Ukraine starts to harvest rewards of reform agenda

The origins of Ukraine as a nation are traced back by scholars to the 10th century, but the country only gained independence from the crumbling Soviet Union in 1991. 

Many locals see the revolution of 2014, during which president Viktor Yanukovych fled to Russia following his massacre of 100 pro-EU demonstrators in the capital of Kyiv, as an even more significant date in Ukraine’s history.

“I don’t think we can look at Ukraine from a 28-year perspective, because essentially, we only started really building this country five years ago, after the Revolution of Dignity,” confirms Daniel Bilak, chairman of UkraineInvest and a government adviser on building the country’s international brand.

“And when you look at it from that perspective, from 2014, it’s been a remarkable transformation,” following the “industrial sized theft” of more than $70bn of state funds by the discredited President Yanukovych, a 60 per cent currency collapse and a 20 per cent drop in GDP after the Russian invasions of Crimea and some territories of the Donbas coal basin in the country’s south-eastern corner.

Since these seismic events, the authorities have rebuilt the army, stabilised the currency, closed down many unprofitable banks and strengthened anti-corruption regulations. 

“We have unlocked probably $2.5bn of investments since 2016 and now we have a story, a great narrative to tell new investors,” says Mr Bilak, speaking on the sidelines of the 2019 YES event in Kyiv, traditionally a forum where foreign investors visit the capital to take the economic and political temperature.

He points to the key sectors of technology, agriculture and automobile parts manufacturing as major growth and investment sectors for Ukraine’s economy.

“About 30 per cent of every car made in Germany has Ukrainian-made automobile parts in it and we have an entire automobile parts manufacturing cluster in western and central Ukraine working for Volkswagen and BMW,” he reveals, with Mercedes-Benz conducting its entire infotainment programming in the country.

Brains and gains

As well as a switch in political direction, he sees the 2014 revolution as marking a significant shift in Ukraine’s economy, away from the heavy metal and coal industries dominated by a handful of oligarchs towards cleaner sectors fuelled by newer technologies.

“This was a massive market correction where we went from having an essentially Soviet era model of an economy heavily dependent on steel, chemicals, coal and iron ore…back to what we have had traditionally, which is agriculture.”

This is being successfully developed, he adds, into a more technology-driven agri-business, coupled with the IT and outsourcing sector, into a combination of “brains and grains”.

But there are warning signs which have recently been heard and seen by foreign investors, including a fightback from former PrivatBank owner Ihor Kolomoisky against the nationalisation of the bank he once owned.

Observers say Mr Kolomoisky has excessive influence over recently-elected president Volodymyr Zelensky, a former TV comedian, but Mr Bilak denies this. “The new president has made it very, very clear that no special interests are going to find any favour,” says Mr Bilak, pointing to the authorities’ vast and difficult clean-up of Ukraine’s banking sector.

“The message here is that the Ukrainian government and the various state bodies are prepared to take tough decisions to bring Ukraine into line with EU norms and standards,” he adds.

This significant move of the country in a pro-European direction, away from the influence of Vladimir Putin’s Russia, is also cited by Vitali Klitschko, mayor of Kyiv and one of the political leaders of the 2014 revolution. Another concern today is that the inexperienced Mr Zelensky may be duped by Putin during face-to-face talks into conceding some sovereignty and pro-EU direction.

“Ukraine was a part of the Soviet Empire…and we don’t want to be back in the USSR,” confirms the former heavyweight boxing champion turned politician. “We see our future as a modern, European country, as a part of the European family and our goal is to bring European and world standards and quality of life to every citizen of our country.”

After several recent visits to Kyiv, the IMF has agreed a $5.5bn loan to Ukraine, a major stamp of approval for reforms.

Makar Paseniuk, founder of the ICU fund management operation, lauds the country’s growing economy, with GDP having doubled to $140bn since 2014, combined with a macro-economic stability promising future growth. 

“If you compare Ukraine to other emerging markets, Ukraine enjoys relatively high interest rates, which obviously attract investors in the current low interest environment. Inflation has also been fought and is now under 10 per cent. So, in terms of a starting point for investors, I think it’s ideal.”

The real game changer for Mr Paseniuk and other promoters of inward investment is land reform, which should not only garner $15bn for the country’s economy, but further stimulate agricultural production.

“Agriculture has surpassed all other industries in terms of export contributions,” overtaking the metals and mining sector and is likely to “continue to be a transformational driver for the economy,” says Mr Paseniuk.

His head of investment, Giles Farley, also draws attention to the country’s fast-growing technology industry. According to ICU, Ukraine is now the third largest global market for IT outsourcing, with the engineers staffing the large firms increasingly starting up their own firms.

The model he favours for investment is one where these tech start-ups – firms such as 3D Look in Odesa or Pet Cube in Kyiv – have Ukrainian founders and locally based development and innovation teams, but sales forces based in the US and other international markets.“So, what you see is a profile where you have Ukrainian DNA, but it’s really an international company.”

Technology is also a driving force in the agricultural sphere says Yuriy Melnyk, chief operating officer at MHP, which employs 28,000 workers in Ukraine, mainly in crop cultivation, livestock and poultry rearing. 

“Ukrainian companies are innovative. They invest in new equipment, new technologies…and today, agriculture is living in the world of digitalisation, which is not just about words. We are really experiencing this.” 

Greater investment in the processing of agricultural commodities, says Mr Melnyk, will help add value to goods sourced in Ukraine, prior to their export to new markets. “In order for our business and our trading partners to win, we have to come back to the question of balance, between production, processing and sales,” he says. 

“As of today, we have more export of pure grains, not processed, and if we can emphasise and try to sell more of the processed products, then everybody is going to win,” he says. “It’s very important to enroll some investments both in the production and processing of agricultural products. That will be beneficial for both parties.”

Key to this expanded processing role are Ukraine’s ports, which have been preparing themselves for a changing client base, shifting from Europe and the US to Asia. 

“As Ukraine started exporting grain, it was always done with ships of 20,000 tonnes, sailing to Turkey or Spain,” says Philipp Grushko, business development director of the MV Cargo Terminal at Odesa’s Pivdennyi port, Ukraine’s newest and deepest shipping hub.

“But now we speak of vessels of five times that size, which can cross to China,” he says. The new grain storage facility, which his firm has built with US agricultural specialist Cargill, has helped facilitate faster loading speed and with it, broader geographical reach.

“Basically, we can load more grain in a shorter period of time to bigger ships which call in at Indonesia, China and Malaysia. So in this way, we connect the world with the Ukrainian farmer,” says Mr Grushko.

Foreign investors can enter this bustling trade and logistics market through either a joint venture or through smaller stakes in a private equity fund, such as the SD Capital vehicle, looking to raise $150m, managed by Mr Grushko’s business partner Andrey Stavnitser.

Private equity, says Mr Stavnister, is the best option because other financial firms are not trusted, with 100 banks recently closed by the authorities. “People have zero trust for the banks and there is a lot of interest in Ukraine, but there are no other working mechanisms to invest here,” he says.

Of the main risks to investing in the country, Mr Savnitser sees corruption as the key concern, dwarfing that of the likelihood of a renewed conflict with Russian escalating once more. 

US president Donald Trump’s recent efforts to paint Ukraine as a corrupt nation have kept the country in the spotlight, yet they have had little substance so far. In fact some of the individuals he has tried to discredit are held in the highest regard by the international community.

The general manager of MV Cargo’s recently opened $150m Neptune grain terminal, in which Cargill invested, reckons that Ukraine must allocate serious money to transport infrastructure, in order for its ports to rival facilities in Asia.

“Ports are hugely dependent on the infrastructure in the rest of the country,” says Jesper Pedersen. “Ukraine still has a huge amount of challenges within the inland waterways, railways and inland silos. So, there is a huge potential which can be developed…depending on the overall infrastructure in the inland sites.”

More to come

As a land of abundant natural resources and innovative citizens, Ukraine has much investment potential, yet further steps must be taken to battle against corruption and big business interference in government, which have held back reforms.

Ukraine must also turn its geographical position – previously a source of conflict between Europe, Russia and Asian powers – to its advantage. With a strategic location at the heart of the Eurasian landmass, the country must improve its rail and road infrastructure and secure shipping routes, to become a major trading hub and destination for international investments. 

Start-up success

There is little doubt as to the innovative nature of Ukraine’s engineers and start-up founders. The key challenge is for them to organise themselves in order to continue developing technological solutions to key problems and to locate marketing and sales forces outside Ukraine to attract an international clientele.

Odesa’s Kwambio has spent many years developing 3D printing technology, initially for ceramic vases, light-fittings and ornaments, but this has since been upgraded to provide laboratory-manufactured bones and palates, which can be combined with human tissue for medical needs. North American partners in this venture include GE and Harvard University. 

Also in Odesa, 3D Look works with clothing manufacturers to solve the problem of online purchasers having to send back many goods because they do not match their size, colour or style expectations. Instead, virtual avatars try the clothes on screen. The plan is to reduce numbers of returns and to save time for both consumers and manufacturers.

“We are seeing more understanding from the US about what Ukraine can do,” says company founder Alex Arapov. “They can see we have a hub for big, deep tech stuff, right here.”