Investment climate of Ukraine

Ukraine with its unique location in the centre of European market and with compared to developed European countries cheap and in the same time skilled enough and well-educated labor force can be the ideal place for investment placement in the nearest future on the background of the World recession. Besides in many regions of Ukraine there is appropriate infrastructure and Ukraine was and remains investment attractive for foreign investments.

 In Table 1 and on Picture 1 direct foreign investments to Ukraine for the last 9 years are displayed.  Evidently, in 2005 the sale of Krivorozhstal for 4.8 milliard USD was the start for serious investment.

Totally for years of independence in Ukraine the sum of direct foreign investment amounted about 40 milliard USD (for 1.10.2008 – 37.6 milliard  USD). According to the report of UNO Conference by trade and development Ukraine entered in top twenty (the 18th place) of the largest recipients of foreign direct investments in 2007-2009 .Nevertheless, on this index Ukraine substantially yields to the European neighbors.. For example, in Ukraine there is 650 UDS of direct foreign investments per person while in Hungary – 7 000 USD, in Poland – 3 300 USD, in Bulgaria – 2 700 USD.

Table 1. Foreign direct investment in Ukraine for 2000-2008 years at an ever-increasing rate in terms of  millions of dollars and a percentage of all direct foreign investment at the end of each year.

The optimism is decreased by the fact that from year to year considerable share of foreign investments is from Cyprus and the British Virgin Islands which actually are Ukrainian offshore investments, mainly working on Ukrainian owners than for economy and budget of Ukraine. So, only in 2007 these two countries increased their capital in Ukraine for almost 3 milliard USD.

83% of combined direct foreign investments at the beginning of 2008 belonged to 10 largest investor-countries among which Cyprus – 5941.8 million USD, Germany –   5917.9 million USD, the Netherlands – 2511.2 million USD, Austria – 2075.2 million USD, Great Britain – 1968.8 million USD, Russia -1462.2 million USD, the USA – 1436.8 million USD, France – 1046.2 million USD, Virgin Islands (Br.) – 1045.7 million and Sweden – 1006.6 million USD.   From Table 1 and Picture 1 you can observe some interesting tendencies.

Firstly, it is abrupt increase of direct foreign investments for the last 4 years, since 2005. So, since 2005 to 2008 inclusive the general volume of direct foreign investments increased from 8353.9 million USD (the end of 2004) to 37621.5 million USD (October 1, 2008) that is for 350 % or almost in 4 times more, than while  for the previous four years – only from 3865.5 to 8353.9 million USD, i.e. 116  %.

Secondly, there is differentiation of the largest investors on active and more careful.  To the second group it is possible to relate investors from the USA, Germany (except large individual transactions), Switzerland and Korea. Republic of Korea did not seriously invest in present millennium and left off the position of serious investor. The USA and Germany for the last three years practically didn’t show great investment interest to Ukraine. Great Britain and the Netherlands invest more actively and also Russia during the last 4 years. Besides for the last few years Poland and Hungary entered the list of Ukraine’s largest investors. The special group consists of so-called offshore investors.  They always invest rather actively in Ukraine and from 2005 became more active. From one side it can be explained by the fact that beyond many offshore investments there are personalities that have solid political and economic influence in Ukraine, allowing to protect investments even in conditions of not very favorable investment climate. On the other side it should be noted that increase of offshore investments probably is also connected with the growth of export and money laundering from Ukraine. For comparison the share of Cyprus direct foreign investments to Poland is only 2 %.

As follows from the Table №3, in 2008 there was a tendency of substantial growth of EU share of direct foreign investments to Ukraine, insignificant increase of CIS share and substantial share reduction of other countries.

Abrupt increase of direct foreign investments to Ukraine from 2005 scarcely can be connected with the same positive abrupt changes in the investment climate of the country. Ukraine according to its investment favorableness of business is at the bottom of the world rating.

Nevertheless, political component of investment climate apparently influenced to direct  foreign investments to Ukraine. As follows from the graphic, on Pictures 1. Obviously that lately the orange coalition, its foreign-policy and internal guidelines is more trusted abroad. At the same time the change of the prime ministers and government not so strongly influenced on movement of direct foreign investments, except under the direction of the Party of Regions some investors from Cyprus became more active.

The largest recipient of direct foreign investments in Ukraine are industrial enterprises the share of which is 23.9 % (8 999.4 million USD for all time of Ukrainian independence from which approximately 85% was invested in processing industry and 15% – in mining industry. Among processing industries -1685.6 million USD went for metallurgical production and production of finished metallic products, 1564,0 million USD – in food products, drinks and tobacco goods, 1049.6 million USD – in machine building and 838.8 million USD – in chemical and petrochemical industry.)

Financial sphere approaches to the industrial enterprises by the volume of foreign investments which dynamically makes the progress and continues to remain the most attractive for investors due to considerably higher than in Europe and other developed countries the interest rates that determines high profitability of banking.

Next according to the volume of foreign investments such industries as trade and vehicles maintenance, household device and articles of personal consumption repair (3866.1 million USD or 10.3%), real estate and engineering services which was provided to the businessmen (3 849.4 million USD or 10.2%), food industry (only 1748.8 million USD or 4.6%) and metallurgy and metal working (only 1715.2 million USD or 4.6%).

For Ukrainian economy such distribution of foreign direct investments can not be considered as optimal because the  volume in processing industry is practically equal to the volume of direct foreign investments, concentrated in financial sphere, which on October the 1, 2008 reached 7 342.7 million USD or 19.5% of all foreign investments.  So far as in the sphere of production the introduction of new technologies can substantially improve labor productivity with all desirable positive consequences to the society.  For comparison in Hungary 44% of direct foreign investments go to production sphere and only 10.5% – to financial sphere.   Obviously that first of all in the most significant industries for national economy it is necessary to create the most attractive conditions for foreign investors.

Lately while keeping the tendency of direct foreign investments increase in the nearest years Ukraine already can be at the turn of 10 milliard USD in a year. This is such a minimum dream of  Ukrainian economy which could  be realized in 2009.

There are many factors which can give the optimism for Ukrainian economy, potential investors and recipients of investments. The consequences of financial crisis in the countries with the infant market relations to which world economic institutes refers Ukraine can be not only so severe than in developed countries but to create new additional possibilities for investing. In confirmation it is possible to indicate a tendency of 2008.

So according to estimations of UNO Commission of Trade and Development (UNCTAD), direct foreign investments for the last year from developed countries fell down on 33% while in developing countries such as Ukraine they increased for 3.6%.

In the production sphere the world crisis forces businessmen to search the ways of cost saving one of which and possibly the easiest in such situation to cutback the spending on labour force and transportation of raw material and ready made products that in practice can mean active autsorsing (re-deployment or opening of new) production capacities in Ukraine. 

It is expected that forthcoming Euro 2012 football championship will favour the substantial growth of foreign investments in building and reconstruction of sport facilities, highways, railways, air-ports, hotels and restaurants, especially in the cities where the football matches will take place and transport routes to them.

However mainly the entering of foreign investments in some years will be determined by balancing between positive and negative, objective and subjective, economic and political factors, between the desire of investors to get additional profit in the conditions of recession and the fear of additional risks.

It’s clear that those investors which will appear in Ukraine «in business» will win the most when the crisis will be at the bottom and inevitable economic recovery will begin in the country. But to appear at the right place and time and more precisely in the right industry it is necessary to have courage to remain onboard during economic gale, «hammer» and hold on the place on the deck to be on place in the sun when a storm blows over and the clouds of crisis will disperse.