Much more is expected from Yanukovych’s team.
Click here to see ‘Net Foreign Direct Investment Inflows to Ukraine’ table.
President Viktor Yanukovych began his term in office promising to make Ukraine one of the world’s most attractive destinations for investment. Results so far are, at best, mixed.
Experts praise the government for bring stability to policymaking after years of squabbling under former President Viktor Yushchenko and his Prime Minister Yulia Tymoshenko.
They also gave the thumbs up to attempts to begin economic reforms, such as the new tax code and cutting bureaucracy when opening a business.
But critics point out that there has been no advance in the rule of law or the fight against corruption, despite assurances from the leadership that these are priorities.
Foreign direct investment is inching back up, but is still down on pre-crisis levels – and miniscule compared to the investment pouring into to other developing economies.
To start with the good news: The stability of the current authorities has brought some confidence back to investors.
The European Business Association’s investment attractiveness index has crawled upward since the presidential election last year, and has now reached the level of 2008, before the crisis hit.
Anna Derevyanko, executive director of the EBA, puts this down to the stable platform provided by the authorities. “This is a vote of confidence in the new government,” she said.
“Now you see that president and government are pulling the strings in the same direction. This gives certain confidence,” added Julian Ries, head of Beiten Burkhardt law firm in Kyiv.
The International Monetary Fund renewed work with Ukraine last year, which provides a strong stimulus for reforms, according to Jorge Zukoski, President of the American Chamber of Commerce in Ukraine.
While the process and result was far from perfect, adoption of the new tax code last year and introduced at the start of this year, fueled much debate and dialogue about how such legislation should look.
The authorities have also worked on deregulating business, eliminating 18 licenses right away According to the World Bank’s Doing Business report for 2011, dealing with construction permits in Ukraine will take an average of 374 days comparing to 535 days last year.
You see that president and government are pulling the strings in the same direction. This gives certain confidence.”
– Julian Ries, head of Beiten Burkhardt law firm in Kyiv.
Companies on average spend 657 hours per year dealing with taxes, 79 hours less than last year.
But that’s only part of the story.
The government has been accused of moving at a snail’s pace on reforms and favoring its own big business backers.
The country’s largest foreign investor, ArcelorMittal last year found itself fighting off what they called an attempt by the state to re-nationalize the largest steel mill in the country, which it bought through a privatization tender in 2005 for a whopping $4.8 billion.
Problems with value added tax refunding persist, and critics link them to a lack of transparency and outright corruption.
British Ambassador Leigh Turner spoke out on Feb. 1, saying: “Some companies receive it quickly, some receive it slowly, and some companies do not receive them at all. Unfortunately, there is an opinion, that how quickly you receive the VAT refund may be influenced either by political connections or corruption. Clearly, this is a catastrophic situation for business climate.”
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Foreign investors were dismayed at the government’s decision to limit grain exports after a poor weather reduced a still big harvest, and then distribute quotas in a non-transparent way, ignoring the applications of leading grain-trading companies, such as Cargill and Louis Dreyfus Commodities.
Unfortunately, there is an opinion, that how quickly you receive the VAT refund may be influenced either by political connections or corruption. Clearly, this is a catastrophic situation for business climate.”
– Leigh Turner, British Ambassador to Ukraine.
Investors consistently mention corruption and the lack of rule of law as the two biggest problems in Ukraine, and perception of these even got worse, according to the EBA index.
Derevyanko from the EBA said the investment attractiveness index was creeping up, but could easily reverse if the much-discussed overhauls didn’t take place or took too long.
“In order to keep investors in the country, as well as attracting new ones, [the government] needs to tackle corruption and bring order to the legal system, so that people trust it,” said Derevyanko.
Ukraine did move up the World Bank’s Doing Business ranking last year, but only by two places, remaining in a dismal 145th out of 183 countries, between Syria and Gambia. This compares with other former Soviet bloc countries as Azerbaijan in 54th, Lithuania in 23rd and Georgia in an impressive 12th.
Many critics say that despite lots of talk, the government is yet to make real headway toward attracting more much-needed investment.
“The lack of meaningful reforms to improve conditions for investors means that investors continue to face the same issues they had in the past, such as over-regulation, an inadequate legal system with unpredictable court rulings and insecurity of the ownership rights,” said Andrey Tsymbal, a partner at consulting firm KPMG.
Ukraine did receive 21 percent more net foreign direct investment last year than in 2010, but 40 percent of that total was money pumped into foreign-owned banks by their head offices.
The fresh injections were needed to keep the banks solvent amidst double-digit non-performing loan levels and other financial problems.
Given choice, foreign direct investors will tend to converge on those economies that offer the best investment environment, the best (low) tax regime, lower levels of corruption, less red tape and bureaucracy. On nearly all these accounts, Ukraine scores poorly.”
– Timothy Ash, head of emerging markets research at the Royal Bank of Scotland in London.
As the world recovers slowly from the 2009 global recession, the amount of foreign investment available is limited, meaning countries – including Ukraine with its notoriously horrible investmetn climate – will have to work harder to attract it.
“Given choice, foreign direct investors will tend to converge on those economies that offer the best investment environment, the best (low) tax regime, lower levels of corruption, less red tape and bureaucracy. On nearly all these accounts, Ukraine scores poorly,” said Timothy Ash, head of emerging markets research at the Royal Bank of Scotland in London.
“Ukrainian policy makers will hence have to work that much harder to offer Ukraine as an attractive place to do business,” he added.
“Business understands that there are no quick results – but some results have to be there,” said Derevyanko from the EBA.
“By the third quarter of this year we will definitely see whether the government is eager to implement reforms and fulfill their promises,” she added.
