I was recently in New York to speak to a wealthy investor who has made millions in eastern Europe and invests millions more for others.
Over dinner at his club, I duly enumerated all of the reasons why Ukraine is attractive: huge agricultural potential, world-class skills in information technology, and excellent manufacturing competitiveness, to name just a few.
His response was positive: “Investing in Ukraine is the right thing to do, for the world’s sake.”
I also explained that over the past three years the country has successfully reformed its banking and energy sectors, achieved macroeconomic stability, implemented a transparent system of public procurement, and eliminated many permits and licencss.
I insisted that this has done much to fight corruption, by reducing the opportunities for graft.
Cutting the number of intermediaries between Gazprom and Naftogaz and aligning energy prices to market levels has prevented the evaporation of considerable cash flows. I quoted a senior executive of a large pharmaceutical company, who recently noted that tenders are now transparent and clean.
While dessert was served, the investor commented: “What I really need to find is an investment that does not require me to spend half my time in Ukraine, and that does not entail outsized risks for the return I can get. Above all, I need to know that my property rights will be protected. There are pretty good returns, too, in countries that are much less risky, so I need to choose wisely.”
Global investors do indeed have a choice.
But does it matter that they choose Ukraine?
It does, because the country needs investment: not only the money, but also the productivity, technology and management practices that real investors bring.
Unfortunately Ukraine has not been the first choice often enough.
Last year, Georgia received five times more money than Ukraine as a percentage of gross domestic product, and a comparable amount in dollars — $1.6 billion compared with $2.2 billion for Ukraine.
Needs to catch up
The current pace of growth in Ukraine remains between 2 and 3 percent. Catching up with Georgia will require sustained periods of growth in the 5 to 10 percent range and foreign investment is the key to that surge.
If it sounds unfair, in light of the country’s achievements, it is.
The problem is that Ukraine has not made enough progress in areas that I would call “hurdle factors,” namely, those factors — such as the rule of law, respect for property rights, currency controls — which are so important that if a country does not get them right, investors will not even look at all the wonderful things that the country has to offer.
To take a metaphor, a beautiful house can be filled with art and furniture, have wonderful views, a garden designed by a famous landscaper, and great architecture, but if it does not have running water or electricity, very few buyers will turn up to even look at it.
So, what is needed to break out of this situation?
End catch-and-release
First, it is important to enforce consequences. The prosecution of the powerful is often referred to as “sports fishing”: you catch the big fish, photograph it, identify it… then release it. This approach must end.
The country’s leadership was courageous and wise to create an anti-corruption prosecutor rather than to wait for the general prosecutor’s office to reform itself. Ukraine now needs more of the same wisdom. The establishment of an anti-corruption court is overdue. The liability of the shareholders of failed banks must be enforced to the fullest extent. Financial crime units must be reformed and disarmed.
There is no need for a tax inspector to carry anything more lethal than a laptop. But they must be really good at using that particular weapon.
Ex-Bank Mikhailivsky clients on July 6 seek reimbursement by the state of their lost deposits in the failed bank. (UNIAN)
Protect achievements
Second, it is important to protect the achievements of the past few years. These include: strict bank supervision as a precondition to the resumption of lending; and the continuation and expansion of improvements in Naftogaz, a bellwether that is often the opening topic of foreign investors when I raise the subject of Ukraine.
Right reforms
Third, critical reforms are planned for 2017: land reform, pension reform, state enterprise reform, and privatisation. It is essential to get these reforms right. State enterprises are among the largest remaining sources of graft. Land reform, if done correctly, could unlock massive funding for agriculture. Privatisation is a great way to put the country on investors’ radar screens.
End bottlenecks
Lastly, some of the major bottlenecks to investment must be remedied. Fees and bureaucracy make it twice as costly and many times more complicated to unload a ship in Odesa as in Constanta or Rotterdam. We need better port management. The government and the European Bank of Reconstruction and Development are finalizing a concession law in this regard. Every rail transport operator I speak to has an interest in Ukraine; all of them ask when the traction segment of the rail market will be opened up. This matters because logistics is one of the largest barriers to growth in agriculture and exports. Ukrzalyznytsia must be reformed, following in the footsteps of Naftogaz.
These reforms are necessary. They can drive significant investment and put the country at the centre of investor interest. They are consistent with the commitments of the country and they can be achieved.
The EBRD, the largest investor in Ukraine, is engaged in many of these important initiatives, and we will work with investors and the government to make them successful. It is time to make the world see beyond “Ukraine fatigue.”
Francis Malige is the managing director for Eastern Europe and the Caucasus for the European Bank of Reconstruction and Development. He has been based in Kyiv since his appointment in 2014 and is responsible for leading the bank’s operations and policy initiatives in Ukraine, Belarus, Moldova, Armenia, Azerbaijan and Georgia. A French national, Malige joined the EBRD in February 2010 as a director in the financial institutions team. Before joining the EBRD, he was managing director for corporate development at BNP Paribas, focusing on bank acquisitions. Malige is a graduate of ESCP Europe, a French business school. In addition to his native French, he is fluent in German, Italian and English.
