Every year politicians make the same grandiose proclamations about raising the country out of the morass of economic stagnation, and each year insignificant progress is made.

This year, heralded by Royal Dutch Shell’s multibillion-dollar gas exploration deal, Ukrainian politicians are proclaiming not only an improvement to the business environment, but an entirely new business paradigm. In reality, these statements are more rhetoric than reality, and Shell’s transaction is more an insular investment than transformational change.

The business environment in Ukraine is much the same as it was at independence – centralist, corrupt, and perpetually transitioning from a soviet state to a market economy. Both empirical and anecdotal evidence contradict the assertions of a paradigm shift. The Global Competitiveness Index, published by the World Economic Forum, ranks Ukraine a respectable 73rd out of 144 countries. The ranking is skewed upwards due to Ukraine’s large market size, extensive education system, and regional macroeconomic conditions. However, the true story is in the ranking of the non-market economic conditions: property rights 134th, bribery 133rd, legal framework 141st, customs procedures 138th, and soundness of banks 142nd.   

The World Bank’s Doing Business index of 185 countries shows similar results. Ukraine ranks 137th overall, compared to the regional average of 73 and Poland’s 55th place ranking. Particularly troubling is that investor protection is ranked a mere 117, whereas the regional average is 62.  

Potential investors need only look at the business headlines, typified by stories of the growing economic influence of President Viktor Yanukovych’s inner cabal and the opaqueness of business transactions, to see why Ukraine ranks so low. Moreover, there is a dearth of Ukrainian initial public offerings on the London and Polish stock exchanges and those that do come up are agriculturally focused. In 2012, Ukraine’s main stock index, the UX, fell by a third; Poland’s WIG rose by 26 percent. Many international companies have left Ukraine, including Marathon Oil in 2008, BG Capital in 2011, and Renaissance Capital this year. 

Shell is not investing in Ukraine because of a paradigm shift or improvements to the business environment. Shell, like Chevron and Exxon who are also looking at potential investments, is big enough to accept the risks associated with a poor business environment and invest based on the market fundamentals of supply and demand.  

The Yuzivska field, where Shell is exploring, is comparable in size to the Marcellus or Barnett fields in the US, holding an estimated 42 trillion cubic feet (1.2 trillion cubic meters) of gas and, unlike the Lublin basin that straddles the Ukraine/Poland border that has had a reserve downgrade, the Yuzivska field has been known since Soviet times so the geology is better understood and there is less exploration risk to Shell.   

Global interest in shale gas is high. Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, has said shale gas is the most important innovation in the energy sector in the past decade and Peter Voser, CEO of Royal Dutch Shell, has said it is the biggest hope for future decades. Therefore, it is no surprise that a multi-national company like Shell has an interest in Ukraine’s potentially immense shale gas fields. 

In addition, Ukrainian domestic demand for gas is strong. Ukraine uses approximately 55 billion cubic meters of gas every year and produces only 20 billion cubic meters. The remainder is supplied by Russia and Turkmenistan via Russian pipelines. Disputes between Ukraine and Russia have caused well publicized supply disruptions and price increases to Ukraine, raising the demand for more domestic gas production.   

The announcement of Shell’s $10 billion agreement to explore for gas led some Ukrainian politicians to herald in a new business paradigm, but the reality is that Ukraine’s business climate is no better today than it was last week, last year, or 10 years ago.  Shell made the decision to invest in spite of all the problems, because they have the size and international influence to insulate themselves from the political and regulatory problems that would cripple a smaller company. That is not to say that Shell’s activities in Ukraine won’t be positive for the country and act a catalyst for future change, but in the present change is more rhetoric than reality.

Ryan W. Lijdsman is a Canadian-based business consultant.