Since I moved to Kyiv in November 2018, my friends have been asking me what impresses me the most about Ukraine.

With reflection, it is not the striking beauty of this country and its nature, or its vast cultural heritage. Not even today’s incredibly vibrant cultural life. It is its people.

Why am I mentioning this?

Because investors base their decisions on a number of factors, including fiscal environment, investment climate, rule of law, political and economic stability, legislative and regulatory predictability, quality of infrastructure. But ultimately the human factor is what determines the success of a venture and Ukraine’s human capital is impressive.

Having established this, it is also clear that the potential of this country is substantial and the argument for optimism strong.

Many achievements

Since the 2014 EuroMaidan Revolution that ended the presidency of Viktor Yanukovych, the country has undergone a difficult journey and implemented wide-ranging reforms, despite extraordinary security, political and economic circumstances. This has been achieved largely thanks to decisive policy actions by the country’s leadership and a sizable assistance package provided by the European Union and the international financial institutions.

The pace of recovery is not strong enough but it is happening: 13 quarters of economic growth after the 2014–2015 meltdown should not be dismissed.

The public debt/gross domestic product ratio has been reduced from about 80 percent in 2015 to less than 60 percent in the first quarter of 2019. Real sector indicators such as growth of capital investment, industrial production, turnover of retail trade, and real wages have all turned positive.

Inflation has been dramatically reduced (even if not yet at the target level). This has been achieved during a conflict, with budget expenses directed to defense and security at 6 percent of GDP.

Source: International Monetary Fund as of April 2019

The banking sector has been stabilized and is being reformed thanks to the relentless, effective and synergetic action of the National Bank of Ukraine and the Ministry of Finance. As a result, capital and liquidity buffers are adequate, non-performing loans — whilst still at unacceptable levels — have been almost fully provisioned, and return on equity in 2018 was at a healthy 14 percent.

The fight against corruption is far from won, but the space for corruption has been dramatically reduced. Sweeping reforms in the public procurement sector (ProZorro), the introduction of value-added tax automatic refunds, fiscal decentralization, the floating of the hryvnia, which reduced the opportunity for exchange rate manipulation, and the energy sector reforms have all contributed to this and have saved the Ukrainian taxpayers 6 percent of GDP.

The convergence path towards the European Union is set, with the signing of an association agreement and the Deep and Comprehensive Free Trade Agreement. This has allowed the country to shift its trade flows and now Ukraine trades more with Poland than with Russia. Ukrainian companies are improving their quality standards and are becoming competitive in the EU markets.

The country has a thriving information-technology sector, whose value increases at rates above 15 percent per year and employs over 100,000 professionals, whose remuneration is 5 to 10 times higher than the average wage.

Source: International Monetary Fund as of April 2019

The way forward

However, this is not enough. A GDP growth rate at 3 percent or below will not allow Ukrainian citizens’ living standards to converge towards the EU. Growth rates of 5 percent or higher will be needed for that.

Neither monetary nor fiscal policies can achieve that. Ukraine cannot afford either.

Relentless improvement of the investment climate is where the action of the authorities needs to focus. The basic preconditions for this to happen are a stable macroeconomic environment, sound institutions that guarantee property rights and provide rule of law and an open competitive economy.

Protecting the legacy of the past achievements and preserving macroeconomic stability remains crucial in the foreseeable future. With about $18 billion of foreign currency debt liabilities becoming due in 2019 and 2020 and limited access to foreign markets, the environment remains fragile, notwithstanding the recent successful Eurobond benchmark issuance. For this reason, the engagement with the International Monetary Fund and other international partners remains the main anchor for macroeconomic stability. The new leadership has acted appropriately in reassuring the markets about the strategic directions. Now deeds must follow words and a new arrangement with the IMF will have to be negotiated and finalized as soon as a new government is in place.

What needs to be done

Among Ukrainian institutions, a reformed NBU has shown what results can be achieved by a credible, independent and professional institution ready to cope with the challenging international and domestic environment. The preservation of its independence is an absolute priority.

The Business Ombudsman Council, created by the European Bank for Reconstruction and Development with donor support, is providing a substantial contribution to resolving issues between businesses and the public administration. It is now important to approve the law that will regulate its operations in the future. The cases of the NBU and the ombudsman show the way for reform in the public administration.

Only sound public institutions and professional public administration with high integrity, providing high quality public services can guarantee private property rights and rule of law. That is why the EU and the EBRD have created the Ukrainian Reform Architecture, a holistic approach to public administration reform and deployed teams of young Ukrainian professionals to rebuild public administration from within key ministries.

When it comes to rule of law, I mentioned that space for corruption has been significantly reduced. I believe this was the right priority, as other experiences where focus has been put on reactive sanctioning rather than pre-emptive removal of corruption opportunities have not proven sustainable in the long term. However, successful anti-corruption efforts entail a holistic approach, where administrative reforms are accompanied by law enforcement and recovery of proceeds of corrupt activities. There is significant room for improvement in these areas. Little success has been achieved in enforcement and recovery despite a large number of new institutions and laws. The anticorruption legislation is not enforced, anticorruption institutions are still weak, lack capacity and there are significant efforts to undermine their independence and efficiency. Little success has also been achieved in confiscating assets, including those of the former regime.

Providing a level playing field for investors and entrepreneurs is crucial for unleashing the growth potential of the Ukrainian economy. Vested interests in the oligarchic structure of the economy have hardened the resistance to reforms and more needs to be done to curb their power and avoid state capture.

Several oligarchs have had a grip on Ukraine’s economy and political life for many years: Rinat Akhmetov, Victor Pinchuk, Petro Poroshenko, Dmytro Firtash, Ihor Kolomoysky, Viktor Medvedchuk.

The productivity gap needs to be tackled. Labor productivity has stagnated over the past 25 years, whilst most peers have improved substantially. Emigration and brain drain, in particular of young skilled workers has to be reversed. It is not tenable that four million Ukrainians, or 10 percent of the population, do not contribute to the Ukrainian economy, if not through remittances. President Volodymyr Zelenskiy, with his passionate reference to the Ukrainian diaspora, struck the right cord in his inauguration speech.

Capital investment in Ukraine lags behind peers at 17 percent of GDP, compared to 25 percent of its peers. The country needs to attract more foreign direct investment. With $1,200 of FDI stock per capita, Ukraine only fares better than Moldova among the six Eastern European Partnership countries. This is a lost opportunity.

The same success Ukraine enjoyed in the IT sector ought to be replicated in other industries. The agribusiness value chain is very much focused on farming and related logistics. There is no reason why vertical integration in more value-added segments should not be pursued. Where this has happened, very successful groups have emerged in both domestic and international markets.
Progress needs to be achieved in the commercialization and privatization of state-owned enterprises and state-owned banks.

Significant progress has been achieved in terms of corporate governance. In the banking system, the ongoing appointment of independent supervisory boards in three major state-owned banks under the leadership of the Ministry of Finance in partnership with the IFIs, is a positive example. It is essential that we keep the momentum and pre-privatization efforts continue in order to eventually reduce the presence of the state in the banking system.

In the corporate sector, while small privatizations are happening, more progress has to be achieved in the large ones and where processes have stalled (e. g. Centrenergo and OPZ), serious and decisive efforts should be made to unblock them.

Three steps for new leadership

I found the results of a recent survey conducted by the European Business Association, Dragon Capital and the Centre for Economic Strategy among foreign investors very interesting. According to the respondents the three steps by the new leadership that would have the biggest positive impact on investment climate are:

  • Demonstrate effective anticorruption efforts;
  • Appoint credible reformers to key positions; and
  • Take visible steps to separate politics and business interests, reducing the influence of oligarchs.

By the same token, the three most detrimental actions would be:

  • A shift in Ukraine’s geopolitical direction away from the West;
  • Steps to undermine the anticorruption efforts; and
  • Attempts to undermine NBU independence.

In my opinion this very well summarizes the pillars of the economic agenda in the years to come.

A lot has to be done and the road ahead is a difficult one, but with the achievements of the past five years, the Ukrainian people have amply demonstrated that the country is up to the challenge and a strong social cohesion can go a long way. The international community is there to lend its continuous support.

Matteo Patrone is the managing director of Eastern Europe and the Caucasus at the European Bank for Reconstruction and Development. Based in Kyiv, he is responsible for the bank’s operations and policy engagement initiatives in Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine with a staff of 180.