political risk insurance, which was published in the KyivPost on 20 March 2015. In principle, the World Bank’s Multilateral Insurance Guarantee Agency (MIGA) should have USD 750 million in political risk capacity, but after the invasion, MIGA became concerned by the conflict risk and, apart from the leasing of Porsche cars (that can quickly be driven abroad), has refused in practice to provide political risk insurance for Ukrainian projects.
The west can, at very little cost, provide support for MIGA, so that it can relax its risk criteria. This should be justified, among other reasons, as an appropriate remedy by the international community for the Budapest Treaty violations that have caused this insurance problem. Such support could be in the form of stand-by guarantees from the US, Japan, the EU, China and others, so that no additional funds would need to be advanced unless Ukraine is subject to further incursions. Assuming the Minsk Treaty is respected, these stand-by guarantees should never need to be used. The special program was previously created to successfully address a similar need for political risk insurance by MIGA for the West Bank and Gaza, could also be used as a model for Ukraine.
There are presently billions of dollars in potential investments for Ukraine that are blocked by the risk, however small, of further conflict. Readily available political risk insurance at reasonable prices is the key to accelerating the return of this investment into Ukraine.
The economic effect of the investment suggested above will be immediate. Each dollar equivalent spent in building such Ukrainian projects will quickly have a multiplier effect to stimulate the Ukrainian economy, well before the projects themselves begin generating revenues. Likewise, the existence of such projects will help generally to re-establish business confidence in Ukraine, leading others to invest.
3. Rule of law – the legal ombudsman to address abuses of justice
The third requirement to promote investment to stimulate Ukraine’s economy is to create a legal ombudsman to improve the rule of law, and specifically to stop “abuses of law” against investors, where courts assist raiders to deprive investors of their property by rendering decisions without any genuine legal basis, an endemic problem that continues in Ukraine. Apart from the “Open Courts Initiative”, that has resulted in public access to courts and campaigning to have all court decisions published in practice, no other rule of law initiatives in Ukraine have had any real impact, despite the large amounts spent. This is not surprising for lawyers, like myself. To be effective, such anti-corruption initiatives need to focus on holding judges accountable for their behaviour that can be objectively viewed, in particular by carefully examining their decisions, as well as their behaviour in court.
The legal ombudsman proposal3 does this by focusing on whether a judicial decision constitutes an “abuse of justice”, meaning that it has no genuine legal basis. Under the Ukrainian Constitution, judges who render such decisions can be dismissed, as this constitutes a violation of their oath of office, but in practice this never happens. The legal ombudsman is to be an eminent jurist, like the legal ombudsman in Sweden where this institution was first effectively used in the early 20th century to address corruption in their courts (it should not to be confused with the existing Ukrainian “business ombudsman”, who acts as a non-lawyer lobbyist focused on resolving administrative problems, as exist for many permit applications).
Such a legal ombudsman, working with the Parliament, should be able to quickly end the practice of Ukrainian courts issuing judgments having no genuine basis in law in order to deprive investors of their property. The bribes that are presumably behind such decisions may, as a practical matter, be very difficult to catch, however, this should not be necessary, as the decisions themselves can be the basis for holding judges accountable (the legal ombudsman is not to be involved where there are genuine legal issues, and thus, would not constitute, in effect, an additional appellate court).
In fact, such abuse of justice cases are already specially addressed by Ukraine’s many bi-lateral investment treaties, permitting the victims of such abuse to seek remedies in arbitration outside of Ukrainian courts.
Unfortunately, such arbitration can take many years, by which time often the investor’s business may be destroyed so that only damages can be recovered.
This risk to investors from losing their businesses from legally unjustifiable decisions, as has occurred repeatedly in Ukraine since its independence, could be effectively quickly controlled by having expedited consideration in months, rather than years, by a legal ombudsman. To be most effective, this legal ombudsman initiative should be coupled with creating a fund to transparently pay Ukrainian judges more, consistent with the magnitude of their responsibilities.
Conclusion
By thus
(1) identifying areas for immediate investment and developing programs to
facilitate this, (2) making political risk insurance readily available in
Ukraine to mitigate the risk to investors of possible further conflict and (3)
providing for a rule of law solution to the problem of abuse of justice
decisions by Ukrainian courts, investment can be restored and the Ukrainian
economy brought back to life.
