Two years into his term, President Viktor Yanukovych is sticking to his story: his administration is working hard to improve the nation’s investment climate, promising that reforms will set the stage for higher living standards and an investment boom.
But the numbers on foreign direct investment, coupled with the insight provided by lawyers that work late into the evening helping investors survive and succeed in the nation’s notoriously horrible investment climate, tell a different story.
“It is no secret that the investment climate has not improved and even worsened in certain areas,” said Armen Khachaturyan, senior partner at Ukrainian law group Asters.
“During the last two years, Ukraine’s attractiveness for investors seriously fell, thanks first of all to the activity of our regulatory bodies, the judiciary and our political situation,” added Vitaliy Yurkiv, an associate in Kyiv for Gide Loyrette Nouel law firm.
Indeed, Ukraine has since independence attracted a cumulative $59 billion in FDI, tiny compared to the $205 billion that has poured into neighboring and smaller Poland. To make matters worse, there are no signs that it is picking up.
According to the CIA’s World Fact Book, a net $6 billion in FDI poured into Ukraine last year. Ukrainian officials admit that the majority came from Cyprus, an offshore haven that is notorious as a hiding place for Russian and Ukrainian money siphoned abroad.
It’s no surprise that investors continue to shy away. Ukraine fell from the 149th to 183th spot on the World Bank’s most recent Ease of Doing Business global ranking of countries.
Foreign investment into Ukraine stagnated during the 1990s, but started to pick up after the 2004 pro-democracy Orange Revolution. In 2005, for example, a record $5 billion alone was raised through the privatization of the nation’s largest steel mill to the world’s largest steel group.
“Three-to-four years ago,” after the Orange Revolution slapped Ukraine onto the radar screen of investors, “investment inflows were at a peak,” Yurkiv said.
What’s keeping larger volumes of investment out now? The same old things, lawyers say. “Lack of economic and regulatory reform together with legal challenges, corrupt regulators and judiciary remain investors’ key concerns,” Khachaturyan said.
There is hope. Khachaturyan said interest is increasing in Ukraine’s energy sector. Desperate to cut down on increasingly expensive Russian natural gas imports, Yanukovych’s administration appears to have opened the doors for the world’s biggest energy companies to invest into Ukraine’s energy sector. That’s a shift from the old ways of keeping this murky yet lucrative playground set aside solely for domestic oligarchs and Russian companies.
The hope now is to boost domestic production using unconventional gas extraction, such as American shale gas technology. Ukraine late in February formally launched the first of two tenders on production sharing agreements. Officials say potential bidders include Royal Dutch Shell as well as America’s Chevron and ExxonMobil.
Such giant investors “are less vulnerable” to Ukraine’s red tape, knee deep bureaucracy and corruption, because they have the “financial resources and influence to protect their interests,” Yurkiv said. “The same can’t be said for many other investors in other sectors,” he added.
While much of the nation’s steel, chemical and industry is dominated by domestic oligarchs, Ukraine’s promising agriculture and food sectors also stand a chance for luring in sizable investment, lawyers said. But a boom will only come if Ukraine follows through on its commitment to sanction the sale of farm land. Doing so will allow domestic farmers to use it as collateral for loans and investors the right to buy it.
Draft legislation that could lift a longstanding moratorium on agriculture land sales was to be adopted last year, but fell off track due to vested interests and political bickering.
“Apart from Ukraine we have business in Argentina,” said Charles Vilgrain, head of Agrogeneration, French farming company. “If this legislation is adopted, we will shift more of our investment to this country.”
Kyiv Post staff writer Oksana Grytsenko can be reached at [email protected]
