After coming out of a recession in 2014 and 2015, last year Ukraine’s economy posted 2 percent growth and attracted $2.3 billion in foreign direct investment. The country is simultaneously an agricultural powerhouse and a hotbed of human capital, producing the top number of engineering graduates per year in all of Europe. Despite these positive figures, Ukraine is still struggling with an image problem stemming from its recent past. UkraineInvest chief Daniel Bilak explains how Ukraine is quickly transitioning from a Soviet-era country to a 21st century nation through accelerated reforms that have already created a much more business-friendly environment
Ukraine has had some difficult years both economically and politically. How has that affected your efforts to attract investment?
We had two big image problems: one was our law enforcement agencies and the second was the courts. But you have to keep in mind that this is a country in transition – we only started building it four years ago. We’d never had the institutions of a democracy here, they were always somebody else’s, whether Soviet, Russian, Polish, Austrian or Romanian. Following the Revolution of Dignity, we began building these institutions. We went from a crisis situation in March 2014 where we lost 60 percent of the value of our currency, 20 percent of our GDP, and 7 percent of our territory to invasion and annexation, to a situation today where we’ve stabilized the economy and can boast modest growth. Now we need to move that growth further and keep building these institutions. Investors should understand that we are a modernizing, transforming European country; we share the same values as people in Central and Western Europe. It pains Ukrainians to see the EU flag being burnt in some European cities because people died on the streets of Kyiv holding that flag. That sense of Europeanness is very strong here.
How are you working to change perceptions?
We are working on several fronts. If we can turn existing investors into happy campers, they will become our apostles for the new Ukraine. The government has already begun the transformation of the civil service, and we’re changing from a Soviet-era decision-making process to a European one. This government’s goal is to be the most business-friendly in the history of independent Ukraine. We’ve created institutions to interact with domestic and foreign businesses to help them get things done, including UkraineInvest and the Business Ombudsman Council. And while there is still lots to do, the fact that we have these changes going on here on the ground is a sign that things are moving in the right direction.
What specific reforms have been undertaken?
The courts are being cleaned up: we had a major overhaul of the Supreme Court that took effect on January 1, and its decisions will start trickling down into the court system. We’ve also had an enormous deregulation push, eliminating over 600 regulations, many dating back to Soviet times. We’ve moved from 150th to 76th on the World Bank’s Ease of Doing Business scale, and there’s a law in parliament that will enact further changes. According to the World Bank, Ukraine since 2010 has done more to improve its business climate than any other post-communist country in CEE or the CIS. We have also undertaken decentralization, a new privatization law, education reform, health care reform and pensions reform. Our land reform is ready to go, but since we have 41 million hectares of agricultural land we cannot afford to get this wrong, we are still developing the political consensus to move it forward.
You have been with UkraineInvest since shortly after it was established in 2016. What has this agency achieved so far?
When I joined UkraineInvest, I knew that if we were to have a story to tell new investors, we would first have to resolve many of the issues that existing investors had. I knew there was a lot of pent-up investment potential blocked in this country due to administrative hurdles, corruption, or simply inertia. Things were not moving forward as they should. So in our first year we focused on building a brand and showing success. We worked hard with business associations, leading companies – many of them American – and we were able to unlock about $700 million in new investment in that first year. We also identified systemic problems in infrastructure, leading to a reduction in port fees by 20 percent, and reined in excesses by law enforcement agencies in how they investigate businesses. All these legislative initiatives have already helped further a better business environment.
How successful have you been so far?
We targeted companies with a global supply chain into which they could integrate Ukraine. These companies have experience in much more difficult environments than ours, and we are now carrying around 20 firms representing over $4.5 billion of potential investment. Bond analysts are important to us because they’re the most cold-hearted investors you can find. All they want to know is what the yield on the bond is and whether or not the country will default. And so far they’ve been producing very good reports about Ukraine. And because they’re so analytical everybody takes them seriously. So the trending message is that Ukraine is reforming, moving forward, becoming more transparent and that the business environment is much more predictable.
What can Ukraine offer investors that is unique?
Ukraine can offer something that most other countries cannot, especially in Europe, and that’s scale. Our two main assets are “brains and grains”. We have this tremendously well-educated, competitive workforce. We produce 130,000 engineers a year, and they are not leaving the country because there are well-paying jobs here. But even though we’re an agricultural powerhouse, we’re still at the low end of the value chain. We need to move up. The Prime Minister’s vision is to build an economy based on Industry 4.0, marrying our manufacturing and agribusiness strengths with our globally-recognized IT prowess.
How are you going to achieve this?
We have a 4+1 sector strategy focused on the key drivers of the Ukrainian economy: manufacturing, energy, infrastructure, and agri-food business. We have one-third of the agricultural land of Ukraine and one-third of the world’s black earth, so we’re already an agricultural powerhouse. The “+1” is innovation technology. We’ve become the digital workshop of the world in many ways: we’re one of the largest IT development centers in the world, and leaders in artificial intelligence, machine-to-machine learning, and blockchain technology. We want the world to recognize this and the potential it holds for manufacturing.
How do you make it all happen simultaneously so that the infrastructure, the workforce, the legislative framework are all in place for the benefit of investors?
I think the main driver is the political will we have to improve the business environment. What the government is doing to facilitate Ukraine’s further integration into its key export markets – Europe, Africa, Middle East, Asia. The vision for Ukraine is to become a Eurasian hub for logistics, transportation, agri-food, manufacturing, and digital industries. I understand the private sector’s concerns, but I’m also asking them for help. I always tell business associations, don’t just come to me with your problems, come to me with your solutions as well.
How important is the privatization drive?
There are two important issues here: one is recognizing that we need to get rid of most of our state-owned companies, and the second is that we need to overhaul the corporate governance of those assets that will remain in state hands. We’re bringing in best practices from all over the world, and we’re increasing the credibility of the process through reforms that are enhancing transparency, access to information and the security and stability of property rights. Now, all privatization deals are governed by English law
Are you focusing on any specific areas of investment?
We focus on opportunities in the regions. Ukraine as a whole has a perception problem. But we have an automobile cluster in western Ukraine, a furniture cluster in central Ukraine, and 16 IT clusters throughout the country. We help investors to go oblast-by-oblast to find the opportunities that we ourselves have discovered by talking with local and regional authorities.
Do you have any examples of global companies successfully operating here?
Siemens has a 50-person research center made up of Ukrainian engineers that handle the most difficult and complex problems for their clients worldwide. And virtually every car made in Germany contains Ukrainian parts: the automobile parts manufacturing cluster in Western Ukraine employing 40,000 people. ArcelorMittal, Bunge, Cargill, Louis Dreyfus, BASF, other Fujikura, Sumitomo, Samsung are some other examples of successful operations in Ukraine. We’re already part of the European automobile parts supply chain, so our pitch is that Ukraine can be an extension of your global business.
What services and support does UkraineInvest offer investors?
We have a solid picture of what is happening throughout the country’s regions. We put investors in touch with the right officials both in central government and in the regions based on their needs, saving them months of legwork. We work with regions and cities that are investor-friendly, and try to educate the others about the benefits of welcoming investors.
What are the financial incentives that make investing in Ukraine attractive?
We don’t have a lot of tax incentives that we can offer because of restrictions in the IMF lending program, but we do have one of the most favorable corporate tax rates in Europe, and the cost competitiveness of operating a business in Ukraine is very attractive. We also have the advantages of the EU-Ukraine Deep and Comprehensive Free Trade Agreement, which means that in the coming years, most of the goods manufactured in Ukraine and the EU will cross the border duty-free. That’s a big opportunity.
Ukraine is an agricultural powerhouse. Which areas of the agricultural sector offer particularly interesting opportunities for investment?
We are among the top five global exporters of wheat, barley, soybean, oats, and corn. We are also the world’s top producer of sunflower seed oil. All the global agribusiness companies are here: Louis Dreyfus, Cargill, ADM, Bunge, COFCO, and that has had a significant impact on the development of agriculture in this country. Soviet-era infrastructure was not rationally designed around markets, but through private investment from large agro-holdings, the infrustructure network is becoming fit for purpose. The government is doing its part to reconstruct the roads, and our priority now is the railway system. Agribusiness is one of the main drivers of the economy, along with IT.
How is the economy changing, and how is UkraineInvest adapting to that?
We’ve gone from having a Soviet-era structured economy to one that is ready for the 21st century. Now we need to encourage investment in all of the added value that goes into machine building and agribusiness, including processing and manufacturing. And here in Ukraine, you can get scalability of data, land and labor. I see an economy that is ready to take off. The momentum is there. We are dealing with the legacy of Soviet and post-Soviet issues, but as we modernize the economy and government, the role of UkraineInvest will be less of a promoter of a better business environments and more of an adviser to all the new investors entering the market. We will work to promote Ukraine’s brand abroad in partnership with our stakeholders based on our three principles: outreach, communication, and collaboration.
What is the image that people should have of Ukraine today?
That this is a frontier market, so there are risks, but there are tremendous opportunities in time of transformation as well. Don’t be afraid. We’re working to get our success stories out into the public domain to encourage there is a different narrative from the one you generally hear in the media, much of which is inaccurate. People should see Ukraine as a dynamic, exciting place to do business.