To paraphrase Winston Churchill, Ukraine’s parliament finally did the right thing after it had exhausted all of the other possibilities.
With the passage of the law establishing a land market and the first reading of legislation prohibiting the return of nationalized banks to their former owners, President Volodymyr Zelensky’s administration is on track to unlock more than $10 billion of support from the International Monetary Fund and other partners. This funding is crucial to alleviating the tragic human and economic consequences of the coronavirus epidemic sweeping Ukraine.
Given this breathing space, Ukraine’s policymakers should also start considering Ukraine’s place in the post-COVID-19 world. The pandemic set to significantly accelerate the “decoupling” of China and America into two geopolitical and economic constellations, with dire consequences for the world’s existing supply chains.
French Finance Minister Bruno Lemaire put the issue in stark national security terms, declaring in the Financial Times that Europe can no longer “depend on Asia, on China, for goods that are strategic for us, whether in the aerospace or medical sectors or in other supply chains.” In a result, damaged global supply chains will need to be reset to accommodate the new geopolitical reality.
This reality presents Ukraine with a unique opportunity to become a key Eurasian technology, infrastructure, manufacturing and agribusiness nexus, a critical link in the new 21st century global supply chain economy.
The European Bank for Reconstruction and Development, Ukraine’s biggest investor, believes that Europe’s companies should address these global supply chain disruptions by setting up “global value chain” supply capacity in countries like Ukraine. In fact, Ukraine may emerge out of the global economic shutdown less impacted than most: the EBRD forecasts a proportionally shorter and less dire shock to Ukraine’s economy than other countries since it has not yet fully completed the process of integration into the added-value global supply chain.
Nevertheless, with the EU consuming 43% of Ukraine’s exports, Ukraine is already an integral component of the European supply chain. As a result of aggressive economic reforms and the implementation of the EU-Ukraine Association Agreement, even before the pandemic investors saw Ukraine as a stable and predictable emerging market for investment. Attracted by its macroeconomic stability and 15 quarters of solid economic growth, a reformed robust and liquid banking sector, the scalability of investments, improved infrastructure and logistics, a competitive highly-skilled workforce and exchange rate, and low asset values, investors understand the capacity of Ukraine’s two main growth drivers – brains and grains – to power innovative supply chain solutions in the IT, agribusiness, manufacturing, and infrastructure sectors.
All of these fundamentals remain intact and with some additional fit-for-purpose measures, Zelensky can cement Ukraine’s position as the economic gateway into Europe.
First, the administration should boost economic growth by launching major strategic infrastructure projects backed by public-private partnerships. Supported by international financial institutions, the European Union and G7 partners, the government should create an Infrastructure Investment Authority to leverage the approximately $6 billion in unspent international financial institution funding to promote financing necessary to build roads, ports, bridges, railway and river logistics and power generation plants. Enhanced by bold incentives for investors – needed to compete with the state aid granted by the EU to Ukraine’s neighbours – this initiative would provide a major stimulus to private sector investment.
Second, the government should secure Ukraine’s place as the “World’s Digital Workshop” by doubling-down on efforts to digitize the economy and promote scientific research. The post-coronavirus global economy will likely be innovation and biotechnology driven. Promoting Ukraine as a global research & development center and supporting start-up and advanced technology production companies through enhanced incentives for venture capital investment will propel Ukraine to achieving a globally competitive “Industry 4.0” economy.
Third, Ukraine needs to immediately harness the productivity and experience of the 500,000 Ukrainian workers who the president estimates have returned home from other European countries. These are people who can facilitate domestic investment and readily provide the local supply capacity of goods and services necessary to feed into the global supply chain. To encourage them to remain in Ukraine, long-delayed Labor Code reforms that will promote productivity must be passed at once and financial and regulatory support for the SME sector should be turbocharged across Ukraine’s regions.
Finally, the president must secure Ukraine’s reputation as a stable and attractive investment destination by unwaveringly and resolutely protecting the sanctity of investor property rights. He must (i) continue to prove that vested interests no longer control key sectors of the economy; (ii) complete the reform of the lower courts and law enforcement agencies; and (iii) unequivocally protect the independence of the country’s anti-corruption institutions, which have now begun to function properly.
With some strategic foresight and planning, Ukraine has everything to play for to become a key portal in the world’s post-coronavirus supply chains.
Daniel Bilak is the former head of UkraineInvest, the Ukrainian government’s investment promotion agency
