Ukraine’s lagging reforms are pushing U.S. investment out of the country while opportunities abound for investors willing to take big risks.
Russia’s war against Ukraine is scaring off some investors, put perhaps less than the indecisive leadership.
Robert Bensh, managing partner of Pelicourt LLC, a private equity firm with a majority stake in Ukraine’s third largest gas producer Cub Energy, said that war won’t stop him or most of his colleagues from doing business. “Not me, not at all,” Bensh says. “Ninety-three percent of the country is open for business.”
Draconian and opaque laws, low transparency and high level of corruption all discourage investments in Ukraine, Bensh said.
Employing 500 Ukrainians through its investments, Pelicourt is finding other places to put their money while putting their Ukrainian assets on hold with a “skeletal group of people” on the ground to survive.
But Pelicourt is doing well compared to other companies.
In December, global gas giant Chevron pulled out of an agreement to extract shale gas in western Ukraine. The U.S. company was to initially invest $350 million into the project. Texas-based ExxonMobil made a similar decision when it suspended offshore gas exploration in the Black Sea near the Crimean peninsula shortly after Russia annexed it in March 2014.
Both Chevron and ExxonMobil would not comment for this story.
Since 2004, Ukraine-U.S. trade relations have barely improved. On the contrary, bilateral trade turnover has been getting closer to where it started off. Since 2009, Ukraine has had a trade surplus with the U.S., where its exports have exceeded imports.
However, tax rules are part of the problems that foreign oil and gas companies face. “The current legislation calls for a 55 percent tax on all produced resources,” says Bensh. “There’s absolutely no economic reason for anyone to be operating within Ukraine in the energy sector.”
Brian Best, managing director of Dragon Capital, one of Ukraine’s leading investment banks, said Ukraine “should have been able to attract about $15 billion in foreign direct investments on a yearly basis if the country had operated like a normal emerging market.”
Instead, Ukraine has been averaging $1.7 billion annual in 24 years of independence. The State Statistics Service of Ukraine, a government agency, reports that Ukraine’s cumulative foreign direct investment was $41 billion in 2014, or $17 billion less than the previous year.
Andy Hunder, president of the American Chamber of Commerce in Ukraine, says that 97 percent of the chamber’s 600 members say corruption is the No. 1 issue in Ukraine. Corruption “destroys value at all levels” which is why it is a huge concern, Best said.
Hunder also blamed bureaucracy, too much regulation and a lack of rule of law.
Ukraine does not know how to attract investments, Bensh said, because of an incoherent economic strategy.
“You have the president saying one thing, you have the finance minister saying something else, you have the prime minister saying a completely different thing,” Bensh said. The current government has “been in office for more than a year, this is yours now, you own it,” he said.
Dragon Capital’s Best said that “if you create the right environment, businesses and investors will do the rest.”
Investors, instead, are finding prospects elsewhere.
“The year 2015 is wasted in our lives, 2016 probably the same,” Bensh said.
But Hunder said growth is possible next year. “It is understanding that it’s not a sprint, it is more of a marathon,” Hunder said.
Kyiv Post staff writer Ilya Timtchenko can be reached at [email protected].
