New government so far making right moves for foreign investors
During fugitive ex-President Viktor Yanukovych’s four-year rule, many foreign investors complained that the administration wasn’t responsive to their concerns.
But they are now starting to bandy the word optimism with their approval of the actions taken so far by the interim government.
“Investors are waiting for the geopolitical crisis to be resolved, but in the meantime they are looking at what is being done” by the new government of Prime Minister Arseniy Yatseniuk and acting President Oleksandr Turchynov, according to Andriy Bespyatov, head of research at Kyiv-based investment bank Dragon Capital.
“We are in such a deep crisis that some action should be done really fast,” Bespyatov said. “The investors want to see first that it’s safe for them and for the money they sent to Ukraine, second they want to see reforms.”
When on March 12 newly appointed Economy Minister Pavlo Sheremeta was addressing the Emergency Economic Summit for Ukraine, he named bringing IKEA, one of the world’s largest furniture chains, to the Ukrainian market over the next three months as one of his major goals. The event was organized by the European Business Association, which represents more than 900 members.
However, with the state burdened with $73 billion in debt, equaling 42 percent of its gross domestic product, foreign currency reserves of only $15 billion and threats looming of a deeper Russian military intervention, potential investors might still be scared. Ukraine received just $5.7 billion of foreign direct investment in 2013, five percent less than it got in 2012.
While a tense standoff remains with Russian-occupied Crimea, the new government in Kyiv has started bailout talks with the International Monetary Fund. Combined with aid from the European Union and the United States, Ukraine stands to receive more than $15 billion to shore up its finances and enact austerity measures. The European Union has also signaled it is ready to sign a landmark political association and free trade deal with Ukraine this year that Yanukovych had rejected in November.
“Major U.S. businesses active in Ukraine are very supportive of the changes in the new government. They believe the opportunity for a reduction in corruption, an improved legal system, fewer regulations, privatization of state assets, a private energy system and other needed improvements in the business climate are now possible,” says Morgan Williams, president of the U.S.-Ukraine Business Council that unites more than 200 American and Ukrainian businesses.
US companies like Cargill, Bunge, Dreyfus, CHS, and ADM are now discussing with the new government how to get their value added tax refunds paid, Williams said. Intellectual property rights remain of deep concern to companies like Microsoft, IBM, Intel, GlobalLogic, Philip Morris, Monsanto, Lilly, SC Johnson, whose products have been subject to copyright violations in the past.
Energy company Shell Ukraine hopes the production sharing agreement it signed with the previous government in 2013 to explore and develop potential shale gas fields in Ukraine will be fulfilled. “We are confident that a potential success of the Yuzivska project in eastern Ukraine would significantly contribute to raising country’s international profile as a reliable business partner and sound country for foreign investment,” Shell’s press service told the Kyiv Post.
Meanwhile, VimpelCom, a large telecommunications service provider based in Amsterdam, that owns Ukrainian mobile service provider Kyivstar had to write off $1.4 billion related to business in Ukraine and Canada. The company did it “to reflect higher political risks and reduction in Ukraine’s credit rating,” according to Jo Lunder, chief executive officer of VimpelCom who says it didn’t affect the company’s cash flow and its plans to invest more in Ukraine.
Volodymyr Sharov, managing director of GlobalLogic Ukraine, an information technology outsourcing giant that lost one of its employees during clashes in Kyiv, says the company “is positive regarding cooperation with the new government and ready to work on (IT) industry development...”
Natalie Jaresko, chief executive officer and co-founder of Horizon Capital, a regional equity management fund, expects investors to pay more attention to Ukraine in the coming months.
But John Shmorgun, chief executive officer of Paris-listed Agro Generation agricultural company, said the tough investment climate in Ukraine makes it problematic for new businesses to enter the market. “No investors are going to come,” Shmorgun says. “That’s why it’s important for leading institutions like World Bank, European Bank for Reconstruction and Development and International Financial Corporation to start providing trade financing, loan guarantees and credits.”
Olena Voloshyna, country manager for IFC Ukraine, the for-profit arm of the World Bank, said the corporation continues to provide clients with financing. The IFC has already invested $191 million of its own capital and attracted $85 million from other investors this year alone.
Foreign companies, like German Billa supermarket chain, continue doing business in Ukraine, although Ukraine’s investment climate is far from perfect.