We, the chambers of commerce and business associations listed below, representing the business community in Ukraine, wish to express our concern over the general absence of readily available political risk insurance for investments in Ukraine, and the increasing fragility of the Ukrainian economy, due in part to the absence of foreign and domestic investment. Despite the promises made in the Budapest Memorandum, in return for which treaty Ukraine gave up the world's third largest nuclear arsenal, Ukraine's territorial integrity is not being respected, and investors in Ukraine are threatened with further military and economic coercion that place their investments at risk. This business and investment risk needs to be covered by suitable political risk insurance, so that investments into Ukraine may generally proceed. We request that foreign embassies in Ukraine ask their national governments to urgently consider this problem in order for their countries to work together to support the creation of a suitable multilateral political risk insurance program (as previously suggested by George Soros), based on:1. standby guarantees to support the World Bank's Multilateral Insurance Guarantee Agency (MIGA) to make suitable political risk insurance available for foreign (cross-border) investors in Ukraine; and2. the creation by the World Bank of a trust fund program, to be managed by MIGA (as was donefor the West Bank and Gaza to get around limitations on MIGA's authority to issue policies), to insure domestic and certain types of existing investments in Ukraine.
Such insurance should be readily available at nominal cost for all bona fide investments in Ukraine (excludingthe occupied Ukrainian territories) to cover the risks ordinarily covered by MIGA political risk insurance, including from war, conflict and civil disturbance. This insurance cover should be granted irrespective of the difficult credit and risk consideration spresently associated with Ukraine due to the current situation, so that Ukraine’s economy can continue and, with suitable legal reform and anti-corruption measures, develop irrespective of any political risks for investors in Ukraine.
Adopted as of 18 December 2014 by:
American Chamber of Commerce (“ACC”)
Benelux Business Club
British Ukrainian Chamber of Commerce(“BUCC”)
Camera di CommercioItaliana per l’Ucraina(“CCIPU”)
Canada-Ukraine Chamber of Commerce
EU-Ukraine Business Council (“EUUBC”)
Franco-Ukrainian Chamber of Commerce andIndustry (“CCIFU”)
Swedish-Ukrainian Business Club
Ukrainian Chamber of Commerce and Industry(“UCCI”)
U.S.-Ukraine Business Council (USUBC)
A Commentary on the Urgent Need for GreatlyIncreased Political Risk Insurance for Ukraine
Ukraine urgently needs additional political risk insurance because of the conflict in eastern Ukraine. Billions of dollars in investment projects previously approved by the boards of foreign companies for Ukraine have been cancelled since October 2013 by companies taking the view that they can not invest into a country that has a conflict going on, even for investments in Kyiv and Lviv that are farfrom the current battle fields. The Ukrainian economy is presently in rapid decline, in large part because ofthis lack of investment.
Adequate political risk insurance is presently not available for Ukraine. The Multilateral Insurance Guarantee Agency (“MIGA”), a branch of the World Bank that is the largest international organization providing political risk insurance, presently hasa theoretical capacity of approximately 350 million US dollars of unused political risk insurance cover available for Ukraine. However, MIGA has strict criteria forthe level of risk that they are willing to accept, andit is understood that MIGA political risk insurance isonly available presently for Ukrainian investments invery special, limited circumstances. Obtaining MIGA political risk insurance is also a relatively long and difficult process, and only available for new crossborder investments.
Turning to private insurance, Ukraine is today largely off cover for political/conflict risk, except forvery limited short term political risk insurance, whichis not suitable for most investment projects. Exceptfor US OPIC and the Canadian EDC, Ukraine is also off-cover for most national political risk insurance programs. Thus, potential investors in Ukraine find themselves with an urgent need for political/conflict risk insurance in order for existing projects to continue and new projects to be developed.
The proposed reform programs to address corruption and other problems are very important for Ukraine, but these reforms by themselves will not result inany significant investment, so long as potential investors fear war and conflict destroying their investments. They need this conflict risk to be insured.
Therefore, developing a program for political risk insurance should begin immediately, simultaneously with the proposed reforms. The provision of adequate political risk insurance by itself should significantly help maintain a level of investment and economic development similar to that in the past, by mitigating the risks from conflict.
As George Soros has pointed out, all that is needed for such political/conflict risk insurance of foreign investment is a multilateral stand-by guarantee, which could be funded by the G7 and the EU. Very little actual capital would need to be advanced. Assumingthat the conflict in the east stabilizes, then such insurance would never need to be drawn on — so there would be virtually no cost apart from administrative expenses. These administration expenses could be very small if the existing World Bank MIGA administratives tructure and staff are used to provide this expanded political risk insurance.
To best respond to Ukraine’s special current situation, such political/conflict risk insurance should be modified from the traditional MIGA insurance as follows:
1. it should be readily available at little or no costfor all genuine investors on a very expedited basis, in order to provide greater support for the Ukrainian economy — investors should thus been couraged to invest on the same basis as if there was no risk from conflict;
2. it should be for both foreign and domestic investment; and
3. it should possibly even protect all existing investments — though that might justify some greater premium.
To provide insurance for domestic and certain existing investments in Ukraine, that MIGA cannot put on its books under its Convention, the World Bank should create a special trust fund administered by MIGA to provide such cover for domestic and existing investments, as has been done by the World Bank for the West Bank and Gaza with the support of the European Investment Bankand the Government of Japan by creating the West Bankand Gaza Investment Guarantee Trust Fund.
Thus, political/conflict risk insurance can be provided to significantly help save the Ukrainian economy from collapse and create the right context forthe reform agenda, such as the fight against corruption.
With such political risk insurance being made available, law reforms are then much more likely to quickly stimulate inward investment.
Finally, the US, the UK and the rest of the EU and G7 should help Ukraine with political risk insurance as a fundamental responsibility. The US, the UK and Russia signed the Budapest Memorandum with Ukraine to guarantee Ukraine’s territorial integrity and protect Ukraine from military and economic coercion, in return for which Ukraine gave up the world’s third largest nuclear arsenal, comprising over 5,000 nuclear weapons, in the world’s only successful act of nuclearde-proliferation, a hugely important precedent.
This treaty also guaranteed Ukraine protection from economic coercion, for which such political risk insurance is now required. In addition, the EU encouraged Ukraine to sign the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU, and as Ukraine’s partner, the EU should react, consistent with the spirit of this Agreement, to support Ukraine’s economy with such needed political risk insurance.
Bate C. Toms
Chairman of the British Ukrainian Chamber of
Commerce (“BUCC”)
