Investment in Ukraine: A Wide Range of Opportunities

Peter Latos, Head of advisory, KPMG in Ukraine

Peter Latos, Head of advisory, KPMG in Ukraine, comments on Ukraine’s investment climate today, realities and future opportunities.

Peter Latos has more than 15 years’ experience of advising companies through the M&A cycle, and has extensive knowledge of managing complex cross border transactions. Since 2012, Peter has been based in the CIS, specialising in advising international clients on market entry, expansion and consolidation acquisitions, as well as divestments in the CIS.

– How do you assess the investment climate in Ukraine?

Overall I believe the investment climate in Ukraine remains positive, and we continue to see a strong pipeline of M&A activity from both domestic and international strategic investors. In the first eight months of 2018, the value of Ukrainian M&A increased by around [5]% to USD[0.9]bn, while the number of deals rose by [40]% to around 60 transactions. Although the European Business Associations index of investment attractiveness for Ukraine remains in neutral territory, it did increase from 3.03 to 3.10 during the first half of 2018 (on a scale of 1 to 5) – the level of dissatisfaction with the investment climate amongst businessmen also fell from 58% to 38% over the same period.

A number of factors have contributed to a more positive outlook for investors. Adoption of the Law of Ukraine on the High Anti-Corruption Court (HACC) by parliament in July will undoubtedly have contributed to this, and importantly, should pave the way to unlock the next round of IMF funding. Other legislative reforms to introduce internationally recognised mechanisms in relation to the corporate governance of limited liability companies, shareholder agreements, squeeze-out and sell-out rights, should ultimately increase investor confidence in Ukrainian corporate law.

This combined with an improving economic situation (the EIU forecasts GDP growth of 3% for 2018), steps to transform the state sector, and real signs of traction in the long-awaited privatisation program, both of which are supported by international donors such as the IMF, EBRD, IFC and USAID, should also provide further reassurance to investors that there is a long-term commitment to driving change in the economy.

Of course, the dark cloud that hangs over all of this, are the parliamentary and presidential elections due next year, and it’s difficult to predict their outcome with any degree of certainty. The one thing both Ukrainian’s and foreign investors will hope for is long-term stability – something that structural reform and market liberalisation are intended to bring, and which the IMF funding is predicated on.

– What areas are the most attractive and promising for investments here?

Over the last two years, agriculture, metals, mining and energy have been the most attractive industries for both domestic and international investors. Of course, changes to the moratorium on agricultural land sales has been long awaited but the recently announced acquisition of Mriya by the public investment fund of Saudi Arabia for a reported USD242 million (according to the Financial Times), demonstrates the strength of interest of foreign investors in the agriculture sector.

Elsewhere, it remains to be seen if and when one of the many draft laws on auction based tariffs for the Ukrainian renewables sector will be passed, and until then, green energy tariffs are providing a continuous flow of investment into the sector. We expect to see this increase over the year ahead given that the current tariffs, which are fixed in euros, are significantly higher than in most other countries around the world.

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– Are there any systemic solutions which can ensure a significant growth of foreign investment in the Ukrainian economy in the short term?

In addition to legislative reforms, stability, both in terms of political agenda and economic outlook are key. With Ukraine currently ranked 76th in the ease of do- ing business index there remains room for improvement. Further simplification of the regulatory environment will drive market liberalisation and thereby contribute to an increasingly attractive environment for foreign investors. In addition, a stable and predictable taxation regime and customs clearance process would also contribute to this, and a number of positive changes are already being considered (e.g. replacing corporate income tax and Ukrainian withholding tax with a tax on profit distributions, in order to limit the outflow of funds from Ukraine and incentivise reinvestment of profits back into companies to upgrade plant and equipment, and fuel their transformation).

However, there continues to a need to demystify perception from the reality of investing in Ukraine. Some investors perceive country risk to be unacceptably high in Ukraine but often based on a limited understanding of the risks and/or willingness to consider pathways to transform companies and drive economic growth. There is a collective obligation on the business community to responsibly promote Ukraine as an investment destination.

– How will Ukraine fit into the new investment landscape of the world: forecast for the next 10 years?

As noted in the KPMG’s Ukrainian M&A Review 2017, deal activity in the country is equal to less than one per cent of GDP; four times lower than the global average and less than one tenth of the US or Uk. In part, this is symptomatic of the turbulent economic and political situation Ukraine has faced over recent years, which has inevitably impacted the capacity of domestic investors and appetite of foreign investors for M&A. So by this measure alone, there is clear scope for Ukraine to become a much more significant player in the global investment landscape.

Furthermore, Ukraine benefits from a highly skilled labour force, particularly in the ever increasingly in demand technology sector. However, investment is required to drive economic growth and provide long-term opportunities to stem the outflow of human capital. The country benefits from fertile agri- cultural land, close geographical proximity to Europe, and potential to develop an integrated transport network and ports infrastructure.

However, this requires significant investment, which in turn needs a stable economic environment and access to capital at affordable rates of interest. Ukraine’s oil and gas sector also has potential to become a much more significant market player but years of under investment, pockets of corruption and a fear of being seen to “give away” the country’s reserves have historically hampered investment. Provided the IMF and EU funding continues, and that structural reforms and market liberalisation are delivered, Ukraine has the capacity to offer a wide range of investment opportunities for domestic and foreign investors in the years to come.

How to improve the situation?

  • to start working on creating the anti-corruptIon court
  • to reform and restore trust to the judicial system
  • to open the land market
  • to reduce tax pressure on the wage fund
  • to remove the shade of the shadow economy
  • to communicate positive changes and cases
  • to downsize the state apparatus
  • to develop and to implement innovations

Interview by Natalia Kyrylenko.
Photos provided by KIEF Organizational committee.

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