Corruption and lack of trust in the judiciary in Ukraine are the largest obstacles for foreign investors
Dragon Capital and the European Business Association survey results
Please see presentation with additional charts here (.pdf)
Foreign investors believe that the biggest obstacles for investment in Ukraine are widespread corruption (average score – 8.5 points out of 10 possible) and lack of trust in the judiciary (7.5 points). The military conflict with Russia (6.1 points), as well as unstable currency and financial system (6 points) were the next most highly ranked obstacles.
Widespread corruption and a lack of trust in the judiciary occupy first and second place for all groups of investors – portfolio and direct, those who have already invested in Ukraine, and those who have not yet done so. Interestingly, military conflict is one of the least significant obstacles for investors who are actively looking for business opportunities in Ukraine, who ranked it in 7th place (4.9 points) on their list of concerns. Of higher concern for this group, just behind corruption and the judiciary, is complicated tax administration (6.1 points).
Among the most positive actions that the government of Ukraine has to take to attract foreign investment, businesspeople mentioned relaunching the judiciary by vetting existing members and hiring new judges (average score – 7.6 points out of 10 possible), and the prosecution of large numbers of high-level officials and judges for corruption (7.4 points). At the same time, the third most highly ranked government action is ensuring the IMF program remains on track and liberalization of foreign exchange controls (including canceling the dividend repatriation ban) – both received a score of 6.2 points.
Implementation of the IMF programs was ranked as less important for investors with no prior experience of business in Ukraine (8th place, 4.6 points) than streamlining tax administration, which they ranked in 3th place with 6.4 points. At the same time in general investors worried less about tax rates than about tax administration – with the rates per se occupying last place among the listed obstacles (offering tax breaks is less of an issue than simplification of administration).
Lifting the moratorium on land sales is not as important for investors as other possible reforms. However, investors who are actively looking for new business opportunities in Ukraine, evaluate its importance as above average. Cancelation of the moratorium on agricultural land sales is even more important than overhauling infrastructure and establishing an investment promotion office as a one-stop shop for foreign investors.
Tomas Fiala, CEO of Dragon Capital, commented: "The resumption of Ukraine’s economic growth and reducing the gap with our western neighbors, which unfortunately increased significantly since 2009, is not possible without foreign investors. The results of interviewing international companies that invest around the world show in which areas the Ukrainian investment climate is uncompetitive and where the leadership of the country should aim first" – says.
Anna Derevyanko,Executive Director of European Business Association, commented: "The study found that the main barriers to foreign investors in Ukraine are corruption at every level of power and a judiciary which is too weak. Despite the authorities’ attempts to improve the situation by introducing an anti-corruption agency or, for example, by introducing a new system of public procurement, business has not experienced drastic and visible changes in this direction. Unfortunately, there is also no significant progress in the judiciary since the process of reforming the judicial system is quite complex and involves many stages. As a result, confidence in the courts is collapsing and companies increasingly prefer pre-trial settlement of disputes. However, despite the negative factors, Ukraine remains a potentially interesting country for investment and businesses plan to continue their activity."
The survey was conducted on the joint initiative of Dragon Capital investment bank and the European Business Association (EBA) with analytical support of the Centre for Economic Strategy from August 25 to September 2, 2016. In total, the survey involved 102 respondents, including Dragon Capital clients and foreign investor-EBA members (including portfolio and direct investors who already have investments and who plan to invest in Ukraine). The survey was conducted by method of online interviews.