In recent months, a great deal has been written about unconventional gas in Ukraine and Eastern Europe. Poland is currently undergoing a shale gas exploration boom that has attracted companies such as ExxonMobil, ConocoPhillipps, and Marathon Oil to the region.
Potential gas reserves alone are not enough to attract foreign direct investment; a country must have “winning conditions” so that the rewards for investment outweigh the risks. Poland has proven that they have these conditions. In contradiction to Ukraine’s poor rankings in competitiveness indexes, I believe Ukraine also has conditions that will make it attractive to resource-based foreign direct investment.
The poor ratings are far from accurate. Ukraine, though not having developed as quickly as other Commonwealth of Independent States or Eastern European countries, is relatively stable with large amounts of human capital, natural resources and adequate macroeconomic conditions.
Oil and gas exploration, regardless of where a country is classified, falls primarily into a factor-driven economy so the “pillars” that are most important to attracting resource-based foreign direct investment are: institutions, infrastructure, macroeconomic stability and health and primary education. As exploration evolves into long-term production, the efficiency-driven pillars, specifically higher education and financial market sophistication, become more important.
Ukraine’s strengths lie in its rail infrastructure, financial markets for banking and debt financing, secondary education, and stable gross domestic product growth that has averaged 7 percent annually between 2000 and 2008.
Ukraine is far from perfect and will need form in order to better weather business cycles and keep pace with developments in neighboring countries. The most significant issues that need addressing are property rights, political instability rooted in a weak Constitution, disruption of economic reforms by popular opposition, the lack of business schools teaching Western business techniques, the power of business groups which has led to corruption, inefficient bureaucracy, and a focus on regional divisions rather than on entire country growth.
The reality is that no country is perfect, and investing in Ukraine is not a Sisyphean undertaking. Rankings without details are of little use to businesses or policymakers.
Ukraine has problems, but also has enough “winning conditions” to fuel a natural gas exploration boom that I believe will include foreign direct investment from Russia, the Middle East, Europe and North America.
Ryan W. Lijdsman is an international business consultant. He has worked with several international governments and businesses and has degrees in political science and energy economics from the University of Calgary and is currently completing his MBA at Queen’s University. He can be contacted at [email protected]
