You're reading: ‘Putin risk’ scares investors, prompts calls for insurance

New investment is at a standstill in Ukraine for plenty of good reasons - war, recession and lingering uncertainty about whether the nation’s political leaders are truly committed to fighting corruption.

But one way – and perhaps the only way – to break the investment drought, is for potential investors to get access to affordable political risk insurance, business representatives say.

The government is not going to be able to revive the economy on its own, said Morgan Williams, president of the U.S.-Ukraine Business Council.

“Putin risk is multifaceted, hybrid. It is not just his boots on the ground, taking your plant or taking more land. It’s the economic destabilization of Ukraine, anti-Ukrainian propaganda, keeping the Ukrainian government weak,” Williams said.

That’s where government-backed insurance comes in.

Ukraine has attracted a dismal amount of cumulative foreign investment since becoming an independent nation in 1991. The reasons are clear: government corruption, government bureaucracy, no rule of law. In 2014, Russia added new reasons for investors to flee: war and Crimean annexation.

Many investors are even willing to put up with lack of reforms and corruption, but need insurance before they are willing to do business in Ukraine, he said. But Russian President Vladimir Putin’s war against Ukraine is the greatest threat to investment.

Only the United States and Canada offer insurance to businesses in their nations that are investing in high-risk Ukraine. The American agency is the Overseas Private Investment Corporation and the Canadian one is Export Development Canada.

OPIC has $73 million in insurance commitments in Ukraine, including agriculture, small and medium business lending, and energy sector projects. It is open for business across Ukraine and seeks investments, OPIC spokesperson Charlie Stadtlander said.

However, OPIC has the ability to cover up to $250 million per project for up to 20 years.
Investors from other nations would be less reluctant to invest in Ukraine if they had the option.
“I know of several billion dollars of investment coming from Asia and Middle East that was approved and going forward when the invasion of Crimea occurred,” lawyer Bate C. Toms, chairman of the British Ukrainian Chamber of Commerce, said. “Investment was cancelled because they couldn’t get political risk insurance.”

Theoretically, the World Bank Multilateral Investment Guarantee Agency could provide insurance But the agency, known as MIGA, considers Ukraine too high of a risk to cover, Toms said
No new projects were started in 2014, although MIGA is “exploring all opportunities, including in Ukraine,” the organization’s head of communications, Mallory Saleson, said in a written statement.
The last MIGA project in Ukraine was signed on Sept. 23, 2013 and guaranteed $23.9 million to cover shareholder loans by Porsche Corporate Finance of Austria to Porsche Mobility in Ukraine for a period of 15 years.

“MIGA coverage helps one feel a little more secure about the potential risk to lose whole engagement in Ukraine. We do hope that such a scenario will not become true, but so far during the last two years every expected worst-case scenario was always exceeded by much worse reality,” Josef Graf, director of Porsche Ukraine said.

He said getting additional risk insurance has become too expensive given the nation’s volatile situation.

But if multi-governmental agencies would step in and absorb some of the risk through taxpayer-backed insurance, “you will see large investments coming in because prices are good,” Toms said.
Konstantin Magaletskyi, Horizon Capital venture fund partner, said insurance could improve access to finance.

“If the mechanisms are designed, this would definitely increase the possibilities to provide funding for Ukraine,” he told the Kyiv Post. “If we price in all the risks present in Ukraine, costs of funding and credits get sky high. Development agencies such as the European Bank for Reconstruction and Development or International Financial Corporation could at least partially cover the risks of potential creditors. The U.S. has OPIC. We need more such OPICs.”

One international financial institution is offering some options.

The European Investment Bank offers risk sharing arrangements for private-sector borrowers outside the European Union.

However, this coverage is not offered on a stand-alone basis, EIB spokesperson Dušan Ondrejicka said. Several EIB projects with bank and corporate borrowers in Ukraine have already included coverage against risks.

Ukraine’s government should be more actively lobbying for a risk insurance program, Toms and Williams said. But Western governments could also set up a separate trust fund under the administration of the World Bank’s MIGA, as it has done for Israel’s West Bank and Gaza, Toms said.

An international public-private fund could be another option. In proposing a multibillion-dollar fund to save Ukraine, for instance, Hungarian-born American business magnate George Soros pledged to contribute $1 billion of his own money.

“The benefit here is that they don’t need to provide money right away. They just provide some insurance that might never” be needed, Horizon’s Magaletskyi said, providing a potential “win-win” that stimulates investment.

Kyiv Post staff writer Olena Gordiienko can be reached at [email protected].