After three years of Russia’s war against Ukraine, the two nations still find it impossible to sever economic ties. In fact, Ukraine’s No 1 enemy is also its No. 1 investor.
In 2016, Russia invested $1.67 billion in Ukraine – 38 percent of the country’s total foreign direct investment, according to the data released by the State Statistics Service on March 1.
The second-biggest source of foreign money, Cyprus, pumped in $427 million, four times less than Russia. But with Cyprus’ status as an offshore tax haven, much of that money is simply recycling back to the nation of origin.
In total, Ukraine received $4.4 billion in direct investment in 2016 – some 17 percent more than the $3.7 billion in 2015 – but still too paltry to improve its economic fortunes much.
The dominance of Russia in foreign investment is a new trend. In the ranking of biggest foreign direct investor countries since 1994, Russia is in fourth place, behind Cyprus, the Netherlands and Germany.
The news that Russia is Ukraine’s biggest foreign investor broke amid yet another escalation of the war in eastern Ukraine that has claimed 10,000 lives and led to the loss of Crimea and 15,000 square kilometers of the Donbas.
Despite the eye-popping news of Russia’s striking dominance in Ukraine’s foreign investment, there is actually a simple explanation.
Bank money
While the State Statistics Service of Ukraine doesn’t say which country invested in which industry, it is safe to say that most of Russia’s $1.67 billion went into the banking sector.
In late 2016, the National Bank of Ukraine allowed Russian banks to recapitalize their Ukrainian subsidiaries by lifting restrictions introduced in 2014, when Russian banks were banned from increasing their assets and deposits in Ukraine.
At least eight Russian-owned banks still operate in Ukraine, including Prominvestbank (VEB), VTB, Sberbank, BM Bank, Alfa Bank, Neos, Forward Bank and VS Bank. Together, they make up 8.8 percent of the Ukrainian banking sector. The National Bank of Ukraine allowed their recapitalization to prevent their insolvency.
At the same time, the regulator said that it wants Russian banks out of Ukraine eventually. Until then, the recapitalization of the Ukrainian subsidiaries of Russian banks will likely constitute a significant share of Ukraine’s foreign investment.
In 2016, Russia’s Prominvest bank recapitalized with an additional Hr 20 billion ($740 million), VTB – Hr 8.9 billion ($329 million) and Sberbank – Hr 4.3 billion ($159 million), according to Aleksandr Paraschiy, the head of research at Concorde Capital, a Kyiv-based investment company.
However, Paraschiy said that the recapitalization can’t be considered real investment, since no money actually came in.
“There is an amazing situation: de jure they have decreased their debt and increased investments,” Paraschiy said. “But de facto nothing really changed. The only positive effect on those banks is that they don’t have to pay interest on those debts.”
But Paraschiy added that the difficulties faced by Russian banks in Ukraine were mostly caused by the aggressive and risky credit policies that the banks had pursued in the recent past. While Russia’s war in Ukraine led to a withdrawal of deposits, unpaid loans hurt the finance even more.
While Russian banks in Ukraine are in slightly better condition now, there are signs that trade between the two countries at war is declining. Ukrainian President Petro Poroshenko said only 8 percent of Ukrainian exports go to Russia. Before the war, it was 36 percent.
Kyiv Post staff writer Veronika Melkozerova contributed to this story.
