Despite the hype by Ukraine’s politicians to declare success in attracting foreign direct investment in Ukraine, the official numbers tell a bleaker story:
The nation attracted a paltry $1.9 billion to $2.3 billion in FDI in 2017. The total amounted to a meager sliver of the $1.8 trillion in investment globally, according to the estimates of the World Investment Report 2017, published by the United Nations Conference on Trade and Development.
The reasons are clear: endemic corruption, impunity, no rule of law — and a perception that Ukraine’s leaders aren’t doing enough to change the situation.
“Look at the business surveys and Transparency International’s Corruption Perception Index,” said Timothy Ash, a longtime Londonbased Ukraine analyst with BlueBay Asset Management Company. “Too many foreign companies have been to Ukraine, tried it, and had a bad experience with corruption. They have left, and don’t want to come back.”
The one bright spot is internal investment of $16 billion. That helped Ukraine’s economy to grow by 2 percent in 2017, according to Anatoliy Amelin, co-founder and director of the economic programs of the Ukrainian Institute for Future think tank.
Still Ukraine’s official gross domestic product hovers around $100 billion, a small figure for a nation of 42 million people, but deceptive because as much as 42 percent of economic activity is uncounted.
Press on “State Statistics Service” label on the chart to see its data.
Exodus of Ukrainians
The dismal conditions have triggered an exodus of Ukrainians seeking better opportunities abroad.
“Think why a company should come to Ukraine, over Poland, Hungary, Turkey, or Morocco. They need big pull factors, and Ukraine still lacks them in sufficient concentration,” Ash said.
“Everyone talks a lot about cheap and skilled labor. But a lot of skilled people have left the country and for many foreign companies, when they come to Ukraine, skilled labor is hard to find.”
More than a million Ukrainians are currently working in Poland, more than 300,000 are in Russia, and some 146,000 are in Italy. Many leave because they’ve given up hope on Ukraine, citing low wages and instability.
Differing figures
There isn’t even agreement between state bodies about how little FDI Ukraine is attracting.
The National Bank of Ukraine, or NBU, said that Ukraine attracted $2.3 billion in 2017, while the State Statistic Service said that the figures are closer to $1.9 billion.
Amelin of the Ukrainian Institute for Future said that the figures are even weaker than those reported by the central bank and State Statistics Service.
“In reality, Ukraine attracted only about $500-$700 million in actual foreign direct investment in 2017,” he told the Kyiv Post on March 12. “Most of the FDI is barely considered as legal reinvestment, belonging as it does to Ukrainian companies that are registered abroad.”
The source countries of Ukraine’s biggest foreign investors are also problematic: Cyprus ($506 million), Russia ($396 million) and the Netherlands ($262.5 million). Many officials and businesspeople in Ukraine have dozens of firms, registered in offshore tax havens such as Cyprus, and many also still have businesses in Russia. In addition, billions of dollars have been siphoned out of the country, either through offshore companies or pocket banks.
To top it off, the weak protection of property rights, corrupt court system and the flagging fight against corruption have made investment in Ukraine simply too risky, Hlib Vyshlinskiy, the acting director of the Center for Economic Strategy, told the Kyiv Post on March 12.
Amelin says that 2017 was not much different from the previous two years.
“It’s not that 2017 was the hardest year,” Amelin said. “In fact, we’ve had a series of bad years for foreign direct investment.”
$10 billion in FDI wanted
Ukraine has gotten less than $50 billion in cumulative FDI since regaining independence in 1991. It needs approximately $10-$20 billion in annual FDI to revive the economy, by the estimate of many economic experts.
In the last year, Ukraine showed mixed performances in a range of economic rankings.
Ukraine’s business climate has slightly improved, according to the World Bank’s 2018 Doing Business ranking, moving up from 80th to 76th place.
But it dropped back in the Inclusive Growth and Development Index 2018, published by the World Economic Forum, and now ranks 49th among the 77 emerging economies in the ranking.
Ukraine ranks 130th out of 180 countries in the 2017 Corruption Perception Index, which is published by Transparency International.
Promotional efforts
The Ukrainian government last year put some effort into improving the country’s business climate: it adopted a bill that aims to reduce officials’ harassment of business, established an anti-raiding commission within the Cabinet of Ministers, created an Investment Council, adopted a privatization bill and a law on limited liability companies and canceled obligatory stamps for documents. It also has with outside funding in recent years established a business ombudsman’s office, to investigate complaints, and UkraineInvest, a promotion agency headed by Daniel Bilak, the Canadian-Ukrainian lawyer who is Prime Minister Volodymyr Groysman’s investment adviser.
But promotional efforts will go for naught until corruption is eradicated.
“We still have high financial risks, widely spread corruption, plus a constant flow of negative news from and about Ukraine,” Illya Neskhodovskiy, an expert of the Reanimation Package of Reforms think tank said. “That all makes it unattractive for foreign direct investment.”
Ash said that investors are looking for long-term assets, such as factories or banks. “For these guys, political, social stability and security are really important. I guess there are still many concerns for investors here due to the security situation in (eastern Donbas),” Ash said.
What to expect?
Many Westerners and Ukrainians are pinning their hopes for a better future on the establishment of an independent anti-corruption court, something that President Petro Poroshenko has resisted but now says he favors.
“That will be a foundation for increasing FDI… making Ukraine’s economy attractive for new investors,” Vyshlinskiy said.
But Amelin doubts that any FDI breakthrough will take place in the next two years amid the run-up to the likely March 2019 presidential and October 2019 parliamentary elections.
The campaigning “always means troubles and protests in the country” scaring off investors, Amelin said.
2020 may bring the boost Ukraine needs — maybe.
“But that will depend on the newly elected government, and the continuation of reforms.”
