Ukraine needs to ensure the maintenance of a sustainable balance in its economy and employment opportunities. As we prepare for the 2020 Ukraine House in Davos, my thoughts have turned to how this can be achieved through the transformation of the industrial sector.
I am not suggesting that focus should be diverted from the growing high-value tech and agricultural sectors – the brains and grains – but to highlight the need for reform and investment across the whole economy.
Nor am I proposing that we should be going to any lengths to prop up Soviet-era behemoths. What is needed is to retain and reform the most viable of the old industries and supplement them with new sectors, skills, and technology; from energy generation to manufacturing.
The first imperative is to remove the state from the direct running of the economy. The ongoing and lengthy privatization process is being accelerated by President Volodymyr Zelensky and his new administration. More than 1,000 state-owned companies are primed for privatization after the abolition of the two-decades-old exemption list. This new wave of privatization will generate billions of dollars for the state, improve economic efficiency and remove opportunities for corruption.
Transparency in the sales process is paramount to reform and regeneration and vital to attract international investors. The process will be by public auction, with full and open due diligence, for companies valued at more than $10 million. Smaller businesses will be sold via the government’s digital ProZorro platform. We must also accept the difficult reality that a percentage of businesses have no viable future so will not find a buyer and be liquidated.
The second imperative is access to sufficient capital investment to underwrite transformation and growth. Ukraine has attracted a wall of money into listed securities. We now need to create the right climate to attract the same levels of foreign direct investment. In particular, start-ups need access to affordable capital.
The new administration is pushing through with an accelerated program of structural reforms that are bolstering the fight against corruption and opening the country to new types of investment such as public-private partnerships and concession agreements. But the government must also support the continued growth of the country’s national institutions.
The need for transformation of the courts and legal process is well known but Ukraine needs new institutions to grow investor confidence, such as an anti-monopoly committee with real teeth. Investors need confidence in the rule of law, that they can maintain proper title and can find a remedy to disputes through the courts. No matter how robust laws themselves are, they are only as strong as the national institutions that ensure they are upheld.
The third imperative is to attract international businesses to invest in locating major facilities in Ukraine, in every part of their supply chain, from R&D to highly technical manufacturing. We can build our industrial future from the skills and knowledge base of our strongest industries such as aerospace, defense and machine, and parts manufacturing. We are ambitious for our industries, but to compete globally we need to develop new skills in our workforce to match this ambition.
Ukraine has many inherent advantages such as proximity to European and near east markets; a low-cost environment; a wealth of rare natural resources; and a skilled and educated workforce. But Ukraine is competing in global capital markets and needs to overcome negative investor sentiment by demonstrating best international practices.
Pivotal to this is the 2014 Ukraine–European Union Association Agreement which is driving Ukraine’s transition into a functioning market economy by means of, inter alia, the progressive approximation of its legislation to that of the EU. Increasingly, doing business in Ukraine is equivalent to doing business in the EU. The decision by Head, the sports equipment company, to build a major new manufacturing facility in Ukraine is evidence that the country can compete and win on the international stage.
Ukraine’s macroeconomic indicators remain extremely attractive and the investment climate is generally favorable. However, it is vital that the success of Ukraine’s non-industrial sectors such as agriculture, IT and retail do not leave industry behind. If the government and parliament deliver and implement the planned market-friendly legislative changes that will attract fixed investment, Ukraine will avoid premature de-industrialization, and become the biggest emerging market success story of the decade.
James Hart is co-managing partner of Hillmont Partners, a law firm founded by British and Ukrainian partners providing high-quality legal services to investors and businesses in Ukraine.
