SPECIAL REPORT: OUTLOOK ON UKRAINE 2017/18
There is a move towards change in Ukraine EBRD
Changes are needed in Ukraine’s economy and business to catch up with CEE growth FOREIGN INVESTORS
Western Ukraine could be an entry point into the country
THE HUMAN FACTOR IS BOOSTING UKRAINE’S PROMISING IT EXPORT SECTOR 02
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FROM THE EDITOR
I have been to Ukraine quite a few times but I don’t think I will ever forget my visit to Kyiv in November 2013. Not that it was special for me in any way, but it did mark the end of the pre-Maidan Ukraine. The events that unfurled only about ten days after I left to return to London, resulted first in President Yanukovich’s escape to Russia and, finally, in an ongoing military conflict in the eastern part of the country.
ANDREW WROBEL Editor-in-chief Emerging Europe
Today, even though many of the old habits prevail, Ukraine seems to be a different country. Experts say that the last three years have seen more reforms than the previous two decades. After two years of recession, the country’s economy is growing again. The long ailing banking sector is being cleansed; corruption is being fought. The IT industry is thriving and increasingly more opportunities are appearing in the energy, agriculture and manufacturing sectors. However, most importantly, there is still a pro-change atmosphere, which seems similar to that which Ukraine’s western neighbours enjoyed, after 1989. As a taxi driver in Kyiv told me, in December 2016, people have changed and want to be closer to Europe. He himself had decided to move back to Ukraine, after living in Moscow for a number of years, and to contribute to the country’s development. That spirit of change is even being felt by companies which come from the Donbas area. Some of the IT firms we spoke to told us they did were doing everything to provide the best service possible, despite all the obstacles.
Ukraine’s pro-change atmosphere says “Welcome!”
As in many cases across emerging Europe, the awareness about Ukraine’s economy, business opportunities and potential in western countries is quite low. At the same time, although the country knows it needs foreign investment, it seems that national agencies and the government have to learn to attract investors and work on the country’s image. Hopefully, that will improve. In the end, the country’s investment promotion agency was set up in October 2016. It is clear that outside the Donbas area, it is safe to do business. Kyiv is about 800 km away from the war zone and is closer to the EU border than to the Donbas. If we look at Lviv, in the western part of the country, it is about 1,200 km away, which is roughly the same distance as between Lviv and Frankfurt. Just as the city of Lviv says, if you do not believe in risk and reward, do not come to Ukraine. However, if you do believe, come: you will find enormous opportunities. As one Belgian investor told us, you would need to be lazy not to succeed. I will surely go. My next trip to Lviv is scheduled for summer, this year. In the meantime, let’s explore the country. The Emerging Europe Outlook on Ukraine is here to discuss the country and to give you a better understanding of where Ukraine stands; what challenges it faces and what investment opportunities it offers.
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TABLE OF CONTENTS
3 | From the Editor
26 | Ukraine’s economy in 2017 – When dreams of growth meet geopolitical reality
68 | Ukraine is energy independent in some sectors and awaiting change in others
28 | Steps to stability marred by a failure to attract FDI
70 | Naftogaz – a good start has slowed but optimism remains high
30 | Mohammad Zahoor: Maidan three years on – what has changed for Ukraine?
72 | Energy tariff reform in Ukraine: estimated effects and policy options
34 | Business moving forward with cautious optimism – can investors win the confidence game?
74 | A very good prospect for future biogas development
35 | Predicting an increase for the Ukrainian economy
76 | Ukraine’s gas industry risks stagnation without investments
The dilemmas of Ukraine’s economic policy
World Bank: There is a move towards change in Ukraine
POLITICS 78 | The political economy of independent Ukraine: late starts, false starts, and last chance?
EBRD: Changes are needed in Ukraine’s economy and business to catch up with CEE growth
Leszek Balcerowicz: Ukraine can learn from Poland’s economic history
80 | European volatility makes economic development slower for Ukraine 82 | Falling into old ways in 2017? Ukraine’s struggle for functioning economic institutions
FDI & BUSINESS 36 | Danish companies support and assist Ukraine’s economic transition
88 | The stalled conflict in Ukraine will be formalised
38 | Longstanding early investors say Ukraine offers foreign manufacturers great prospects
40 | IFC: Europe’s breadbasket offers opportunities for investment and diversification
90 | Western Ukraine could be an entry point into the country
44 | Ukrainian agribusiness – a jewel in a crown
94 | Kyiv’s mayor is used to fighting to attract attention and interest
45 | Legal reforms are improving the existing problematic situation in the Ukrainian agro market 46 | Ukraine’s government declares ambitious privatisation targets 48 | Changes are making Ukrainian banking more aligned with international standards 52 | The Ukrainian banking sector looks set to regenerate new growth 56 | Start making connections for the great opportunities Ukraine is currently offering 58 | Anti-corruption efforts are the starting point for further reforms 60 | Governmental support is vital to fight corruption 62 | Protecting intellectual property to encourage business confidence 63 | Ukraine’s reputation for cheap labour may not ring true in the long-term 64 | SMEs should play an important role in the economy and export development 66 | Office space remains available in Kyiv
86 | Between the East and West, geographically and politically
95 | Lviv is the pearl and the soul of Ukraine
98 | Ukraine is offering Europe unique combat and technological experience
110 | Ukraine continues to make waves as an IT outsourcing destination
101 | A roadmap for reform in Ukraine and a promise of EU support
112 | The Innovation District IT Park will help Lviv become CEE’s IT hub
102 | Finalising the DCFTA is expected to bring multiple benefits to Ukraine
115 | Ukraine outsourcing’s value is now in its technological expertise and reliability
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104 | Ukraine and Canada a history of settlement and a future for investment
117 | Ukraine’s NIX Solutions Expands to Israel and beyond
105 | Poland’s business experience makes it a good neighbour to Ukraine
120 | Thinking big; working hard; delivering value to clients and building relationships
106 | Denmark in Ukraine: fostering a better business climate for both sides
122 | From a small family firm to a Top 100 Global Outsourcing company 124 | A Ukrainian firm conquering global markets 126 | The human factor is boosting Ukraine’s promising IT export sector 127 | See the new Ukraine and benefit from the best by partnering or investing in IT 128 | Military operations in Ukraine have had some surprisingly positive side effects for modern businesses 130 | Ukrainian start-up projects recognised in the international market but still more investors needed 131 | Ukrainian venture investment market is immature and needs growth
AFTER HOURS 136 | The Eurovision Song Contest is a perfect showcase for Ukraine’s talent and warmth 138 | ‘Viking’ is yet another way to annoy Ukraine 140 | Past troubles belie the opportunities for investment
Editorial team Editor-in-Chief Andrew Wrobel firstname.lastname@example.org Deputy Editor Claudia Patricolo email@example.com Senior Reporters Jerry Cameron firstname.lastname@example.org Eva Keller email@example.com Justyna Wróbel firstname.lastname@example.org Editor Kate Yeadon Contributors Frédéric Schneider Nikodem Chinowsk Santiago de la Presilla Lyubomira Dancheva Robert Lazarev Antonio Ricci Graphic Designer Radomir Dikosavljevic Video Editor Luka Sarlija For advertising and commercial partnerships, contact Emiliano Ramos Commercial Director email@example.com Photographs: BigStockPhoto.com FreeImages.com unless stated otherwise. All intellectual property rights are owned either by us or by the licensors of the services and are protected by copyright, trademark and other intellectual property laws. The magazine and the portal are designed for personal, non-commercial use only. No part of the magazine and the site may be downloaded, republished, retransmitted or reproduced without our prior written consent of the owner.
The dilemmas of Ukraine’s economic policy Written by
ANDREW WROBEL Published on March 14, 2017
What changes are needed for Ukraine to catch up with CEE growth?
The vast majority of emerging Europe countries started their transition process into market economies at the beginning of the 1990s. Ukraine became an independent state in August 1991, yet the country’s social and economic development still lags behind its Central European peers. Emerging Europe asked some leading economists how to speed up growth and catch up with the country’s Central European neighbours. Ivan Mikloš Chief Economic Advisor to the Prime Minister of Ukraine and co-chairman of the Strategic Advisory Group for Support of Ukrainian Reforms. Also a former Minister of Finance and Deputy Prime Minister of Slovakia, in 2004, named the top business reformer by the World Bank’s Doing Business report. It is clear that high and sustainable economic growth is the only way Ukraine can achieve its goal — that is to increase the quality of life, standard of living and public service quality, but also to secure it’s independency and territorial unity. The word “sustainable” is of decisive importance in this regard because in the past Ukraine achieved a few periods of the fast growth but every time it was done in a non-sustainable manner. The necessary preconditions for achieving this goal are deep and comprehensive reforms in macroeconomic stabilisation as well as structural and institutional reforms. A lot of was done during last
three years, after Euromaidan, especially in the area of macroeconomic stabilisation. For the first time in its history, Ukraine is changing its economy towards a functioning market economy. The economy, which is based for the most part on vested interests and rent seeking behaviour, is changing to free and fair competition and a profit seeking based system. But there is still a lot to do. What is extremely important now is to continue in the efforts in macro-stabilisation and at the same time to speed up structural reforms, especially in area of property right protection, deregulation, de-monopolisation and privatisation. The Ukrainian economy and the Ukrainian people overcome very difficult recession period in 2014–2015. Now the economy is more or less stabilised with growth in 2016–2017 around 1.5–2.5 per cent. But the Ukrainian economy has the potential for sustainable growth of around six–seven per cent when it comes to of accelerating and intensifying the necessary reforms. One of the most important preconditions for achieving this is a significant increase in foreign direct investment (FDI). In order to attract FDI, the above mentioned reforms and changes in property rights protection, deregulation, de-monopolisation and privatisation are needed.
Sergei Guriev Chief Economist, European Bank for Reconstruction and Development
Ukraine has actually made substantial progress since 2014 in terms of macroeconomic stabilisation, fiscal adjustment, cleaning up the banking system and restructuring of the gas sector. These are however only necessary but not sufficient steps to restart growth. Economic growth comes from investment and growth in productivity and these require drastic improvement in the business and investment climate. In this respect much more is to be done. First and foremost, it is crucial to continue the work on fighting corruption and building an effective and honest judiciary system. Without the public and business community’s confidence in the government and the courts, other reforms are unlikely to succeed; moreover, political stability will be at risk. Secondly, Ukraine has to revise its regulatory system to make it friendly to business. Thirdly, Ukraine has to finally start privatisation and to raise the efficiency of the companies that will remain in state ownership.
Fourthly, Ukraine has to undertake land reform. Fifthly, pension reform is crucial for improving the long-term fiscal outlook and for creating long-term financial markets thus bringing households’ financial resources. Finally, reforming the health and education sectors is key for raising Ukraine’s competitiveness and for making sure that reforms bring benefits and opportunities to all citizens, irrespective of their place of birth or parental background. Paul Gamble Head of Emerging Europe Sovereign Ratings, Fitch Ratings
Fitch forecasts that economic performance in Ukraine will improve in 2017 and 2018, underpinned by increased exchange rate flexibility and a tight monetary policy. Nonetheless, at around 2.5 per cent, growth will be low relative to its peers at the ‘B’ rating level. Macroeconomic stability is gradually being entrenched with
ECONOMY the authorities enacting fiscal reform, that includes significant tariff reform, and tackling the weakness of the banking sector. These gains are still fragile and a weak liquidity position means the economy is vulnerable to commodity and confidence shocks. Fitch has identified improved macroeconomic performance and a stronger external liquidity position as factors that could lead to a positive action on Ukraine’s ‘B-’ long term foreign currency rating. The key challenge for the government is implementing the reforms that will strengthen the policy framework and create an environment for faster growth. In our opinion, the framework under the Extended Fund Facility with the International Monetary Fund (IMF) provides a solid grounding for strengthening growth. Progress with structural reform and privatisation will improve the business environment. Political considerations have delayed reform in the past and the political environment, weak governance and corruption are likely to continue to pose a challenge to reform. The conflict in eastern Ukraine will continue to weigh on growth, while unresolved. Gunter Deuber Head of Economic, Fixed Income and FX Research, Raiffeisen Bank International (RBI) AG The recent Privatbank nationalisation offers great potential to flag a turnaround in Ukrainian economic prospects and how the Ukrainian economy is managed. That said, a decent handling of the restructuring and a partial wind-down of Privatbank is needed. In order to be successful on this front, close cooperation with independent and internationally experienced accounting/restructuring managers will be key. Finally, the Ukrainian authorities have to work on a mid-term re-privatisation strategy with 50 per cent of the banking sector now being under state control. Such a scenario will require consistent policy action and returning investor confidence. Any signal that taxpayer money will be used for the Privatbank restructuring, supporting vested interests of either old or new oligarchs, is a no-go. Also, an overall restructuring of the banking sector should be also used to foster the development of broader capital markets. This could help to improve the governance, while the overall degree of debt capital financing seems to be still at fairly high levels. In total, more outsider equity capital investment (e.g. via debt to equity swaps) is needed rather insider and (offshore) debt financing. In order to secure a decent mid-term planning for foreign investors the commitment to a more flexible exchange rate regime should remain in place. Firstly, FX markets are definitely a useful “weighing machine” of the economic potential in a given country. Secondly, they are an important discipline device. This especially holds true in a highly dollarised economy such as Ukraine. Thirdly, a flexible exchange rate can help to implement tough adjustments rather quickly, while markets could be blamed for that. This seems especially important in Ukraine, where there are still many vested interests. Vladimir Vano Chief Economist and Head of CEE Research, Sberbank Europe AG
Ukraine is undeniably a country of an enormous potential, not in regard to the economic opportunities offered by the size of its unsaturated market but also its geographic location. In the contemporary economy of the 21st century, Ukraine is rather well-positioned internationally, also in terms of the quality of its human capital, i.e. the qualifications and motivation of its workforce. However, analysis of the current economic situation and the necessary reforms should be more in-depth than is currently popular among the majority of observers. Such an analysis should be retrospective enough to contrast the trajectory of the Ukrainian economy, after the fall of the Iron Curtain, in particular, with their corresponding East European peers (e.g. Poland and others). These countries shared a similar starting position in terms of economic situation as well as institutional capabilities of the post-socialist era. At the same time, an analysis of the past two decades should fully take into account the non-negligible role, which the special conditions for the oil and gas purchases had for long played in sustaining the Ukrainian economy before the global recession. Former Slovak Prime Minister Mikulas Dzurinda used to say, that once you button the first button on the shirt wrong, it follows that all the subsequent buttons would not fall into their right place. When addressing the inevitable but gargantuan task of economic reforms in Ukraine, it is important to re-emphasise the crucial importance of the effective and conductive institutional framework. The foremost important and necessary condition for successful economic reforms of Ukraine (though not sufficient on its own) is the thorough reform of the governance institutions. Well-functioning and effective governance institutions can subsequently create the necessary preconditions for planting of the further informal institutions, such as confidence of investors, entrepreneurs and citizens, which are altogether a backbone for sustainable and well-functioning market economy. Igor Burakovsky Head of the Board and Professor of Economics, National University “Kyiv-Mohyla Academy” Strategically Ukraine needs deep and comprehensive structural reforms to get on track for long-term and sustainable economic growth. In the meanwhile I would just like to highlight some areas for priority actions. Firstly, the military conflict in Eastern Ukraine has been causing obvious socio-economic losses but, in general, economic agents have already adapted to the new political and economic realities. Now the government has to elaborate and introduce clear regulatory regime of economic relations with occupied territories immediately. In order to do this Ukraine has to take the difficult political decision of how to treat these territories, politically. Secondly, Ukraine needs to improve the condition of public finance further, paying special attention to tax and tax administration reform, as well as proper state debt management. Thirdly, labour market reform became a pressing priority a long time ago. This reform is closely connected with the reform of the social security system and pension reform in particular. Fourthly, a radical improvement of the regulatory environ-
March 2017 ment must become a real long-term strategy for the government. In Ukraine this reform has two clear cut dimensions. The most “popular” one is deregulation, i.e. the abolition of the red-tape barriers that are hampering economic activities. At the same time Ukraine faces a challenge to introduce new regulations that are determined by the current level of economic and technological development. Fifthly, energy sector reform, as in Ukraine’s case this reform is a prerequisite for energy independence and a stable economic development. Needless to say that the success and speed of these, and other reforms, critically depend upon the institutional capacity of the government to elaborate and implement proper economic policies. Prince Michael of Liechtenstein Founder and Chairman of Geopolitical Intelligence Services, providing independent political intelligence, strategic analysis and future scenarios to companies, governments and organisations Ukraine is being ground between the millstones of geopolitics. An assertive Russia and a weak response from the West is partly to blame. The other reason, however, is a lack of drive for self-determination, which has allowed foreign powers to have too much influence in Ukraine. Another unfortunate legacy of the Soviet system is an oversized, complicated and, as a result, corrupt administration. This has prevented Ukraine from developing as quickly as other Central European countries. In order to overcome this situation, Ukraine must address its governance shortcomings. This is a difficult task, especially while it is also suffering a war. However, the country has no choice but to streamline its bureaucratic and judicial functions. Only the Ukrainians themselves can carry out such reforms, and they should do so with self-confidence. Foreign interventions should be avoided. Ukraine could be in a similar position to Austria during the Cold War. Austria had to be neutral, and was not allowed to join NATO or the European Economic Community (which later became the European Union). However, it had economic self-determination. Though it traded predominantly with the West, it was also a leader in trade with the Comecon countries in the east. Austria became one of Europe’s most prosperous countries. Geopolitically, Ukraine will have to strive for neutrality. This means, as the Swiss example shows, a strong will to preserve territorial integrity, diplomatic networks, political pragmatism and a commitment to military deterrence. Anders Åslund Senior Fellow, Atlantic Council
Ukraine has achieved macroeconomic stabilisation. Today, the issue is to attain a substantial economic growth of six-eight per cent per year. Economic growth always starts with exports. Ukraine needs to boost its exports of agricultural products to the whole world, and it needs to become integrated into the European supply chain, as Central Europe has done so successfully.
The next step is to attract more investment. Ukraine’s investment ratio should rise from 16 per cent of GDP to 25-30 per cent in the medium-term. A fundamental problem is Russia’s military aggression in Ukraine. Few big foreign companies are ready to invest in a country they perceive as at war. It is vital to achieve a real armistice, at least, which the Minsk agreements are aimed at but have never delivered. After the West has provided some financing for financial stability, it should offer some $five billion a year for the next five years through its multiple sources. The most important measure the Ukrainian government can carry out is probably to legalise the private sale of agricultural land, which could open Ukraine’s agricultural bonanza up to fast development. The government should also sell off all the useless state enterprises that do not really work or that cause losses. A vital long-term project is to build up a new judicial system in Ukraine. The European Union should take the lead and follow the successful examples of East Germany, Estonia and Georgia, where the whole judicial system was built up anew. Marek Dąbrowski Non-Resident scholar, Bruegel; Professor, Higher School of Economics in Moscow, a member of the Scientific Council, E T Gaidar Institute for Economic Policy in Moscow Ukraine has long way to go to catch up with its neighbours in the EU. Its economic prospects will depend partly on the opportunities to end the war in Eastern Ukraine, and to the reintegrate country’s territory. However, even more important will be speed and comprehensiveness of domestic economic and institutional reforms. For the first 25 years of its independence Ukraine was not a star reformer. The dramatic events of 2014-2015 pushed the country’s political elite to take the task of reform more seriously. As result, considerable progress has been accomplished in several policy areas. With support of the IMF and other donors authorities Ukraine managed to avoid a macroeconomic catastrophe in 2014 and early 2015, i.e., the uncontrolled devaluation of the hryvnia and the high inflation spiral. This required substantial fiscal adjustment which was achieved by eliminating large natural gas subsidies. Bringing domestic gas prices to an international level also helped to reduce an important source of corruption, and decreased dependence on gas imports from Russia while creating an opportunity to restructure the gas and energy sectors on a competitive basis. Other important measures which can support future growth, were the cleaning up of the largely insolvent and corrupted banking sector and a partial tax reform. Creating the National Anti-Corruption Bureau, the National Agency for Preventing Corruption and publishing the asset declarations of public officials may help in fighting this deeply-rooted social disease. However, the list of reforms, which should be completed in near future remains long. It includes privatisation, ending the moratorium on selling agricultural land, increasing the retirement age and the elimination of privileged pensions for various sectors and professional groups, building a genuine local and regional self-government, judicial reform, and many others. Ukraine also must sustain its fiscal consolidation effort to be able to return to private markets after the expiration of the IMF programme in 2018.
World Bank: there is a move towards change in Ukraine Written by
ANDREW WROBEL Published on March 7, 2017
In the past three years, since Maidan, there has been quite a serious effort for reform on the government side. Within the last three years the Ukrainian government has introduced more reforms than all the governments of the previous 15 years, says Satu Kahkonen, country director for Belarus, Moldova, and Ukraine at the World Bank. She spoke to Andrew Wrobel about the business climate in Ukraine and the impact of the conflict in the east of the country. The World Bank has been helping Ukraine for over two decades. What is your involvement in the country like now? In Ukraine, the World Bank is one of the major development partners. Since May 2014, we have provided more than $4.4 billion in assistance to Ukraine, both in the form of policy development loans and investment projects. We have a large investment portfolio at the moment, amounting to about $2.8 billion. There are eight investment operations which support basic public services that aim to benefit the ordinary people. We are supporting water supply, sanitation, heating, energy, health, social protection, and energy efficiency and growth. Adjacent to that, we are also heavily engaged in policy dialogue. What areas does the policy dialogue cover? It’s quite a wide-ranging policy dialogue. Let me tell you a little bit about the path first and then I can talk about what we are doing now, and how we are moving forward. The main instrument that the World Bank has to support policy dialogue is technical assistance, but we also have our development policy operations that are supporting the implementation of policy reforms financially. In the last three years, we have disbursed $2.25 billion to Ukraine, through two series of development policy operations that have supported key structural reforms. That has included the movement to flexible exchange rates, the reform of energy tariffs, strengthening of the social safety net system, the stabilisation of the banking sector and procurement reform. So, there are a lot of different things. In the past three years, since Maidan, there has been quite a serious effort for reform on the government side.
courtesy of the World Bank
But I believe these reforms need to continue. Yes, there’s a lot more that needs to be done. At the moment our dialogue is very much focussed on anti-corruption because governance is one of the biggest problems in this country. Then there is pension reform, which is sorely needed. If the pension system is not reformed, the future generations of pensioners are going to be even poorer than pensioners are today. After that, there is land reform. Agriculture is an area where Ukraine has significant potential, and the land markets are not functioning as they should. Ukraine is one of the only two countries in Europe that don’t have properly functioning land markets, and doesn’t allow the sale of land. We also have health care to look at. The government approved a package of health reforms a few months ago. Health is a major issue in Ukraine. Life expectancy in Ukraine is over ten years lower than in rest of Europe, which is unacceptable. Additionally, the people are very unhappy with healthcare services. The surveys show that only ten per cent of the population is happy with the country’s healthcare services, so this reform is something that is greatly needed. Obviously, the banking sector reform will need to continue, so that’s also something that we are focusing on. These are just some of the areas that we are covering, but there are also others. You have seen that since Maidan, or rather since the end of 2013, the reforms have sped up a little. Which areas do you see the biggest improvement? The banking sector is definitely one that has to be highlighted, and the National Bank of Ukraine needs to be commended for their work. However, moving forward there’s a need to continue the efforts, strengthening the supervision and ensuring the restructuring of the sector. There’s a need to address the high level of non-performing loans (NPLs) and also to try to get the credit growth back up. Credit growth has plummeted during the crisis. There are other areas where there has been significant progress. One example is the energy sector. The government has brought the
March 2017 heating tariffs to a level that covers the cost of production. Before this was a major fiscal risk; a fiscal drain, as well as a source of corruption for various people. But, again, in that area, much more needs to be done .- for example, Naftogas needs to unbundled and the EU’s third energy package implemented. Another example is anti-corruption efforts. The electronic asset declaration was a major move forward. However, it’s only a partial reform so far because the asset declarations need to be verified and then action must be taken based on the findings of those verifications. As you said there is still room for improvement, but what are the key challenges now and the opportunities too? Well, we see a lot of potential for Ukraine, moving forward, but we are also worried as we see that this potential has not been tapped. One of those areas of untapped opportunity is agriculture. Another one is the geographic location of Ukraine between Europe and Asia; something that has not been fully exploited. The third opportunity is the people. Ukraine has well-educated and very entrepreneurial people. It is important to unleash the potential of that resource moving forward. Action must be taken, and conditions need to be put in place,to take advantage of this potential. This will require securing fiscal and financial sector stability, fostering private sector competitiveness, and providing more effective health education and social protection for the people. The quality of education is a serious problem in Ukraine and, as I mentioned before, unless the pension system
is reformed, this country is also going to have a serious problem with poverty in old age. You mentioned competitiveness. That is a serious issue because Ukraine is an oligarchic country, so how do you see the situation for small and medium firms? At the moment, they obviously face a number of hurdles. Financing is an issue given that Ukraine has come through a serious crisis in the banking sector. Private sector credit is low. In addition, the issue of access to markets is quite big in Ukraine, which is why deregulation, competition policies and anti-monopoly policies are important. Ukraine has a large number of SMEs, but for them to be able to grow and develop further, reforms need to be taken. The business climate is an area where the government needs to take further action. If we look at the Doing Business indicators, Ukraine basically moved up during the last few years. In 2013, Ukraine was 140th in the index and in 2017 it ranks 81st, which is very good. But it’s still lagging significantly behind the other European countries. For example, areas such as permits, licenses, and inspections need to be addressed. 59 notches is an improvement but on the other hand, we see countries which have climbed up the ladder and where businesses don’t see much improvement in their day-to-day operations. I completely agree with that. That is because the Doing Business only covers a slice of the business environment. As you said, there
courtesy of the World Bank
are countries that are taking some reforms just to move up in the rankings; the reforms may be only in the books and actual implementation may be lagging. We are keenly aware that we cannot rely only on the Doing Business Indicators to assess the business climate. For that reason we are talking to private business people. In the past few months, I have been traveling around Ukraine and, in fact, we have had consultations with private sector representatives to find out that what constraints they are facing. So what is the most prevalent problem that companies have in Ukraine? Corruption is the number one issue that comes up, not just from the companies, but also from ordinary people. Companies also talk about tax administration and its unpredictability, and then about permits, licenses, inspections and certification. Some companies mention access to a skilled labour force. Of course, there is the ongoing military conflict. Yes, the military conflict in Ukraine has had a very widespread impact. It has affected economic activity and the prospects for the whole country. It has also impacted the people, as there has been a human cost. The biggest economic impact has been in Donetsk and Luhansk, which used to be the industrial heartland of the country. They accounted for almost one-quarter of Ukraine’s industrial activity and the same share of Ukraine’s exports. So when that all but disappeared, the economy was hurt. Secondly, the conflict has significantly undermined investor confidence in Ukraine. Obviously, when investors see that there is a military conflict going on in one part of the country, they become hesitant to enter. Thirdly, there have been widespread job losses. Then there is the human cost. In addition to the about 10,000 people that have been killed in the conflict, there are 2.7 million people that have been displaced – that’s about five per cent of the population. Some of them, about one million people, have left the country, and 1.7 million have moved elsewhere in Ukraine. Do you think there is a chance of higher economic growth now, despite the conflict? In Q4 2016 the GDP growth equalled 4.7 per cent. Yes, I think that the biggest economic impact of the conflict we have already seen, given that the revenues from the region under conflict went down by 40 per cent already as far back as 2014. There should be no further revenue effects, but the conflict is not over yet and it is continuing to affect the country fiscally, as military expenditures are taking a large share of the budget. In fact, up to five-percentage points of GDP is allocated to military spending. That’s a significant amount of money that could be otherwise allocated to services that benefit ordinary people. At the beginning, we touched briefly on exports. How do you the Deep and Comprehensive Free Trade
Area (DCFTA), which is part of the Association Agreement (AA), can help offset the fall of exports to CIS countries and increase exports to the EU? The trade diversion is something we have expected to see, but the increase is not showing up in the numbers yet. We know that the movement is there, but it will take time for Ukraine to see the full advantage of the trade agreement. There is also the issue of certification and standards that some Ukrainian companies have yet to meet, before they can start trading with the EU. Yes, it is a challenge. I have talked to agribusinesses and one of the issues they are facing is meeting the phytosanitary standards, which are different from those in the CIS countries. At the same time there areas, such as engineering and IT services, in Ukraine that
have started growing again. Those services are exported to the EU and already meet all the requirements.
That leads me to the issue of foreign direct investment (FDI) in Ukraine. Every single country wants to attract investors. Do you see Ukraine as an FDI destination at the moment? I see significant potential in this country, but at the moment it’s very difficult to attract investors to come to Ukraine, not only because of the conflict but also because of the broader investment climate. Traditional reforms and better law enforcement are going to be critical to tackle if we are to attract
investors. Over and over again foreign investors tell us that they are worried about the court system; whether they function in an impartial manner and whether they can count on contract enforcement mechanisms. There is a need to strengthen property rights and investor protections in order to get the foreign investors to come. Do you think that Ukraine has an image problem right now? To some extent, yes. I think that there are people who have never been to Ukraine and don’t realise that the conflict is concentrated in only the eastern part, while the rest of the country is open for business. Also the country’s potential and the opportunities that are present here are not necessarily that wellknown. So, there is quite a bit of work to be done if Ukraine is to present its value proposition on the international arena. There’s a perception that very little, in terms of reforms, has happened in Ukraine in the past three years. However, if you look at the record, in fact, the government in Ukraine has introduced more reforms, in the past three years, than governments from the past 15 years. There is a move towards change here. Things have already started moving, and in the right direction, but more has to be done in order to reach the potential.
EBRD: changes are needed in Ukraine’s economy and business to catch up with CEE growth Written by
ANDREW WROBEL Published on January 24, 2017
What Ukrainian businesses do need to realise is that an open market doesn’t mean that clients are waiting with open arms and bunches of flowers for you to appear.
How do you see the prospects for growth in Eastern Europe and the Caucasus? Well, it is a region that has suffered from economic, and sometimes political, shocks over the past couple of years. The drop in the price of oil, the recession in Russia and the uncertainty linked to the political situation have had an impact on its growth, investments and remittances. If we look at the EEC countries, however, they have all reacted in different ways. Some of them are also impacted when the harvest is not as good as planned or even not as good as the year before, for example, Moldova. Recently, Azerbaijan has been impacted by the drop in the price of oil. Belarus, despite being a non-oil producing country, is also hit when the price of oil goes down because one of its major sources of export revenue is the refining of the oil that it gets from Russia at a fixed price. Once refined, it is exported elsewhere at market prices, but this margin is being compressed now. Georgia has been an outsider there, managing to handle all the crises relatively well. They saw some drop in the GDP between 2014 and 2015, and their currency was devalued by 28 per cent. At the same time, compared to what we saw for the Russian or the Belarusian rouble, the Azerbaijani manat (which is in a free-floating mode as of mid-January) and the Ukrainian hryvnia have been rather well-managed and we are seeing a resumption of growth, both in 2016 and 2017. We expect Georgia to have the highest GDP growth in the region.
Francis Malige (courtesy of the EBRD)
Until now, the European Bank for Reconstruction and Development (EBRD) has invested over € 21 billion in more than 1,000 projects across six countries of Eastern Europe and the Caucasus (EEC), contributing to the countries’ economic growth as well as policy dialogue. Francis Malige, Managing Director for Eastern Europe and the Caucasus for the European Bank for Reconstruction and Development (EBRD), spoke to Andrew Wrobel about the prospects for growth in Armenia, Azerbaijan, Belarus, Ukraine, Georgia and Moldova, which make up the Bank’s EEC region, as well as the business climate and investment opportunities in its largest economy — Ukraine. If we look at the region, I believe, the countries’ representatives would say their strategic location is one of their key assets. Is it? Certainly, but it is a region which has a lot to offer, in terms of the potential. But you’re right, each of these countries likes to think that it has a strategic location, and to some extent, 100 per cent of the world’s countries have a strategic location. However, these six countries are in the middle of the new Silk Route. Clearly this applies to Azerbaijan and Georgia. Armenia also stands to benefit from the opening of the Iranian economy, even though it’s in a landlocked situation. Of course, Ukraine is a key transit country for gas and oil. In addition, if there has to be one branch of the Silk Route that follows the road through the Caucasus and eventually goes north to the Baltics and to the Scandinavian countries, that would logically go straight through Ukraine. Moldova is in a rather more difficult position from that standpoint because the east-west route is not as easy to take, mainly because you need to go through Transnistria, and frankly, on the north-south route there are other, better, ways to travel than going through the country. Then, Belarus is a doorway to the Russian market. It is one of those places where, in current circumstances, it’s easier and more practical to do business than in Russia. At the same time, it allows people to get into the Russian market and it’s where you’ll find a very well-educated population at a comparatively low cost, so it’s a favourable investment location. If you keep believing in free trade which, of course, these days
March 2017 is a bigger challenge than a year or two ago, Belarus is a good place to invest and to re-export. Belarus and Armenia benefit from access to the Customs Union market. Ukraine, Moldova, and Georgia, in their turn, benefit from the tariff-free access to the EU market. The European Bank for Reconstruction and Development has been very active in the region, hasn’t it? Yes, these are places where we have invested between €1.6 billion and €2.2 billion every year for the past two or three years. In Ukraine alone, we’ve invested €12 billion since 1993. Across the region, it’s more than €21 billion, over the past 25 years. So, we are the largest financial investor in any of these countries. All of them, of course, are shareholders in the bank, so that creates a close relationship between the authorities and the Bank, and that positions us quite well to manage both the policy dialogue as well as the investment, meaning we can influence the way in which we contribute to the countries’ changes. Our priority is to support private initiative and investors of different sizes across the region. At the same time we also finance sovereign and municipal projects that are aimed at the improvement of the key infrastructure which is vital for the development of the private sector in all the countries. In the beginning of our discussion, you mentioned political changes taking place in the region. How do you see the political stability in the region impacting the region’s potential? I mean we see a lot of declarations. I still believe that common sense will work in the end, meaning that free trade is beneficial for all these countries. It is beneficial for the EU and it is beneficial for everyone involved. What we probably need to understand is that, inside these countries, the reason people criticise trade is mostly because the benefits of that trade have not been shared internally. More effort is required to make sure that the benefits of growth are not just going to the top one per cent and that there’s more inclusion in the entirety of growth. So, I guess that’s the difficult part, because frankly, we’ve not been very good at it. If you look at the recent developments in Europe and the US: the Brexit referendum or the elections in the US, what is the impact of these developments on the region? We see a slightly negative impact. A modern economy in any given country is better off when it’s integrated into other economies rather than when it’s built on a standalone basis, for reasons of the spread of innovation, better competition, and so on. However, integration is also a political process. We’ve never seen an example where any country has succeeded in isolation. This simply doesn’t work. Talking about integration, how can Ukraine’s integration help the country develop? Firstly, the relationship between countries is the country’s business, (not the EBRD’s), so it’s their choice whom they want to be friends with. Secondly, I think what we see is that, of course, the EU is a very large market and if a country chooses to bring itself closer to the EU standards, it will probably make it easier for its companies to develop, design, and sell products to the EU. The EU is still is one of the largest, if not the largest, consumer market in the world. What Ukrainian businesses do need to realise — and some of
them have already realised it extremely well — is that an open market doesn’t mean that clients are waiting with open arms and bunches of flowers for you to appear. In fact, it’s tough to get German and British customers, but feasible. Here’s an example from Ukraine: there is a medium-sized brick manufacturer who supplies the London Underground out of a small factory somewhere not far from Kyiv. I say hats off to them because not only do they have a good product, but they’ve also thought about how to make it good for export and how to convince some of the most prestigious clients in the world to buy their product. That does sound like an achievement. Yes, and more companies in Ukraine should emulate this
Francis Malige (courtesy of the EBRD)
example and go out and conquer the free market, but to do that you need to build up your distribution and your client base. It’s not just good enough to say, “I’ve got this great product. Its description is written in Ukrainian only, but that’s fine because it’s great and it’s cheap.” That’s not necessarily what consumers and distributors want. So, this whole notion is of changing the product specifications, of adapting to the taste of the customers, and then learning to work with the ways of the distribution. You must also be able to supply more than just one truckload; you need regular truckloads when they are required. The reliability of supplies is becoming a key decision-making factor in the supply chains of today. Additionally, if you want to have Ukrainian products on the shelves of supermarkets outside Ukraine, you need to make sure that corruption in customs, or elsewhere (or other similar factors), doesn’t interrupt the supply. We know that the EBRD is the biggest investor in the region. If we look at other foreign investors in Ukraine, as I’m talking specifically about Ukraine now, it seems that FDI is desperately needed here. A couple of years ago, a lot of investors fled the country. How do we attract those investors back? Yes, FDI is desperately needed here but look at Poland and Ukraine as investment destinations, for example. While there is a GDP growth of about one per cent in Ukraine, you cannot even think of catching up with Poland, because Poland is growing faster than this, so the gap is only going to get worse. Naturally,
ECONOMY investors will opt for a better developed economy. The people in Ukraine are going to look to their northern and north-western neighbours with more and more envy and regret, knowing that when the Soviet Union collapsed, the two countries were at about the same level. But this example shows what it does to an economy if you manage it well, or less well, over a long period. You see a huge divergence in growth and in the path of prosperity. If we want to play a catch-up game, we need to see growth in Ukraine at a pace of between five and ten per cent annually, the latter being a rather optimistic scenario but the former a desired minimum. This cannot be achieved without significant investments and not without significant foreign investment in particular. Currently, the way to attract foreign investment is not just to build a wonderful kingdom for foreign investors, but to create a level playing field where the rule of law will apply, where you will have no concerns and where there will be an efficient service that treats all issues according to the regulations and so on. It works so much better if you do this on the national scale rather than in a specifically designated zone where you need a foreign passport to benefit from
March 2017 it. There are also Ukrainian investors and building a better environment for them is also going to bring a lot of benefit to this country. A proper investment climate for domestic investors will help stimulate foreign investors, because very often what do foreign investors do? They look for partners. Ask yourself if they would prefer to look for partners who have to fight every day for the survival of their business because someone is trying to steal it from them, or do they want to look for happy partners who have the rule of law, who have their property rights preserved and so on? So, building a country — building an environment — where local, private business people can prosper in an honest manner is the best way to attract foreign investors. So, is it about making local business people’s lives easier and then attracting foreigners? Yes, and then sharing that experience with others because we can say wonderful things about the investment climate, but they aren‘t going to listen exclusively to businesses operating in the Ukraine. How do you make these investment decisions? I’ve been on the other side making investment decisions for a private company. Firstly, you look at the market. Does the market look as if it is working reasonably
well? If not, you have a problem. What you do then is you start exporting into that market, which means finding an agent, finding a retailer and finding a dealer to sell your product. So, the first step in establishing your presence is to start exporting there or to start finding suppliers to import from there. After that, you ask how I should integrate this. These guys make a great product. It’s really cheap. It’s much cheaper that what I could do in-house. How about I buy them or I create a partnership with them? That’s FDI, but attracting dozens, even hundreds of small investors into the country, of either local investors or foreign investors, requires building a good business environment. It seems that the discussion about the business climate or corruption, for example, has been going on for ages. It also seems that people know about it, but still not much has been achieved. What’s your opinion on that? Well, as long as it doesn’t change, I don’t expect foreign investment to come in any meaningful way. More people in Ukraine have to understand this. Some of the people that don’t understand this are the people that need to understand this the most.
Leszek Balcerowicz: Ukraine can learn from Poland’s economic history Written by
ANDREW WROBEL Published on March 18, 2017
Leszek Balcerowicz (photo by Adam Golec)
The freedom regained by Poles in 1989 and Maidan were similar, but such an atmosphere cannot last for a very long time. This is a gift and it should be used, but how? By rapid reforms. In 1990, GDP per capita in Poland and Ukraine was roughly the same and amounted to some $1,600. By the end of 2016, Polish GDP grew to $12,700. In 2013, GDP per capita in Ukraine equalled $4,200 but the recent recession has caused it to fall again, to some $2,000. Leszek Balcerowicz is a former Polish deputy prime minister, and he is known for implementing the Polish economic transformation programme in the 1990s: this was a shock therapy that is commonly referred to as the Balcerowicz Plan. He is a former governor of the National Bank of Poland. He also was Ukrainian President, Petro Poroshenko’s, representative in the cabinet of ministers. He spoke to Andrew Wrobel about Poland’s transformation in the 1990s and the current government’s economic growth plans, as well as his ideas for the economic development of Ukraine. Are you happy with the so called “Balcerowicz Plan” which you introduced at the beginning of the 1990s in Poland? I mean, if you look back at the transition that has taken place in the country over the last quarter of a century? This is a classic question. I’ve been asked this plenty of times, by different people, and that is not a criticism. No, not at all. I would like to know if you would have done something differently. Yes, but first of all, I think the word “transition” is hugely
misused and rarely defined. Usually it indirectly means that you have a change from one system to another system, call it a market economy or even more precisely, capitalism together with democracy, with highly developed civil rights and a high level of the rule of law. So if you mean that transition, then you see huge differences. I think that Central Europe, including the Baltic States, has reached this different model. They are not all the same, but quite similar. Then if you look at Russia, reforms were started [by Yeltsin] but have been reversed under Putin. In Belarus, reforms were reversed even earlier by Lukashenko who has won several elections. What you see in Central Asia is more socialism, not transition. Now, if I come back to your question: I try not to base my judgment on emotions, but rather on what careful, empirical, economic investigation can tell you. There is a lot of investigative research, so one can draw two sorts of conclusions. The first one is that the countries that started the transition earlier, as early as possible in fact, and that did not reverse it, are in much better economic situation now than countries which, for some reason, started it later and achieved fewer institutions in the market economy. Professor Oleh Havrylyshyn discussed that topic in his article in Emerging Europe where he compared Poland and Ukraine. Yes, there are indicators; comparative studies of Poland and Ukraine. In 1999, these two countries were at the same level of per
Before we discuss this, would you say there is a reform that should have been introduced and wasn’t, especially in the early 1990s? It would have been better to have tackled the social sector early. I do not mean more social spending. I mean more reforms, but I very much doubt that would have been possible given the initial situation in Poland which was catastrophic – there was hyperinflation and a very high level of foreign debt and I only had a small team, which I directed. It would’ve been better but I don’t know whether it would have been possible to do much more. However, it’s worth mentioning that Poland had a second period of reforms that is often forgotten, but which are equally important. This happened between 1997 and 2000, and when I was deputy prime minister and minister of finance. At that time we accelerated privatisation; we introduced a fundamental pension reform and an education reform. We also carried out a massive restructuring of mining. You said that the Polish economy was in a catastrophic condition after the fall of communism. Yes, there was hyperinflation, but there were still massive shortages because many prices were still controlled. There was a chaos in the pricing system. The economy declined because of this chaos. But there was one good outcome: Poland became free. There was also a feeling that since Poland had become free at the same time as the economic catastrophe then people were readier than normal to accept, say, radical changes. I would have never accepted a government job just to be in the government. Prime Minister Mazowiecki asked me and I refused. Then, he asked me again. Eventually I accepted but I it was under
the condition that I would make radical changes. Based on my previous research, which I had also done with a group of people in the late 1970s, only radical changes can succeed. The Prime Minister accepted my condition and we began. Would you compare the freedom regained by Poles in 1989 in any way to what happened during Maidan? I remember a Ukrainian taxi driver in Kyiv who had come back from Moscow, to live in Ukraine, saying that Maidan had changed people and they wanted change now. I thought then, and I think now, that they were similar, but remember such an atmosphere cannot last for a very long time. It can last for a year, but not longer. This is a gift and it should be used, but how? By rapid reforms. For me, this was an important non-economic reason for rapid reforms but there were also plenty of economic reasons. I very often hear experts saying that the last three years have seen more reforms in Ukraine that the previous two decades. Do you think those 20 years were lost? Not completely. It certainly could have been better, but there’s no point in discussing what was missed. Rather one has to try to catch up. Exactly. So if we were to compare Ukraine with Poland… I would say that perhaps the biggest similarity would be between Ukraine in 2014 and perhaps Poland in 1997, in the sense that the second reforms have already been done, but one has to speed up the other reforms. What is specific to Ukraine, and not for the Poland of 1997, is the aggression, both military and economic. As much as the military aggression is obvious to everyone, the economic one is not — Russia used to be Ukraine’s largest importer
Leszek Balcerowicz (photo by Adam Golec)
capita income. Now, I think Poland has a level of per capita income that is at least twice as high. Of course, there are non-economic aspects and there are some people who would wrongly imply that, “Yes, okay, radical market reforms are good, perhaps for the economy, but not so good for other aspects of life.” They cannot find examples because in Poland, and in some other countries, – if you look at social statistics such as life expectancy, child mortality, etc. – you see that they have achieved very good results. Countries which have introduced economic market reforms are better than countries which have, for some reason, not done it. In Poland, the social record improvement, which is a social indicator, is as fast so far as the economic growth. You can point to the mechanism which links market reforms with improvement with social indicators, including health. We have seen some interesting research in Poland, which links an improvement in health with huge changes in the diet, but which were not the result of any government programme, but rather the revolution in prices, as well as the ability to learn and recognise the value of more healthy food. There are also other aspects such as the level of fear, which is much higher under non-democratic regimes than under democratic regimes. That is a very important component of the standard of living; whether you are afraid of your own government, such as happens under communism or socialism. So, once again; by looking at the available research, there isn’t a single iota of proof that fewer market reforms are better for the economy. However there is still a lot of clamour about this which started with this nonsensical distinction between shock therapy and gradualism, or in other words — all at once or one by one.
and then it introduced a ban on Ukrainian products. This alone was bound to produce a deep recession, which did happen and collectively was about 17 per cent. However with new authorities’ policies, there could have been a worsening catastrophe but they avoided it. Why? Well, they avoided a fiscal catastrophe. The budget deficit of 2014 was in the range of ten per cent and now it’s about three per cent, with a simultaneous increase in military spending because Ukraine did have a proper army before.
Leszek Balcerowicz (photo by Adam Golec)
Then, there is the banking sector — Governor Gontaryeva did a tremendous job by reducing employment in the Central Bank by two-thirds, and then improving the banking sector. Finally inflation was reduced from around 60 per cent to around ten per cent. I believe privatisation should have happened faster. I think privatisation is low-hanging fruit from the economic point of view. Demonopolisation definitely needs to come, which would involve the identification and elimination of the role of oligarchs, if they are not compliant with the rules that are in order. Another aspect would be improvements in the business climate, so that there’s more investment including foreign investment.
overall productivity has slowed down a great deal in the last few years and this is the main driver. Two years ago, my younger colleagues and I presented three scenarios for Poland’s development. The first one assumed that all challenges had been neutralised by proper reforms. The second one assumed no reforms were introduced and the third one assumed counter-reforms were introduced which would result in a slowdown. What has, and is, being done and is also listed in the so called Morawiecki Plan which is the worst-case scenario: for example, not only nothing is being done to heal the public finances but additional expenditures are being introduced.
If all the necessary measures were taken now, when do you think Ukraine could potentially catch up with countries such as Poland? What matters is to grow faster at, say, more than three or five per cent. Unfortunately, Poland is starting to have its own problems, given the bad policies of the present government.
The government has also lowered the retirement age. Yes, so this is not a plan, unless the goal is to slow down the growth of Poland’s economy.
Yes, the new Polish government has been in power since mid-November 2015 and Mateusz Morawiecki, the deputy prime minister and the minister of economic development and finance has created a Responsible Development Plan which was approved of by the Council of Ministers in February 2017. First of all, this is not a true plan in a technical sense. There are goals in it but they are the continued fast growth of Poland and catching up; however, the measures which are proposed are contrary to these goals. Just to be more specific, Poland has an excessive budget deficit. In a booming economy there should be a surplus, or at least a balance, but not a three-per-cent deficit. Then, the forces that are responsible for longer-term growth are weakening in the country. Because of the ageing population, fewer people will be going to work, unless certain measures are taken, such as raising the retirement age. Then, the investment ratio, especially private investment, is low and, most importantly, the rate of growth of
What, then, should be done in Poland to benefit from the growth of the last quarter of the century and even to further improve the situation? If we look at ageing, which is a good thing in itself because it’s better to live a longer than a shorter time, but we need to remember that it has certain demographic consequences. You have to increase retirement age, which was done by the previous government but has been reversed by the present one. As a result, if no further action is taken, we will have even more people who are not working and who are drawing pensions in a pay-as-you-go pensions’ system that is financed by younger people. It’s difficult to imagine a greater sabotage to economic growth than that. It was not very difficult to diagnose the challenges and to propose reforms. The main problem, as always, is it’s a political economy. We have now a bad government. They should be democratically removed and this is a test for the Polish society. Now the government is after the VAT mafia. Tax offenders can be imprisoned for 25 years. I can refer to the economics of crime literature. From that,
March 2017 one learns that there has to be a certain gradation of crimes ascribed to different offences, because otherwise, it’s chaos. Let me give you an example: imagine there is a VAT offender who committed a crime and there are witnesses who can prove that. What should this offender do if the penalty for murder is the same as for his VAT crime? Secondly, the very possibility of being wrongly accused and sentenced adds to uncertainty. So if no proper reforms are introduced to address the key challenges we discussed earlier, how do you see Poland’s economy in two or three years? Poland is vulnerable, especially its public finances. If there’s a strong external shock who would be hit the hardest? Countries with weak public finances. What is practically certain is that with these policies, which are intensifying and making challenges harder not easier, Poland cannot maintain its previous rate of growth, so there will be a serious slowdown. Whether it is dramatic or gradual depends on the external factors. But speaking practically, what Poland has achieved so far was beyond the expectations of most people. Who would have had expected, in 1999, that Poland would be the best-performing country in Europe? Why do people emigrate from poorer countries? I’m not speaking about refugees, because they are poorer and they have an economic direction. This is an old story. If there is a substantial or big gap, between what you can earn in your country and what you can earn
elsewhere, and the standard of living is better, some people make a decision to leave. The Polish governments want Poles to come back, for example, from the UK. Yes, but the only effective way of halting this feeling of pre-emigration is to grow faster in a poorer country. The threat is that if Poland stops catching up, emigration will continue. These are usually the most entrepreneurial people. So policies which are bad for growth are very good for emigration. Now, if again, we look at Ukraine and Poland, what lessons, perhaps, should Ukraine learn from what is happening in Poland today? The lesson is first work to increase the pressure for reforms; be ready with a package, and finally move with the maximum possible speed. I believe, you shouldn’t introduce counter-reforms because they result in a slowdown. In your recent book you call yourself a fighter, don’t you? Actually, somebody else suggested the title but I thought it matched me because, yes, I have had to fight. I am not speaking about my childhood fights, but fighting for reforms because they are not going to just drop down out of the sky. There are many resistance forces and interest groups defending that system so one has to overcome them by mobilising other people. You have to be faster and more energetic and better at communicating your ideas.
Petro Poroshenko meeting Leszek Balcerowicz (courtesy of president.gov.ua)
GENE ZOLOTAREV Founder Maximus Group Published on January 30, 2017
Ukraine’s economy in 2017 – when dreams of growth meet geopolitical reality The economy is inherently unsustainable and is heavily dependent on external investments such as direct investment from the IMF and the ECB and the EIB, and open markets via the Eurobond programme.
Those who follow the ups and downs of Ukraine’s economy cannot help but ask one obvious question — what is the “cause” behind all this “effect”? While the obvious disconnect between the economic data and market performance is sometimes baffling, we need to listen closely to the sources that matter more, such as the International Monetary Fund (IMF), the US Department of State, etc. and less to those that matter less — the Ukrainian Ministries of Economy, Finance, and the Central Bank, etc.). In this analysis we also refer to Eurobond pricing as the “market”, at least as its closest indicator given the catatonic state of the Ukrainian domestic stock market and the fewAmerican Depository Receipt (ADR) that are listed in London and elsewhere. So, once again, if one listens to the formal sources of such information, everything appears to be going well. According to the poll that Reuters’ poll carried out over 15 analysts, at the end of January, Ukraine’s economy will show more sustainable growth in 2017 compared with the sluggish recovery that was expected in 2016, after a two-year recession. If we look at their median forecasts, the analysts from the Ukrainian banks, brokerages and think tanks expect Ukraine’s
gross domestic product will rise by 1.2 per cent in 2017 and 2.3 per cent in 2018. If we add in the World Bank’s joining in, Ukraine’s GDP will grow, against the backdrop of the improved situation in the sphere of security and the effectiveness of the reforms that have already been undertaken. Growth in 2017 is expected to reach two per cent, which is unchanged compared with the forecasts that were made in June 2016. However, with Eurobonds trading at YTM’s (yield to maturity) in the high single digits, anyone with a decent memory of recent events should only have one thing on their minds — sell! Here’s why: the economy is inherently unsustainable and is heavily dependent on external investments such as direct investment from the IMF and the European Central Bank (ECB) and the European Investment Bank (EIB), and open markets via the Eurobond programme. Private direct investment, despite an impressive number of Turkish and Pakistani businessmen’s being booked into Kyiv’s hotels, is yet to come in any tangible form. Investments from Ukraine’s largest and most natural trading partner, Russia, also seem unlikely as those Russians who are already invested are being kept busy keeping them safe from predatory hands.
The Eurobond markets are unlikely to be tapped into again in the immediate future, because of a recent restructuring which forced a 20 per cent cut. That leaves Ukraine with state aid from the US/EU which is heavily influenced by geopolitical factors. The EU is likely to be less enthusiastic about its role in Ukrainian aid, despite its clear motivation for keeping over 40 million Ukrainians from heading to Europe and disrupting its own, already fragile economy. This leaves us with the only remaining option for keeping the Ukrainian economy afloat — the US and its newly elected leader of the free world — President Trump! This is where skies darken — it seems that the Ukrainian government has badly misplaced their bets. That can best be summarised by a recent and very well researched article by Politico called “Ukrainian efforts to sabotage Trump backfire”. It seems that serious efforts were made to publicise the Trump team’s economic links to Russia and as Politico writes: “Ukrainian government officials tried to help Hillary Clinton and undermine Trump by publicly questioning his fitness for office. They also disseminated documents implicating a top Trump aide in corruption and suggested they were investigating the matter, only to back away after the election. And they helped Clinton’s allies to research damaging information on Trump and his advisers.“
However, the most serious threat to US-Ukraine relations is its lack of any communication channels with the current administration. There is fierce competition for the attention of the current US administration for the Ukrainian context: from President Poroshenko, from his political opponents and from Russia which sees this as another low-cost high-impact opportunity to weaken Ukraine. In all of this uncertainty, there is one thing that is certain — the Kremlin will test the US administration on Ukrainian matters. Given Mr. Trump’s attitude to giving financial aid to those who do not “appreciate it” it seems that US support, both economic and political, is far from certain. Should the US drop its support programmes, this would send the Ukraine’s economy into a tailspin, removing any superficial perception of normality that it is presently exhibiting. The only way forward for Ukraine seems to be something everyone has been suggesting all along: economic self-reliance through radical market reforms, strong business incentives to boost job creation and a gut-level renovation of its administration of public offices. It is a huge country with huge potential, but only decisive action will save it from a meltdown.
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Steps to stability marred by a failure to attract FDI
ALEXANDER FROST Head of Global Risk Intelligence and Data Axco Insurance Information Services Published on February 11, 2017
In order to meet the government’s ambitious growth targets and to provide a meaningful recovery, Ukraine would require an FDI of $6 to $7 billion per year.
Recent statements by the European Union (EU) and the International Monetary Fund (IMF) give the impression that Ukraine is making significant steps toward stabilisation and normalisation. There has been much praise for the administration of Petro Poroshenko, especially for the nationalisation of the heavily indebted PrivatBank, and recognition that reforms such as this will be sufficient to unlock the next $1.7 billion tranche of IMF assistance from its $17.5 billion rescue-fund. If one were to only look at macro-economic indicators, Ukraine appears to have made some progress. After a fall in real GDP of over 15 per cent, since the Maidan revolution in 2013, the economy returned to growth of 1.5 per cent in 2016 and is expected to expand further to 2.5 per cent in 2017. Likewise, the deficit has been brought down to 1.6 per cent of GDP and a tighter monetary policy at the Bank of Ukraine has seen inflation brought down to 9.8 per cent from its high of close to 50 per cent, in 2015.
Despite all of this however, foreign direct investment (FDI), the major measure of foreign capital’s confidence in Ukraine’s medium- to long-term trajectory has failed to recover; falling from $8.5 billion, in 2012, to only $484 million in 2015 (the most recent year for which complete figures exist). While there have been some notable exceptions in the fields of agriculture and information technology, in order to meet the government’s ambitious growth targets and to provide a meaningful recovery, Ukraine would require an FDI of $6 to $7 billion per year. How can this caution be explained? The reason can found in Ukraine’s elevated and persistent political and geopolitical risks. Judged on a combination of public satisfaction, government stability, policy certainty and national security, Ukraine’s position remains extremely precarious, despite its increasingly positive qualitative indicators. While the much touted headline figures, used to substantiate stabilisation, may impress Ukraine’s western partners and the international financial institutions, they have had less of an impact on regular citizens. Unemployment remains over nine per cent and per capita income has declined from $3,878 in 2012 to an estimated $1,988 in 2017. Moreover, despite billions of dollars in support for economic reform from the EU and the IMF, few of those reforms have had a positive impact for consumers. Transparency and price liberalisation in the energy sector have seen household bills rise an estimated 450 per cent, between 2014 and 2015; there has been major disruption to health and welfare services and plans for a rise in the pension age, in 2017, are sure to provoke public anger. The government has also struggled to address the pervasive issue of corruption which, recent surveys have revealed, average citizens see as a high priority and perceptions of which have worsened since the Maidan. Few have confidence in the government of Volodymyr Groysman, which is supported in the Verkhovna Rada by a number of oligarch-aligned parties, to tackle this issue. Reform of the judicial branch, which is vital to prosecuting major violators, remains stymied by vested interests and anti-corruption legislation and institutions lack the authority and budgetary capacity to fight back. Geopolitically also, Ukraine’s position remains extremely precarious, as evidenced
March 2017 by the flare up in violence between Ukrainian troops and Russian supported separatist forces in January 2017. Although low level fighting has persisted regularly beyond the Minsk II agreement, which was signed in early 2015, this was the first time in months that heavy weaponry, prohibited under the agreement, were used by both sides. This included artillery and saturation Grad rocket systems and resulted in numerous civilian deaths and widespread property damage. Russiaâ€™s determination to ensure that Ukraine is prevented from further integration into Atlantic economic and security structures means it has little incentive to implement the Minsk agreement and the simmering conflict in the east is a useful lever with which to destabilise Kyiv. The occupation of the Donbas, a major centre of coal mining and industry, affects 16 per cent of Ukraineâ€™s pre-conflict output, while the cost of maintaining an army of 280,000 troops and carrying out a major re-armament programme, estimated at 3.1 per cent of GDP, is a huge drain on Kyivâ€™s resources. Ukraine also has little incentive to enforce Minsk, as this would involve giving considerable powers to the separatists, including a veto over NATO and EU membership. To attempt this would precipitate a major domestic crisis given that it would be unacceptable to nationalist parties, but its abandonment will make the prospect of EU integration even more remote, thus fuelling public anger. The stage is therefore set for a turbulent medium-term outlook in Ukraine, with near constant political instability, domestic squabbles over reform, an increase in the potential for public demonstrations and greater geopolitical risk as anti-Russian sentiment potentially becomes the unifying focus of the country. In such an environment is seems likely that foreign capital will continue to avoid the country, or at best return slowly.
Mohammad Zahoor: Maidan three years on – what has changed for Ukraine? Written by
ANDREW WROBEL Published on January 10, 2017
Manufacturing is a good bet, but that’s purely for exporting it back to the EU.
After two years of contraction—seven per cent in 2014 and 12 per cent in 2015 — the Ukrainian economy returned to growth in 2016 and is expected to increase by more than two per cent in 2017. However, that is not the case for Donetsk and Luhansk, which are still engaged in the military conflict and where the manufacturing sector has contracted by 32 and 42 per cent respectively. Dr Mohammad Zahoor, a Ukraine-based, British businessman of Pakistani origin, the founder and owner of the ISTIL Group and publisher of the Kyiv Post, spoke to Andrew Wrobel about how his business has been affected by the Russian-Ukrainian conflict, the investment opportunities the country offers and the recent reforms following Maidan as well as Ukraine’s integration with the West. We last spoke less than a year after the Maidan situation and you had already been doing business in Ukraine for more than a few decades. How have your operations in Donbas been affected over the past three years? Well, we have been affected quite significantly. Our coal washing plant, that was a very good profit-making business, is gone. Our hotel in Donbas is still controlled by the separatists. Plenty of our people, living in the eastern-most part of the country, have had to leave their homes, so business-wise, it is a terrible situation over there. Once you have incurred losses in one region, you want to make profits somewhere else to make up the gap. Unfortunately, that hasn’t happened and is not happening here either. Not enough has been done to get out of that crisis, I must admit. That means our other businesses are not doing well. For example, we had a satellite channel packaging firm but people were not able to pay the $1 a month for subscriptions. We had a TV studio but there was no demand for content, so we had to dispose of it. We just disposed those things at huge losses, instead of carrying them. What are you focused on now?
Right now, we are investing money to finish our hotel project and we have also invited some partners to join, as we would like to share the risk. It seems that quite a few foreign companies have left Ukraine, but at the same time everyone is talking about the enormous potential Ukraine offers. Where is it? What is the problem? First of all, the problem is corruption. The country hasn’t reformed itself. Cronyism still exists. It’s not that nothing is happening here. In fact, there are a few new regulations which have been approved and even implemented, but I think a lot things have been changed only cosmetically. The agricultural sector here was, and still is, quite profitable and a lot of companies are investing in it. If foreign investors could buy land in Ukraine much more investment would come in. The IT sector is thriving, but I meet representatives of large multinational IT companies who say that they have offered the government financing for new courses at universities, to increase the number of students, but the government has ignored the offer. Of course, they weren’t doing it for free—after the students’ graduation those companies would have had access to more Ukrainian IT specialists. Finally, as far as the free trade agreement with the European Union is concerned, the country offers great manufacturing opportunities and large giants are in production here already. Ukraine has the cheapest labour market in the world; even cheaper than China, because of the depreciation of the hryvnia, so it’s good time to invest in that area also. So, you would bet on manufacturing? Unilever recently opened a production facility, didn’t they? Yes, any type of manufacturing—shoes, textile, outfits, what have you—because Ukraine is very close to the European Union, I would say manufacturing is a good bet, but that’s purely for exporting it back to the EU. IT and agriculture are also sectors where I see the largest potential.
March 2017 Okay, so we have those three industries. But at the same time, the country faces quite a few challenges, right? How would you convince prospective investors to consider investing in Ukraine? I would say there is no faith in the government. Investors, who are up to date with what happens on a daily basis, actually find the country too risky. They don’t always want to come even if the government is offering incentives. There is not much confidence left because no structural changes have been made. The reforms are not there. The tasks have taken too much time and effort, such as European integration, visa-free travel, joining NATO, an innovative economy etc. Just think about reducing corruption, making a nice judiciary system, whatever. So, the plans are huge, but what has actually been done? We are trying to help here. We are trying to set up a $50 million package fund and to acquire certain assets, which we think are the right assets, based on our presence and experience in this market for so many years. We believe that if someone invests with us they will achieve a great return on their investment. Bearing in mind the overall picture, what message would you pass on to prospective investors? Well, if you look at whole picture, it looks very gloomy—if you go by the set rules, you would never invest in Ukraine because hardly anything works well. I would say some 90 per cent of investors would have that opinion. There are maybe ten per cent who like adventures, who like risk-taking and who would consider Ukraine as an investment destination. So, coming back to the fund, you mean a fund managed by the ISTIL Group? As the ISTIL Group, we are not licensed to do that but, yes, we would rather be some sort of custodians of the funds coming in here, through various fund managers, and we would rather tell
them what to do with the money. I see. Now, we already talked a bit about the last three years and you said not much has been achieved. How do you see Maidan from the three-year perspective? Put very simply, I would say that there were people who wanted change but there were also dacoits and bandits. They robbed people quite openly and people knew they were bandits. In the eyes of the world, we have the most reformist parliament and the government but the people have not benefited from it at all. At the end of three years, people have become much poorer. All the benefits of being a reformist movement have not been passed on to the stakeholders, so the people are not happy. There are even voices that say that if things don’t change then, when the next election comes, someone more favoured by Russia might come to power. If we look at Russia, Mr Putin has been able to find more partners in the West. We have had the Brexit referendum and Mr Trump has been elected across the Atlantic. After three years, I don’t think Ukraine has gained much. They have lost Crimea. Some of the most industrialised parts of the country are still occupied. There are people in power who are not taking good care of the country. President Poroshenko – though a good businessman himself – has surrounded himself with his friends, who are business partners etc., and these people are not passing on the benefit to ordinary Ukrainians. So, in other words, was Maidan worth the time and effort? Well, it was worth it because what was going on here, before, was intolerable. The result of Maidan is still to be delivered and there are still questions to be answered: was a revolution necessary? Should more time have been given to Yanukovych? Perhaps, if the latter had been carried out, a transition would have been easier— after the revolution, Yanukovych knew the people had the power and the people fought for a transition, however, people who here at Maidan for speeches etc. were booed. People knew that those who came to speak had their own agendas and that they were not future leaders. Unfortunately, Maidan didn’t produce any leaders at all. That was the worst part of it. The most positive result of Maidan is that the people have become more patriotic. However, for me, patriotism and nationalism are very close to one another and that must be reviewed very carefully. When we spoke two years ago, you said you weren’t really happy with how the West reacted to the conflict between Ukraine and Russia. Has your view changed? I think western countries and leaders are being fooled quite successfully by the Ukrainians. The only promise they can make is that they will be against Russia, but that’s what they actually want. Now, I have said this before and I am saying this now—doing harm to Russia doesn’t mean doing good to Ukraine. The West is trying to harm Russia. Sanctions are not a solution. The Russian economy is not doing well but has this changed Russia’s approach? Of course, not. The Russians have found their own way—they have gone to China and other places. While a food producer, for example from the UK, complains about their government because they cannot export their products to Russia, farmers in Argentina, Brazil, India, Pakistan are praying for these sanctions to last forever because they are benefiting from the situation.
ECONOMY So, I think to some extent, nothing has happened. Mr Putin never meant to bring his entire army to Ukraine. He keeps sending his people there to just run the local army, to train people and to fight with Ukraine. He keeps supplying them with equipment and he would continue to do this, whether the sanctions were in place or not. What could change Mr Putin’s approach then? Firstly, we must look at the root of the problem. If we look at Crimea and Ukraine (people will not like my saying so, but) I believe we should go and talk to the Crimean people and ask them whether they would like to come back to Ukraine or not. I am totally against what Russia has done in Ukraine with Crimea — they signed a memorandum respecting the Russian-Ukrainian borders in Budapest in 1994, and two decades later they just took over part of the country. Let’s imagine that if the people of East Timor revolted against the Indonesian government, the entire West, including America, would support them and would create a separate republic for them. It might be a Muslim talking right now, and they are Christians, but I think the West has a way of creating a problem out of nothing, or forgetting a problem when it is huge. So why don’t we imagine for a moment that Crimea is now East Timor and they want their independence from Ukraine? It is clear that the way Russia did it was wrong but it was the desire of most of the Crimean people. I am an outsider here and I can have an independent view here: the Crimean situation happened, so what? This also happened in Pakistan in 1971, with Bangladesh. They did not want to be part of Pakistan. Bangladesh became Bangladesh and it is still Bangladesh today. So, why don’t we just apply the same principle from that problem to Crimea? Because the West supports Ukraine. If it was Ukraine who had taken over Crimea, I think it would have been much easier for the West to justify it. I see. At some point, you mentioned the European integration, and again, I remember, from our discussion, that you said that Ukraine should remain neutral. Exactly. The first thing is that Ukraine should never become part of NATO. I am totally against that because the country should use its position just as Switzerland has been using its location. Why can’t Ukraine make a good deal with West and with the East, with its geo-political position? Would the occupation end if Ukraine stopped pursuing its integration into the EU? I think Mr Putin would be very happy. In fact, after that he might no longer be interested in the conflict in Donbas. If he doesn’t feel there is a threat from Ukraine, then why would he keep using his people, his energy, and resources to solve a problem which isn’t his? Ukraine has to stay neutral.
ANNA DEREVYANKO Executive Director European Business Association Published on January 19, 2017
Business moving forward with cautious optimism – can investors win the confidence game? Investors are increasingly interested in the Ukrainian market but it will take time for this optimism to translate into FDI.
Investors’ feelings concerning the outlook for Ukraine’s economy improved slightly in late 2016, although the economy remains fragile as the pace of reforms is still too slow. The widely observed investment attractiveness indicator that is published by the European Business Association, rose to 2.85 points in December, from 2.57 in June 2016. The rise was driven by the National Bank’s measures to support the currency, a solid banking policy, a results-oriented approach to the International Monetary Fund’s (IMF) requirements and some macroeconomic improvements — namely in the inflation rate and GDP and FX market stability. After years of scepticism concerning the business climate, investors must consider some more optimistic outcomes. Now, following a drastic post-Revolution of Dignity slowdown, investors are beginning to feel there is some light at the end of the tunnel. January 2017 marked one year of the Deep and Comprehensive Free Trade Agreement (DCFTA) between Ukraine and the EU. One year on, the evolution of trade is already showing progress, particularly in the agricultural sector which is one of the traditional heavy hitters of Ukraine’s economy. Limited optimism and a very gradual return to market stability is great news for the end of the year, but it is not necessarily driving investors to put their money into the Ukrainian market. Ukraine offers a broad range of challenges and opportunities, as well as risk and reward. The country’s regulations can be a challenging route to navigate. “The risk of turbulence is low, but we suggest that businesses keep their seatbelts fastened as we are now entering 2017”. This nicely sums up the prevailing mood, among the business community, early this year.
Concerns over the insufficient pace of reforms and the lack of progress in fighting corruption are taking their toll on investor confidence, which might affect economic activity in the months ahead. Measured on a five-grade scale, the investment attractiveness index has still not reached a positive, or even a neutral, zone. The careful optimism that was felt among investors at the end of last year was caused by the ability of the business community to adapt, rather than by tangible reforms successes. Ukraine is not yet among the big improvers for implementing reforms to business regulations, ranking 80 out of 190 in the World Bank Doing Business rating. Nonetheless, as I have mentioned, while at this time last year there was turmoil, the feeling has picked up and the signs are encouraging. Ukraine is making challenging steps forward, and is undergoing its most sweeping and fundamental reform movements ever. Given the magnitude of the changes, progress will come in fits and starts, but we are truly optimistic about the country’s investment potential. To be sure, reforms are a long-term effort and a dose of patience is needed, but I am sure meaningful changes in regulations that boost the overall ease of doing business will occur. Investors are increasingly interested in the Ukrainian market but it will take time for this optimism to translate into FDI, especially when businesspeople have been so cautious for so long. Ukraine has a unique opportunity to attract strategic and job-creating investments. The time for action is now.
March 2017 Written by
Predicting an increase for the Ukrainian economy
Published on January 12, 2017
Continued cooperation with the IMF is crucial for Ukraine’s outlook, to ensure that the economy remains on a recovery path. After an expectedly modest increase of 1.1 per cent in 2016, the Ukrainian economy is expected to grow by 2.4 per cent in 2017 and by 3.0 per cent in 2018, according to a survey of 30 local and international economic analysts made by FocusEconomics. The National Bank of Ukraine is more optimistic and sees the economy expanding by 2.5 per cent in 2017 and by 3.5 per cent in 2018. “The country’s recovery picked up steam in Q3 of 2016, as the GDP grew at the fastest pace in almost three years. Surging fixed investment because of an improving business climate and higher household consumption has fuelled the economy’s acceleration. Data for the fourth quarter suggests that the economy has continued on a modest recovery path with industrial production expanding at its fastest pace in eight months, in November,” says Angela Bouzanis, an economist at FocusEconomics. In Q3 of 2016, fixed investment grew by 24.8 per cent year-on-year, up from a 17.6 per cent rise in Q2, and private consumption expanded by 4.9 per cent year-on-year, which was higher than Q2’s 4.3 per cent. Government consumption also rebounded from the 2.4 per cent contraction of Q2 to a 3.0 per cent expansion in Q3. “Impressive as they are, these figures must be considered in context, as both investment and consumption have undergone sustained falls in recent years; the economy is therefore still playing catch-up. The strong increase in internal demand contrasted with an ailing external sector which continued to drag in growth, with exports in Q3 falling 5.5 per cent year-onyear, compounding the 6.5 per cent fall that was registered in the previous quarter. Meanwhile, imports rose 13.9 per cent, a large jump from the virtually flat figure that was recorded in Q2 (-0.1 per cent year-on-year). In the third quarter, the
external sector subtracted 6.7 percentage points from growth,” says Ms Bouzanis. In an effort to earn fresh funds from the International Monetary Fund (IMF), the Ukrainian government passed a delayed 2017 budget, on the 21 December, after rescuing its largest bank, Privatbank, a few days earlier. The government’s cooperation with the IMF bodes well for Ukraine’s outlook and the economy is expected to continue on an upward trajectory. “The budget targets a fiscal deficit of 3.0 per cent of GDP, meeting the IMF’s requirements, and along with efforts to clean up the country’s banking sector, should pave the way for a stalled $1.3 billion in aid from the financial organisation. Ukraine’s government is reliant on outside support for financing, however, patchy reform momentum has threatened aid and delayed payments. Continued cooperation with the IMF is crucial for Ukraine’s outlook, to ensure that the economy remains on a recovery path,” adds FocusEconomics’ Ms Bouzanis. The 2017 budget is designed to lower the country’s fiscal burden from an estimated 3.7 per cent of GDP in 2016 to 3.0 percent. A rise in the minimum wage and pension increases are to be balanced out by greater revenues from income taxes, value-added tax and dividends from the Central Bank. In addition, the government is expected to cash in on planned privatisations and asset sales. “The budget assumes GDP growth of 3.0 per cent, which is a more optimistic projection than the 2.4 per cent which was forecast by FocusEconomics’ analysts and, if the recovery fails to hit this speed, some of the revenue targets could come up short. Moreover, a number of late additions to the bill complicate the spending estimates and the numbers could see revisions going forward,” says Ms Bouzanis. More exorbitant challenges remain. A number of tough and politically unpop-
ular IMF-demanded reforms have still not been completed by the government, including pension and land reforms as well as a stepping-up of efforts to tackle corruption, such as jailing corrupt officials. “These reforms are critical to ensure continued support from the Fund, as well as to fuel sustainable growth, yet the government’s history of slow reform momentum bodes poorly for quick implementation. Additionally, there is a risk of fiscal slippage if growth or revenues fail to live up to the government’s targets. Our panel foresees a slightly larger fiscal deficit, than planned, this year of 3.2 per cent of GDP,” says Ms Bouzanis. In December 2016, consumer prices rose by 0.9 per cent from the previous month, after November’s 1.8 per cent increase. December’s reading marked a four-month low. Inflation edged up from November’s 12.1 per cent to end the year at 12.4 per cent. Although price pressures have picked up recently, due to adjustments in gas prices, inflation remains significantly lower than 2015’s year-end result of 43.3 per cent. “The Central Bank sees inflation ending 2017 at 8.4 per cent, which is unchanged from last month’s forecast and for 2018, the panel sees inflation easing to 7.1 per cent,” says Ms Bouzanis. The Ukrainian hryvnia continues to depreciate but the process has slowed down. At the end of December 2016, the hryvnia traded at 27.10 per USD. The currency has depreciated dramatically in recent years. In 2012, the hryvnia traded at 10.62 per USD. FocusEconomics expects the hryvnia to end the year at 27.97 per USD and depreciate to 29.27 per USD at the end of 2020.
FDI & BUSINESS Written by
CLAUDIA PATRICOLO Published on April 12, 2017
Danish companies support and assist Ukraine’s economic transition Every business person knows that once Ukraine has a more stable situation, investors and trade partners will flock.
Ukrainian President Petro Poroshenko felt quite content, during his visit to Copenhagen in early April 2017, when he heard leading Danish companies that already work, or plan to invest, in Ukraine say that they had already noticed practical results of the reforms. “This is a very good advertisement for potential investors to come and work with us,” he said at a joint press conference with Danish Prime Minister Lars Løkke Rasmussen. “During the business roundtable with the President, hosted at the Confederation of Danish Industry, I did not hear a single company not giving positive signals about Ukraine; no reservations,” says Morten Munk, Consul of Ukraine to Denmark and CEO of Mafcon. “That enthusiasm is driven by the combination of reforms and financing injected into the country from the IMF and the European Investment Bank that will foster development,” he added. Mr Munk’s optimism is backed by a recent review of the inbound deliveries to Ukraine from Denmark showing more than ten per cent volume growth over the last 12 month. Large players present But there are more reasons for President Poroshenko to be happy — companies such as Carlsberg, Axzon, Cimbria, Ciklum and Jysk have been successfully operating in his country for quite some time, and they have continued their operations even in the times of crisis and have even helped transform the market. “Carlsberg now has three production facilities in Ukraine. They have changed the local habits and have made beer a drink that is consumed when socialising. Today, Axzon is Ukraine’s second largest producer of pork and is now investing in meat processing. Together with these large players, there are about 150 companies with Danish capital operating in the country, mainly in Western Ukraine, and there creating the largest cluster of Danish manufacturing companies outside the EU. Danish investments in the region have directly and indirectly generated approximately 13,000 jobs,” Mr Munk adds. Actona, which has been producing upholstered furniture in the outskirts of Lviv since 2008, currently employs about 500 people and is planning to hire 100 more in the upcoming months. “We have had our challenges, for example, related to the depreciation of the hryvnia, but we still believe that Ukraine is the right place for manufacturing,” Torben Villadsen, Actona’s CEO, tells Emerging Europe.
What makes Ukraine such an interesting destination for Danish companies? Jakob Ekholdt Christensen, senior analyst at Danske Bank, says it’s a combination of things. “Very low salaries, which are even more competitive after the devaluation of the hryvnia, together with a well-educated work force and the proximity to the European Union, especially in the case of the western part of the country,” he adds. Making a change On top of that are the unlimited opportunities and contribution to the country’s growth. “In Western Europe, Scandinavia, everybody does the same things in the same way and everything is simple. For me, it means a lot that I am in the region where I can make a difference. I have always had a passion for this region,” says Leif Midtgaard Pedersen, Managing Director at ICT Logistics, which has been providing transportation services and warehouse facilities in Ukraine since 2006, and had previously done business with the Soviet Union in the late 1980s. “Ukraine is an interesting market for us. One of the reasons is that there are a lot of Danish investors here and they have manufacturing facilities producing furniture, agriculture machinery and shoes, etc., and there are a lot of goods moving between Ukraine and Denmark on a daily basis,” says Helge B. Olesen, Sales and Marketing manager at Uno Transport, which established an office in Kyiv in 2011. “The thing that makes Denmark a strong investor in other locations is that we tend to cluster together in small areas which leads to our building a strong community,” Lars Vestbjerg, the Founder and President of the Danish Business Association and General Manager of Sika Footwear in Lviv, tells Emerging Europe. Actona’s Mr Villadsen says that despite so many success stories for Danish companies in Ukraine the country’s image in the Danish media is not very positive. “The picture is very clear, with three main questions being asked: First of all, is it safe there? Then, what about corruption? And thirdly, why is it all so difficult,” says Consul Munk. Danske Bank’s Mr Christensen thinks the image that the Danes have of Ukraine is one of high risk related to the military conflict that Ukraine is involved in with its large neighbour as well as the challenges of getting a stronger economic performance. “That
March 2017 makes people less inclined to see the potential positive image of the country. I agree that may be quite a contract with the strong performance of Danish companies operating in Ukraine,” he says. Mr Munk confirms that corruption is manageable in Ukraine. “A solid legal platform, capable management and transparency in business place you on the safe side and this also makes business easier — because you know what to do,” he adds. New opportunities arise Jørn Fredsgaard Sørensen, Director of Country, Bank & Sector Risk at EKF — Denmark’s Export Credit Agency - says that lots of Danish companies operating away from the conflict zones in the East, in western or central Ukraine, would say that the crisis doesn’t affect them. “However, statistics show that the recession is not far behind us and that lots of local companies still struggle. My impression is that the general perception is reverting to the state where most business people focus on the positive prospects for Ukraine. It is definitely true that Ukraine has great potential in the long run. The reform process is not running very quickly however, and there is a risk of a backlash because of the threat to certain interests that benefit from the current state of affairs,” he adds. ICT Logistics’ Mr Pedersen believes even more business would come to the country if the situation in eastern Ukraine was resolved. “Every business person knows that once Ukraine has a more stable situation, investors and trade partners will flock. The country, with its population of 44 million, needs pretty much everything,” he says. For example, in April 2017, the Danish Board of District Heating is organising another business mission for its prominent
members to Ukraine within the last few years. DBDH wants pave the way for transfer state-of-the-art district heating knowledge and technology from Denmark to Ukraine. A sector, that has been suffering from lack of maintenance and upgrades. The European Investment Bank (EIB), the Nordic Environment Finance Corporation (NEFCO), the European Bank for Reconstruction and Development (EBRD) and others have already allocated financing in the level of €1 billion for upgrading the country’s municipal infrastructure. Silhorko-Eurowater, a water treatment company, already works in Ukraine. “A main goal for our customers has been to improve standards in order to meet the stringent regulations of the European market,” says Jens O. Gjerløff, marketing manager at Silhorko-Eurowater. Future prospects In 2016, Danish exports to Ukraine were worth €230 million, while Ukrainian goods were imported for a value of €107 million. The Danish Ambassador to Ukraine, Ruben Madsen, says that both sides confirmed very promising prospects for increased business cooperation in light of a growing commercial interest in the Ukrainian market from Danish companies. Jens Holst-Nielsen, director of market development at the Confederation of Danish Industry, says there were a lot of valuable concepts established during the President’s visit and the sectors where he sees the largest potential are energy and agribusiness. “Denmark will not let Ukraine sink into oblivion in the middle of the world’s other crises and conflicts. Ukraine has Denmark’s support,” Lars Løkke Rasmussen, Danish Prime Minister said at the joint press conference.
FDI & BUSINESS
Longstanding early investors say Ukraine offers foreign manufacturers great prospects Written by
CLAUDIA PATRICOLO Published on April 12, 2017
Assuming that the Ukrainian economy is opening up and going in the same direction as the Western economy’s cultures, we hope that Ukrainian society will regain the prosperity it deserves.
Since the beginning of the military conflict in eastern Ukraine, quite a few foreign companies have left the country. Other firms decided to stay and grow the business, however, seeing Ukraine as a great location for their manufacturing facilities. Decades of experience Ansgar Bornemann, Head of Nestlé in Ukraine and Moldova, says it has been a good investment for Nestlé. The company has been operating in Ukraine since 1994, and has completed three large acquisitions in the last 23 years: the Svitoch factory in Lviv, followed by the Torchyn cold sauces factory and brand and, lastly, the Mivina noodles and seasonings factory in Kharkiv. “Over the last years, we have been growing the business significantly and now are in a position, where Nestlé is either number one or two in the FMCG market in Ukraine depending on the year. This growth has been built on internal progress and successful consumer-facing initiatives, based on the products that we had at that time in the market,” Mr Bornemann told Emerging Europe. BASF, a world-leading chemical’s company, is celebrating its 25th anniversary in Ukraine. “During this time, the company has changed considerably and has turned from a small representative office into a well-developed middle-sized business. Today, BASF serves the needs of all the main industries, with approximately 150 employees and representatives in almost all regions of Ukraine” says Andreas Lier, managing director of BASF in Ukraine and Head of Country Cluster East Europe (Ukraine, Georgia, Moldova and Armenia). “BASF was among the first representatives of big European business to enter the Ukrainian market. Why?, because we believed in Ukraine and saw a good prospect for the development of our business here. There is the location in the centre of Europe, the favourable conditions for agriculture with 30 per cent black soil, a well-educated population and in many areas a large but not fully developed market,” Mr Lier adds. Taras Yurynts, managing director at Guldmann-Ukraine, a
Danish company that develops and manufactures technical aids for the disabled, and working tools for their carers, says his company would definitely invest in Ukraine again. “The investment was made in several steps. We had to show success in one step in order to proceed to the next one, which allowed us to control costs. Eventually, the investment was paid back within three years. The devaluation of the currency drove the costs down and has made the investment even more profitable,” says Mr Yurynts. Better is yet to come “Assuming that the Ukrainian economy is opening up and going in the same direction as the Western economy’s cultures, we hope that Ukrainian society will regain the prosperity it deserves. The consumption per capita will grow with a potential in the revival market, and it could be enormous in the categories we operate,” Mr Bornemann told Emerging Europe. “The choice of the Ukrainian market was not an accidental one: Ukraine offers a huge sales market and provides opportunities to transfer a portion of production capacities. Because of the relatively low property prices and the cheap labour force, we believe that Ukraine is the most attractive option for European investors today,” says Dariusz Furman, Director of Zefir Ukraine, a Polish leader in paper products such as toilet paper, paper towels and wipes, which has recently set up an office and is planning to start manufacturing in Ukraine. “Followed the annexation of Crimea and the conflict in the East we witnessed significant economic disruptions. In such conditions, it is always a big challenge for an organisation and its employees to keep the business positive, to sustain and even grow it. Just consider the last crisis concerning the devaluation of the hryvnia followed by inflation going up to 40-50 per cent. Consequently, the population of Ukraine faced tremendous challenges with a drop in disposable income. Our consumers face challenges, and they suffer economically. As a food supplier, we need to adapt, be fast, react and protect our business,” Mr Bornemann adds.
“We are optimistic about Ukraine’s development. The situation in the country has improved. Under other more favourable conditions such as rule of law, reduced corruption and ongoing reforms this trend will continue, says BAFS’s Mr Lier. “By the end of 2017, the GDP should grow by two per cent and in 2018 the market is expecting growth of four per cent. However, the Ukrainian market still remains risky, but given the ease of logistics and the rather large capacity for manufactured goods, Ukraine is definitely promising for many Polish companies,” says Zefir’s Mr Furman. Nestlé’s Mr Bornemann believes that there isn’t a country where success and growth can be reached easily. “You have to work hard, be fast and understand the FMCG area, its consumers, trends and products. You also need to deliver products of a good quality and taste. We must be better than the competition. It’s not easy; it’s not something that simply falls out of the sky.” A wave of optimism Companies see opportunities across all sectors. For BASF, the demand for innovation is important. “Ukrainian business acknowledges the importance of chemical innovations and technologies. Some industries, for example food and beverages and light industries and construction, experienced slight growth in 2016. We see good potential in Ukrainian regions. West Ukrainian regions and regions of Central Ukraine (especially in Kyiv) are developing the most quickly. The reasons are the foreign investments that are coming there, the improved political framework and the entrepreneurial approach to the development of the region as such,” says Mr Lier. “So far, our investors have been happy to have their production in Ukraine. Beside metal-production, we have also started sewing
(courtesy of Nestle Ukraine)
production. Future growth is expected to come from bringing more work to Ukraine, which is now outsourced to external suppliers, and from providing more value-added services, for example, participation in R&D projects” says Guldmann’s Mr Yurynts. BASF’s Mr Lier is strongly convinced that the EU Association Agreement is a long-term roadmap for Ukraine to modernise and become globally competitive. “This has an impact on all industries starting with agriculture, light industries and others. This is an opportunity for Ukrainian market players to develop and win new markets by implementing new business processes, while changing product ranges and marketing policies to better meet EU requirements. In 2016, Ukraine exported its goods and services to 221 countries in the world. Ukrainian medium-sized companies are actively developing and investing into new technologies to conquer new markets in Turkey, European countries, South and South-East Asia and North Africa, etc.,” Mr Lier says.
FDI & BUSINESS
IFC: Europeâ€™s breadbasket offers opportunities for investment and diversification Written by
ANDREW WROBEL Published on February 12, 2017
If the privatisation of energy distribution companies is put on the right ground, with a proper process put in place, there is potential for international investors there.
Ukraine is known as Europeâ€™s breadbasket and has close to a third of all the arable land area in the whole EU: some 34 million hectares. 70 per cent of that land is highly fertile black soil with a depth of up to six metres deep. Elena Voloshina, country representative of the International Finance Corporation in Ukraine, spoke to Andrew Wrobel about the challenges and opportunities in the agricultural and energy sectors, where the IFC is strongly engaged in in Ukraine. What role is the IFC playing in Ukraine and what are you focussed on right now? The IFC has partnered with the Ukrainian government and other donor organisations, and is trying to address the serious challenges that the country is currently facing. The way we do that is by coordinated investment in selected projects, as well as advisory services: we operate a fairly extensive advisory programme, whereby we create a business-enabled environment; we help small businesses access finance and we also develop new products for the market and establish new markets. Of course, we recognise certain areas where we can add value and there are three mains areas: agribusiness and food products, the financial sector and energy and energy efficiency. From the three sectors you mentioned, I am particularly interested in agriculture and energy. If we look at the agricultural sector, it is clear that Ukraine offers enormous opportunities but what are the main challenges? As we see it, the number one challenge would be access to financing. Larger companies can probably raise financing both in and outside Ukraine but itâ€™s the medium and small ones that are suffering. Hence, part of the work that the IFC is doing here is also to offer other instruments such as promissory notes, crop receipts and risk-sharing guarantees. The second challenge is land reform. It looks as if there is a need to start thinking and designing a programme for land reform and the World Bank Group is putting together an advisory component, whose goal would be to identify the best way to move forward. The third challenge is the overall business-enabling environment. There has been a lot of progress in certain areas such as deregulation; reforms of state companies, the banking sector and the energy sector, but, overall, the business environment is far from perfect.
Yes; I believe that in a recent study two thirds of all members of the European Business Association in Ukraine said that the business climate needs further improvements. Going back to land reform, what do you think are the key issues, that need to be addressed? First of all, it is a very socially and politically sensitive issue which is why every government that has been in power has tried to put it on hold. Secondly, there is opposition from certain large agri-holdings which have found a way to operate on a long-term lease basis. Unfortunately, this is not sustainable, going forward. There needs to be comprehensive reform but it also has to be tackled very carefully so that the people in the rural areas do not suffer. This needs to be approached cautiously and with the proper institutions in place and with a proper information campaign.
Once this reform has been introduced, new opportunities will open. First of all, we must not forget that Ukraine is a natural attraction in the agricultural sector. Up to 30 per cent of the worldâ€™s black soil is available here. In addition to that there is skilled labour available here. Plus, all the leading global players are here. They are now moving from agricultural processing to logistics. A lot of that is already happening. There are three large logistics projects, two of which have already been completed. The Bunge Terminal was recently opened in Mykolaiv on the Black Sea. There is also Cofco, Mykolaiv, run by the Chinese. Finally, there is also a project that the IFC and the EBRD are planning to finance, which is called MV Cargo. It is a green-field grain terminal that will be located in the Port of Yuzhny, located in Ajalyk Estuary on Ukraineâ€™s Black
Elena Voloshina (courtesy of IFC)
FDI & BUSINESS
Sea coast, approximately 30 km from Odessa. Once completed, Cargill Inc., a leading global agriculture commodities producer and trader, is expected to purchase a 51 per cent of stake and will become a major user as well as operating the terminal and berth. The construction works have already started. So … agricultural logistics. Where else? It will still be in the food processing sector, but not so much in primary agriculture but in developing niche areas and value added products. Just to give you an example, there is a company called Agrofusion, which both the ICF and the EBRD are providing financing to. They’re now one of the largest producers of tomato paste and they supply global markets. When it comes to primary agriculture, there is also room for more efficiency. Ukraine currently produces between 50 and 60 million tonnes of grain with international experts saying that this output could be doubled or even tripled, but that would require operational efficiency. We have also discussed energy. What are the biggest challenges there? I think I need to start by saying that significant reforms have been carried out in the sector so far; for example, the rebalancing of the tariffs between households and the industrial consumer which had been an opportunity for corruption for a long time and which had brought distortion to the market. There is also a certain amount of progress being achieved in the implementation of the Naftogaz corporate governance action plan and an independent supervisory board of Naftogaz has been established. So the unbundling of gas transmission is a stepping stone into a broader reform in the gas sector. There is also some progress in terms of decreasing Ukraine’s dependence on gas supply from Russia. In fact, the country hasn’t bought any gas from Russia, for quite some time. What needs to happen is further reforms of Naftogaz, further progress in allowing and enhancing the local private sector
exploration and extraction of gas and also slowly moving towards bringing in the private sector financing for gas purchase. When it comes to electricity, what is needed is: better private sector participation; the introduction of a level playing field, for all the players on the market and further privatisation of the energy distribution companies, which should be done in a very transparent and efficient way with international advisers. What about renewables? There is certainly huge demand for renewables. We think that the tariffs are quite attractive for private and international players to come in. There are certain improvements that need to be made in the regulation area and we are part of the working group. Wind energy seems to be the one that is progressing the most but also solar and, of course, biomass. We would like to help set up independent biomass processors that would collect waste from smaller farmers, as we believe there is a lot of potential in that space. This is because the nature of Ukrainian agriculture means there are a lot of biomes available and so far it is only the large agri-holdings who are doing this. The supply chain and the logistics haven’t been worked out yet. What opportunities do you see for international players in the energy sector? We feel that if the privatisation of energy distribution companies is put on the right ground, with a proper process put in place, there is potential for international investors there. There are also opportunities in gas extraction as Ukraine could benefit from Western technologies, and in renewables. Couldn’t privatisation help foreign companies enter the market? Well, investors need a platform, a kind of entry point, and privatisation could serve as one. Ukraine still has over 3,000 state-owned companies. They need to be privatised, but the process has to be organised in a correct manner so that investors can participate in it.
FDI & BUSINESS
SEVKI ACUNER Head of Ukraine European Bank for Reconstruction and Development (EBRD)
The agribusiness sector accounts for 17 per cent of the country’s GDP, 32 per cent of local employment and 31 per cent of foreign currency revenues. Given this potential one would assume that investors from all over the world would be flocking to Ukraine with projects in land farming, processing, packaging and retail.
Published on March 25, 2017
Ukrainian agribusiness – a jewel in a crown Ukraine’s favourable geographical location; it’s extremely fertile black soil; decent infrastructure and relatively cheap labour force make the country’s agribusiness sector highly competitive. A lot has been achieved in the country over the past 25 years to enable Ukraine to live up to its status as the “breadbasket of Europe” and to help, at least partly, address the global challenge of sustainable food supply and food security. As a result the agribusiness sector is one of the main drivers of the Ukrainian economy: it accounts for 17 per cent of the country’s GDP, 32 per cent of local employment and 31 per cent of foreign currency revenues. During the severe economic downturn of 2014/2015, the agrifood sector was the only one to increase its production and exports. In fostering Ukraine’s agribusiness potential, the EBRD has provided over € 2.2 billion of financing to the sector, to date, since the start of its operations in the country. Given this potential one would assume that investors from all over the world would be flocking to Ukraine with projects in land farming, processing, packaging and retail. For now, however, this is not the case. Unfortunately, the complicated geopolitical situation, corruption and the slow pace of reforms (especially the land reform) dampen the overall investment mood. For a number of years, the EBRD and the Food and Agriculture Organisation of the United Nations (FAO) have initiated and supported reforms and dialogue between regulators and private sector companies in the grain, dairy and meat sectors. This partnership has supported associations of producers of agricultural commodities in dozens of legislative initiatives such as crop receipts, food safety standards, veterinary services etc. – all aimed at improving sector regulation and investment climate. As a result the development of the grain sector has been particularly impressive, with annual grain yields of well over 60 million tonnes. With this Ukraine has firmly established itself as one of the key international
players in this segment. However, in addition to much needed reforms, Ukraine’s agribusiness markets, and in particular small businesses, need to develop new approaches to business, to look for new markets and to concentrate on the production of high-value goods, in order to remain competitive on local and global markets and to maximise returns while tapping into export markets. A lot remains to be done in this respect. In 2014, Ukraine’s agricultural exports were worth US$ 17 billion of which no less than 54 per cent were primary agricultural products. This highlights the need to find a more prominent role for added value in the total export structure of agricultural commodities. Domestic producers should also be more responsive to the preferences and demands of existing and new export markets. The tasks may seem challenging, but Ukraine has a longterm partner in the EBRD and we are ready to offer financial support as well as expert advice. For example, the first results of an export promotion project with FAO, under which members of the association of Ukrainian millers promoted their products on trade fairs in South Asia, the Middle East, Africa and Eastern Africa, have been impressive. As a result some participants reported immediate increases in exports to those regions. Teams of highly experienced local and international experts, commissioned by the EBRD and its international partners and in coordination with the Ministry of Food and Agriculture of Ukraine, have also developed strategies to improve the investment climate. These efforts will continue, while we will also continue to provide financing and to support local agribusiness associations and cooperatives. Given these efforts and support, the private sector has a unique opportunity to increase the quality and range of its products; to coordinate with companies and associations and to dare to venture into new markets. The EBRD and all the other partners of Ukraine are ready to support the sector and its players.
Legal reforms are improving the existing problematic situation in the Ukrainian agro market State enterprises hold approximately 0.5 million ha of agricultural land, which may be of potential interest to investors. The agricultural market is currently one of the most dynamic and profitable in Ukraine, providing 12 per cent of the national GDP. The country is also one of the leading producers and exporters of agricultural products in the world. Considering the latest developments in the agricultural sector (including legal reforms) it seems to be the right time for foreign investors to enter the agro market. Currently, most of the agro producers lease their agricultural land rather than own it (a moratorium on the sale-purchase of agricultural land has existed in Ukraine from 2002). Although long-term lease agreements are allowed (up to 50 years), leasehold does not provide a sufficient comfort level, in the view of many foreign investors. The draft law of Ukraine â€œOn Agricultural Land Circulationâ€? is about to be passed (expected at the end of May 2017) and it will allow the sale-purchase of agricultural land, by Ukrainian individual, from 2018 and by Ukrainian companies (including owned by foreign shareholders) from 2020. When one plans to purchase or establish an agricultural enterprise in Ukraine, it is necessary to consider not only the target company itself but also the infrastructure that is required for storage, processing and transportation, i.e. connecting links to the railway, storage capacities, silos and or grain terminals etc. The last few years have demonstrated that there are some problems with railway transportation because of the lack, and condition, of hoppers. Therefore, it is planned to renew the hoppers and to purchase new ones so as to ensure the prompt transportation of agricultural products all over Ukraine. Considering the above, it is also recommended to make a preliminary estimation of the costs involved in the probable construction or modernisation of a silo or grain terminal. When acquiring an agricultural business, you should consider the risks that are common in this sector: risks related to land lease (premature termination of land lease agreements / acknowledgement of land lease agreements as invalid) and assets (risks related to the history of assets acquisition, namely acquisition from the state). Due diligence should be paid to tax risks, in particular those related to VAT accrual and payment, including VAT credit. Considering this, it is strongly recommended that potential investors hire local advisors to carry out the due diligence, covering land /other assets, as well as taxes, in order to avoid the risks and to stay on the safe side. The deal shall be structured based upon the results of the due diligence and subject to considerations of the BEPS regulations, in as far as Ukraine joined an Inclusive Framework for BEPS implementation, starting from 1 January 2017. When structuring a deal, you should be careful to pay attention to compliance with antitrust requirements. In general, the purchase of 25 per cent or more in a Ukrainian company is considered as a concentration which shall require a permit from the Antimonopoly Committee of Ukraine (AMCU), if the financial thresholds
ANDRIY DOVBENKO Managing Partner N&D Law Firm Published on April 12, 2017
are exceeded. In 2016, the respective thresholds were increased but are still relatively low. The permit is granted by the AMCU within 45 days (25 days within the simplified procedure) from the date when filing is completed. The establishment of a company in Ukraine may also require an AMCU permit if the company is being established jointly with either Ukrainian or foreign partners. Resolution of disputes should also be one of the key considerations. When structuring a deal, it is always better to arrange for an arbitration clause to be included, so as to be able to submit any disputes that crop up to either one of international arbitrations or the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC). This is definitely more effective than seeking dispute resolution in court â€” over 75 per cent of cases are considered by ICAC within three months. One should also note that agricultural enterprises are subject to the general taxation system; no tax benefits are applied (a special VAT-regime for agricultural companies was cancelled from 2017 onwards). However, some agricultural enterprises are entitled to state subsidies, but actually, this scheme is not yet working. Please note that the general income tax in Ukraine is 18 per cent and VAT is 20 per cent (0 per cent for export operations). Currently, there are certain currency limitations in Ukraine: namely, companies must sell 50 per cent of their currency earnings. It is prohibited to transfer currency out of Ukraine in order to pay dividends to foreign shareholders etc. The good news is the National Bank of Ukraine is making progress on the elimination of such temporary limitations. Ukraine is working out the issues concerning the privatisation of enterprises in different sectors, including agriculture. Currently, state enterprises hold approximately 0.5 million ha of agricultural land, which may be of potential interest to investors. The existing legal procedures are not that favourable, however, and the State Property Fund of Ukraine, along with the other state authorities, is developing new laws to make privatisation transparent, easy and beneficial for both the state and the investor. A new law on privatisation is to be adopted by the end of August 2017. Summarising the above, it should be noted that we still have some problems, including legal gaps, ambiguity and overregulation. However, Ukraine is undergoing a period of active legal reforms to improve this situation. This is demonstrated by the envisioned cancellation of the moratorium on sale-purchase of agricultural land, the elimination of currency restrictions and the improvement of corporate governance etc. Moreover, in recent years Ukraine has also improved its position in the Doing Business ranking and is moving towards strengthening the national economy and attracting foreign investments.
FDI & BUSINESS
Ukraine’s government declares ambitious privatisation targets
DMYTRO KORBUT Counsel Sayenko Kharenko Published on March 18, 2017
Whether ongoing reforms will bring real changes and what all parties should do to ensure true success is yet to be seen. Ukraine’s privatisation potential is based on more than 350 objects dedicated for sale in 2017, including the most interesting “blue chips” including: the second biggest producer of ammonia and carbamide in Ukraine (PJSC “Odessa Port Plant”), a power generating company that produces eight per cent of the electricity and 18 per cent of the heat in Ukraine (PJSC “Centrenergo”), one of the biggest domestic producers of mineral phosphorus fertilisers (PJSC “Sumykhimprom”) and a monopolistic producer and retailer of pure alcohol in Ukraine (State Enterprise “Ukrspyrt”). The privatisation targets that have been declared by the Ukrainian government are ambitious and the need for an inflow of foreign capital into Ukraine is dire. However, there is still long road ahead before all the foreign investors’ challenges are met and the obstacles are removed in the Ukrainian privatisation process. Among those obstacles, the most significant are: the high level of corruption on all levels, the inefficient administration and judiciary, the heavy tax burden and the protective measures in foreign currency exchange rules which are temporarily preventing a free outflow of capital from Ukraine. Additionally, every potential buyer would have to consider the key legal issues, described below, which have been existence since earlier times as which will most probably remain true for at least for couple of years ahead. While disclosing their shareholding / beneficiary chains to the Ukrainian State Property Fund potential bidders should take into account the fact that companies registered in offshore jurisdictions and residents of the state-aggressors toward Ukraine, as well as entities directly or indirectly controlled or beneficially owned by the above, are prohibited from participation in Ukrainian privatisation. Even after the recent increase in May 2016, low merger control thresholds make merger clearance a basic prerequisite for the privatisation of most targets. Moreover the privatisation of companies that are operating in the areas that are subject to an enhanced supervision may require the approval of a competent regulator.
Following the submission of an application to the Ukrainian State Property Fund, every bidder would need to pay initial deposit amounting to between five per cent (for largest targets) up to 20 per cent of the announced minimum privatisation value. Considering that recent foreign currency exchange problems might scare off potential investors, the common rules were eased for foreign bidders. Thus, bidders’ deposits that are in foreign currency are freed from the obligatory conversion into Ukrainian Hryvna; the repatriation of deposit funds from Ukraine. by unsuccessful bidders is expressly allowed and finally potential bidders may provide a substitute bank guarantee instead of wire transferring the cash into a Ukrainian bank account as a deposit. The due diligence of a privatisation target may also be complicated, considering that the rules of the Ukrainian law on the disclosure of sensitive information (e.g. state secrets, commercial secrets, confidential information and personal data) limit bidders’ ability to conduct a proper investigation. Many state companies, on the privatisation list, have thousands of minority shareholders and Ukrainian law does have takeover rules that the acquirers must take into account, while no squeeze-out of minority shareholders is allowed. A sale and purchase agreement that has been concluded, in the course of privatisation, will most probably be governed by Ukrainian law, although there have been a lot of debates recently about the possibility of using English, or some other foreign, law in order to provide additional comfort for foreign buyers. Ukrainian law may not award buyers the same level of protection as they might expect, based on their experiences from other jurisdictions. For instance it does not recognise the concept of warranties and indemnities that exist in many common and civil law countries therefore giving rise to concerns about for hidden, inherited environmental and legal risks.
March 2017 In the process of privatisation, it is not uncommon for a sale and purchase agreement to impose a number of additional obligations on the purchaser (e.g. preserving workplaces, modernising production and ensuring social guarantees) and failure am investor’s failure to honour these at any time, may lead to loss of the purchased asset. At least disputes arising from the sale and purchase agreements that are concluded, in the course of privatisation, can be submitted for consideration for international commercial arbitration, which is presumably a more favourable option for investors than the Ukrainian courts. Although it has been widely criticised for its slow progress, the Ukrainian government has still managed to launch number of significant reforms that are aimed at improving the country’s investment potential, such as the national launch of the ProZorro public e-procurement system. This is one of the first steps in the easing the currency control limitations, and an adoption of new legislation on judiciary reforms and energy tariffs. Important changes were introduced into the Ukrainian privatisation legislation in 2016 and 2017, in order to achieve a
transparent and efficient privatisation process, including: the sale of small state-owned companies through electronic auctions that were supported by Ukrainian stock exchanges and an obligation from the Ukrainian State Property Fund to allow unlimited online access to privatisation information, translated into English, as well as allowing privatisation counsels (funded by foreign donors) to play significant role in the preparation of the state companies for privatisation. We have grounds to believe that the recently announced intentions of the Ukrainian State Property Fund, to enhance procedures and to finally launch the previously postponed, largescale privatisation of Ukrainian state companies, may come true in 2017, thus setting the precedent for success and restoring investors’ confidence in Ukraine. 2017 should be a decisive year, as society and businesses hope that privatisation will change the rules in the Government controlled sector of economy. Whether ongoing reforms will bring real changes and what all parties should do to ensure true success is yet to be seen.
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FDI & BUSINESS Written by
ANDREW WROBEL Published on January 18, 2017
photo by Julia Berezovska
Changes are making Ukrainian banking more aligned with international standards We have had quite a few challenges here and not everything has been addressed but when we look at Ukraine in 2014-2015, what the country experienced was a perfect storm. In January 2014, €1 cost about 11 Hryvnias (UAH) and $1, almost eight. At the end of December 2016, these foreign currencies were bought at close to 28 and 27 Hryvnias, respectively. However, depreciation is not the only challenge the National Bank of Ukraine has had to face. Dmytro Sologub, Deputy Governor of the National Bank of Ukraine (NBU), spoke to Andrew Wrobel about the recent nationalisation of PrivatBank, the country’s largest bank, about the reforms of the banking system and development prospects for the financial sector, as well as the future of FDI in Ukraine. In the second half of December, the National Bank of Ukraine declared PrivatBank insolvent and the government subsequently backed the nationalisation. The reason was to “preserve financial stability in the country.” How exactly? Well, PrivatBank posed risks to the domestic financial system. Over two years ago, the NBU launched diagnostic studies that comprised an asset quality review and stress tests, to assess the capital needs faced by banks. These tests revealed that as of 1 April 2016, PrivatBank had capital shortages amounting to UAH 113 billion, which, apart from crisis-related factors, were caused by imprudent lending policies pursued by the bank. As of 1 November 2015, related-party loans accounted for 97 per cent of the bank’s loan portfolio, totalling UAH 150 billion. PrivatBank, as well as other financial institutions in which capital shortages were revealed based on the results of stress tests, was required to address these capital shortages, as the rules are the same for all financial institutions. The bank’s management team designed a recapitalisation programme and another programme to unwind related-party lending. The bank’s shareholders also provided guarantees as proof of their commitment to implement the recapitalisation programme agreed to with the NBU. However, neither the bank nor its shareholders implemented it. Over the past year, the NBU held over 30 meetings with the shareholders and managers of this financial institution. Given
that PrivatBank is a systemically important financial institution, the NBU took a more flexible approach, extending deadlines for fulfilling the recapitalisation programme on many occasions. As a result, as of 1 December 2016, the capital shortages faced by PrivatBank increased to UAH 148 billion and its liquidity deteriorated significantly. The bank had not complied with reserve requirements for a year. The past-due debt owed to the NBU for stabilisation loans amounts to UAH 14 billion out of a total outstanding debt of UAH 19 billion. So, we had to act eventually. Does the Bank consider the process a success? We could call it successful as the nationalisation was carried within couple of days, which is a quite rare happening, worldwide. We also managed to organise the process so that it almost didn’t disrupt the routine functioning of the bank, at all. As a result, we managed to avoid panic and deposit runs in the banking sector. The NBU is said to be a standout success story in reforming the country’s financial sector — what are the bank’s biggest successes? Well, we have had quite a few challenges here and not everything has been addressed but when we look at Ukraine in 2014-2015, what the country experienced was a perfect storm. It was a combination of pure macroeconomic crisis, a huge political crisis and finally, a military crisis. Before that time, the Ukrainian economy was very much dominated by exports of low-value commodities such as grain and steel. What happened then, is that a lot of production facilities were wiped out at one time. For instance, in 2013 Donbas accounted for 25 per cent of exports of goods, 24 per cent of industrial production and 15 per cent of the country’s GDP and suddenly everything just disappeared at once. The war resulted in the forceful reorientation of foreign trade. Ukraine’s trade with Russia and the CIS equalled 37 per cent in 2012 in exports and now Russia is below 10 per cent of exports and the CIS countries account for about 18 per cent. This is the economic background. Coming back to your ques-
March 2017 tions now, I would say that the general perception of the National Bank is that it might be the best public institution in Ukraine, but by international standards, it is definitely far from the best central banks in the world. We used to have 12,000 people working here, which meant big problems in the decision making process. It was a big monster and I think that it resembled Ukraine, to some extent, so we had to solve the problem immediately — an ailing economy, an ailing banking system, a non-transparent and non-efficient central bank. In early 2015, the national bank had $5 billion of reserves which only covered one and a half months of imports. There was no IMF programme. There were all kind of political battles and so on. So was one of the steps taken to close up several banks? Well, most of the banks which we wiped out from the market were already “dead”, by 2008. Some of them had been haunted by imprudent practices for 20 years, and their supervision had been pretty negligible. So, there was simply no other choice because the longer you wait, the larger the problem you face. Coming to the reason’s for the bank’s success: I would say they were political, as we were one of the key organisations in the country. For example, we now have around 5,300 people — less than half of the number we used to have — and out of these 5,300 people only about 550 are new employees. This proves that it was the people who have been working in the organisation for a long time who contributed greatly to the success. So if you look at what’s ahead of the bank right now, what are the challenges that you are facing and that you have to address? Well, I would say the challenges are both external and internal. In terms of external challenges, the worst seems to be behind us already, in terms of macroeconomic performance. In 2016, the economy returned to growth. In 2017, we expect even higher growth. Additionally, inflation has declined from 43.3 per cent to 12.4 per cent which is close to the central meaning of our inflation target for 2016. You recently said that in 2017 it would go down to a onedigit figure, right? Yes, eight per cent. Our situation has basically been stabilised but the challenges for the economy still remain enormous. We have had some respite from our external dependence, but our debt to the GDP is still quite high and there will be payments coming up, starting from 2019. The economy should prepare for that, by building up international reserves, for example. Today reserves are around $15.5 billion. But so far, the most of the increases in our reserve are because of external official borrowings. We are buying currency in the market as well. We bought $1.6 billion in 2016, but most of the money comes from the IMF and other donors. What we need to do is to generate a substantial and strong inflow of foreign direct investment and portfolio investment, to the country, in order to make the economy more sustainable. Let’s briefly circle back to the GDP growth. In 2016, Ukraine had GDP growth of one per cent. In 2017, we expect it to be 2.5 per cent. Some investors keep asking us why we are not growing more quickly. My answer is that the structural rebalancing of the economy is going pretty slowly.
For example, as far as the reorientation of foreign trade is concerned, we are seeing some successes for Ukrainian companies who are trying to get into the new markets, especially the EU, under the the Deep and Comprehensive Free Trade Area (DCFTA) agreement. However, it’s not easy as a lot has to change: reforms, standards, even the mentality of the people. We do hope that the reforms will go quickly and will generate more perception and feeling from investors as the climate improves. That could generate still higher growth. I would still like to come back to inflation. One of the bank’s newest responsibilities is to target inflation. What Ukraine has actually never had is long periods of low inflation. That’s what we would like to deliver. This is a challenge from a macroeconomic point of view, and also from an internal point of view. We do see that we are better than we were before. You mentioned the FDI coming to the country. What do you think are the biggest challenges for foreign investors in Ukraine right now? Well, the world is pretty competitive nowadays. We have possible investors sitting, in the UK, the US or Canada. They don’t have any personal kind of affiliation, they just work with the country where they see their business will do better. Here, Ukraine is competing with more than 100 other countries. What should be done now? Well, I think capital control and macroeconomic stability are primary concerns for an investor. That boils down to the business environment, the judiciary system, the tax system, customs and so on. I talk to a lot of the companies working in Ukraine, especially those who have been here for a long time, and who have had their highs and lows in Ukraine. They are pretty optimistic now, certainly more than they were before. The problem is that in order to generate sustainable growth, Ukraine needs greenfield investment. I believe that the country has a lot of advantages, doesn’t it? It does. The Ukrainian labour force is relatively well-educated and if we compare Ukraine and Eastern Europe with other parts of the world, the quality of the workforce is much better here. This region is considered to be a highly educated area, compared to the Middle East, Latin America and Southeast Asia. Of course, we are seeing a lot of migration, now, to Poland and other countries, but potentially, the labour force is in place. Ukraine also has a very good geographic location and it sits next to a big market. If it is compared to its neighbours, it could very likely repeat the development of Poland, the Czech Republic, Hungary in the 1990s, and Romania in the 2000s. Finally, there’s a lot of potential in Ukraine. That’s in terms of quite sophisticated production, machine building and other things. Ukraine has a vast domestic market; it’s a country of 45 million people. Now a lot of basic products are imported from neighbouring Poland, for example. I believe people see an enormous potential in Ukraine, but still, investors are not coming. So what’s the problem? I think it is changing slowly and foreign investors are starting to invest. Not only foreign investors, actually, but also domestic ones. They are becoming more optimistic. They have also started to increase wages for their employees. On the authorities’ side, I think the fight against corruption is important, as is the continuation of the IMF’s programme. I
FDI & BUSINESS photo by Julia Berezovska
also used to believe that the authorities should do more to lure big investors, to potentially work with them. However, in order to do that, we need to be sure that our general environment is changing. I mean if you go — let’s say, to Siemens — and promise them something, then if Siemens comes and then it blows up, you’re finished for ten years because of your reputation. Or perhaps even longer. Yes, this is a risky game. On another note, what might actually work as a trigger are successful privatisation deals. Of course, during crises you cannot raise a lot of money from privatisation, but getting a new and efficient owner can help, so if in the first round we have a big — let’s say American company coming — then investors in London, Frankfurt and other cities will start to ask themselves, “if they went to Ukraine, why can’t we? Let’s go.” So you think improving the business climate, luring potential investors, and privatisation could be triggers that increase interest among foreign investors? There’s probably no single trigger but its a set of actions: a continued fight against corruption, continued work with the IMF, improvement in the judiciary system, etc. New foreign investors don’t appear out of the blue. Earlier, we briefly mentioned the devaluation of the Hryvnia. Has that improved at all? How are you fighting devaluation and also increasing internal demand? It’s clear that people have been suffering a lot for the last few years: falling living standards, higher gas prices, exchange rate depreciation, inflation, etc. However, going forward, a long-term period of low growth could also be quite detrimental to social stability in the country. As a bank, we are in charge of prices and financial stability. But once again, we can’t assure these long running prices or financial stability, if other things are not improving. In terms of monetary policy, Ukraine has been quite open and has always accumulated external imbalances because of a fixed exchange rate. Previous managements have been quite reluctant to change that. We took advantage of the crisis and switched to a flexible exchange rate, but it was pretty clear that under the perfect storm, that I described earlier, the currency adjusted quite substantially, basically losing around 60 per cent of its value. We are now continuing to look at the exchange rate, in order to ensure that it aligns with the fundamentals and that we are rebuilding our reserves. For the past 18 months, we have been dealing with it, again, in a quite hostile environment, because we saw a substantial decline in global commodity prices in 2015 and early 2016. Russia introduced further restrictions on imports, but also on transit to other countries. We saw encouraging signs coming from domestic demand as well, in the second and third quarter of 2016. We have seen actually that consumption and investment contribution to GDP have turned to be more positive. If we look at the disposable income of the average Ukrainian, how have you seen that change in the last couple of years and what are your forecasts? Well, there has been quite a lot of suffering because of increase in prices and tariffs, and also because of the general decline in the economy. Actually, in 2016, we saw quite strong growth in wages,
while incomes are actually lagging behind. Why? Because physical economy is quite tight and it needs to be. Therefore, this means that all social payments — such as subsidies — have not been growing as strongly as the wages in the private sector. In terms of incomes in general, there’s no free money. If the economy is not growing, incomes cannot be increased on a sustainable basis. The decision by the government, to double the minimum wage, has been pretty brave although so far it has had pretty limited consequences. So, looking forward in terms of incomes, I expect fiscal policies to still be pretty tight. In 2017, a further relaxation of policy is actually conditional on general improvement in the economy. We have talked about the anti-corruption programme and the reforms that have been started. How do you think that will improve the image of the country in the eyes of foreign investors? To a large extent it is about perception. If we ask small and medium enterprises about corruption, the general answer is negative, but when we start asking about details, for example, about fire inspection, or veterinary matters, you will hear that they have improved. However, it’s also a real issue and everybody knows where are the bottlenecks are: state-owned enterprises, the court system, the tax system and customs. We started the interview with a question about PrivatBank. I would like to ask you about the banking sector again. How do you see the banking sector right now? Well, I think we made great progress there. We are still not at the end of the road, but compared to where we were a few years ago, when we had about 200 banks, the situation is much better. Even before the crisis, it was not clear how much capital they had, who their owners were, how many loans they gave, etc. Then the crisis came, and again, we didn’t have any other choices so we started looking at that mess and we identified three pillars for the reform. As I mentioned at the beginning, we performed two series of diagnostics: an asset quality review and a stress test. The first was performed by external auditors and the other one was done in-house together with the IMF and the World Bank. They showed what skeletons we had in the closet. The situation with PrivatBank I’ve described is the most vivid example. Most of the
March 2017 banks had negative capital but we told them all — ‘you have three years to bring your capital to the level of ten per cent of risk-weighted assets.’ So that was the first pillar of our banking system reform. So far, the NBU has stress-tested the top 60 banks. Some of them failed and have been removed from the market. Most of the 20 largest banks have already replenished their capital and are going along with these rules now. We currently have 95 banks in the system. The second pillar was the identification of bank owners. Previously we didn’t really know who the end owner was because they were all hidden behind nominal directors and so on. There was a regulation saying that if a stakeholder has a stake higher than ten per cent, then you should disclose where their wealth comes from, how much money they have, etc. In response to that banks created 11 nominal owners, each one with a stake of 9.1 per cent. We have now cut down this threshold to almost zero per cent and we have been actually removing banks from the market for failing to identify the real owners of the bank. And the third pillar? We examined whether banks maintain adequate provisioning levels for credit exposures and if they verify the valuation accuracy of the banks’ books. We are still in the middle of this and banks are continuing to work on their balance sheets. So, I would say the picture that is emerging is much clearer at the moment and now we would like to ensure that the banks which are on the market are transparent. Of course, no one can say there will not be any bankruptcies because it depends on the economic cycle, and the owners of the bank, as well as a number of other factors. What about the insurance market? How do you see that developing? Well, our system is pretty bank-centred. We don’t have a lot non-bank financial companies. We are currently in the middle of a big process, which will bring the supervision of insurance companies under the supervision of the central bank. Do you think that there’s room for foreign investors in the financial sector? There is room for sure. But it also depends… it’s not only a kind of a pulling process, it’s also a pushing process. The rules in the global banking system have changed and there isn’t much active expansion of banks. However, when we look at Ukraine, I would say the market is pretty attractive. Which areas in particular? Where is saturation relatively low? Well, I believe if we look at our region, Ukraine could copy some of its successful neighbours, which in 1990s and 2000s managed to attract foreign investment in the manufacturing sector. Given its highly educated workforce, low labour costs, favourable geographic location coupled with preferential trade regime (i.e. DCFTA with the EU), Ukraine is perfectly positioned to attract foreign investors in such industries as machine building, food processing, wood production, light industry etc. But, of course, the homework (i.e. fighting corruption, improving business climate, ensuring macroeconomic and financial stability) also needs be done.
(courtesy of the NBU)
FDI & BUSINESS
ANDREW WROBEL Published on March 1, 2017
The Ukrainian banking sector looks set to regenerate new growth The market cleansing that happened was necessary to restore its health.
The Ukrainian banking sector is going through tremendous changes. The National Bank’s efforts to clean up the industry, the recent nationalisation of PrivatBank and the merger of Ukrsotsbank and Alfa-Bank are only a few examples. Tamara Savoshchenko, Chairwoman of the Management Board at Ukrsotsbank, and Roman Shpek, an advisor to the President of Alfa-Bank Ukraine and Head of the Independent Association of Ukrainian Banks, spoke to Andrew Wrobel about the bank’s merger and its impact on the market as well as the prospects for the banking sector in Ukraine. Ukrsotsbank has been in the market since 1990, but its history is very much linked to Pekao and UniCredit, which means the bank has a background of international experience. How does this help the bank to operate? Tamara Savoshchenko: It is true. Ukrsotsbank’s history spans back, practically to the USSR: We are one of the oldest banks in the country. In September 2017, we are going to celebrate the bank’s 27th anniversary, which is an unrivalled marker for the local market.
Needless to say, our ten years within one of the largest European banking groups has left us with a collection of experience, a rich corporate culture and the reputation of being a true international brand. The good thing is that now, as the deal with Alfa-Group is closed, we can combine the global experience of our two groups. The challenge in our hands now, is to take what’s best in the practices of UniCredit and Alfa and find a proper synergy to use as a cornerstone for building ourselves into a market leader, both in terms of size, technologies and quality of service. Speaking about UniCredit; the bank was sold to ABH Holding at the end of October 2016. What will be the consequences of that transaction? Roman Shpek: This deal was a milestone for the whole financial market of Ukraine and was dubbed “The Deal of the Year”. As you know, the deal prescribes that 99.9 per cent of Ukrsotsbank should be transferred from UniCredit Group to ABH Holdings S.A. (ABHH) in exchange for a minority 9.9 per cent stake in ABHH. Once it was completed, in October 2016, Ukrsotsbank announced the return of its historic brand. Globally speaking, the deal will have a positive influence on
(courtesy of Ukrsotsbank)
March 2017 Tamara Savoshchenko (courtesy of Ukrsotsbank)
the financial market and the economy in general, as noted by both the National Bank and the Anti-Monopoly Committee. I would also add that this deal was a much needed positive signal for international investors, demonstrating the possibility to do banking here and stimulating their desire to develop business in Ukraine. What is the bank’s current market share and how do you see that growing in the next year? Tamara Savoshchenko: I would rather concentrate on the combined share of Ukrsotsbank and Alfa-Bank, for that’s the way we look at it. In terms of assets, we cover 7 per cent of the market, commanding a 17.5 per cent market share in terms of capital; we give 22.8 per cent of loans to individuals and 6.6 per cent of loans to legal entities. In terms of deposits we hold 7 per cent and 5.7 per cent of the market for individuals and legal entities, respectively. We also have 4.3 per cent of the country’s POS terminals, having issued 5.1 per cent of all payment cards in the country. It is a very competitive share and we expect it to grow even further, because clients tend to migrate to stronger international banks that have the full support of their shareholders and no inherent political risks. We are touching on the banking sector in Ukraine now. It has gone through significant changes recently, especially in December when the country’s biggest bank was nationalised. How do you see the changes from your bank’s perspective?
Tamara Savoshchenko: The banking sector is still far enough from the state that one could say it is “healthy and growing again”. However, 2016 was a turning point for the sector. The biggest banks have been proceeding with their business restructuring and capital increase programmes, and many of them climbed out of the red back, returning to positive financial results. Roman Shpek: The issue of PrivatBank was a big worrisome blot on the radar throughout all the year, and the resolution of this issue, by the government in December, went rather smoothly. This alleviated a lot of risks for the sector. General market conditions have also improved, with macro financial stability restored and the economy returning to growth. Some 2 per cent growth in real GDP over 2016 was shown, which is still modest, but it is finally positive after several years of recession. Despite some problems still existing at some banks, we saw deposits returning to the sector. In 2016, deposits in Ukraine’s banks increased 5 per cent in real terms, after an accumulated outflow of 30 per cent over 2014-2015. When I spoke to Dmytro Sologub, he talked about “a mess” in the banking sector that the National Bank is putting in order. What is your perspective on the sector? Tamara Savoshchenko: Now, we can see that most of the big banks have passed the “stress tests” and continue operating on the market. Those banks where shareholders could not, or did not want to, cover their losses went under and are now out of the market. The central bank made a tremendous effort, handling not only the latest banking crisis, but also all the issues that have been accumulating in the sector over the last ten years. After nationalising Privatbank and removing several troublesome
FDI & BUSINESS
second-tier banks (Fidobank, Mykhailivskyi, and Platinum) from the market, the process of market cleansing that is going on at the start of 2017 seems to be close to the finish line. Only small banks, which account for some 3 per cent of the market, remain to be dealt with; however, any developments that involve them should not have any material impact on the market generally. Roman Shpek: The market cleansing that happened was necessary to restore its health. The failed financial institutions had been spreading toxic waves all over the market, filling the mass media with stories of frozen deposits and discouraging shareholders of other banks from injecting additional capital, a very hard decision, especially for foreign-owned banks. Nevertheless, despite the ranks of Ukraine’s banks having more than halved, we see that market competition on the market remains very tough. The number of bankable clients in Ukraine is limited and a lot of corporate clients are too indebted to be given new loans. Do you think the Ukrainian banking system enjoys public confidence now? Tamara Savoshchenko: Of course, some significant losses of deposits in failed banks and the dramatic devaluation of the national currency have not been instrumental in increasing public confidence in the banking sector. At the same time, Ukrainians still have to invest their money, or at least to try to save its value against inflation. With very small, risky and underdeveloped financial markets, there is no real alternative to the banking sector. The recent macroeconomic stabilisation has helped to restore the public’s confidence. People understand that there have been banks, and there have been safe banks that value their reputation. For instance, in our banking group, Ukrsotsbank and Alfa-Bank have always repaid every cent of deposits, even in the darkest times of 2008-2009 and the 2014-2015 crises. Do you see any room for mergers and acquisitions? Perhaps involving foreign players? Roman Shpek: We are a vivid example that shows such deals are possible. The strategic merger of Ukrsotsbank and Alfa-Bank businesses was definitely one the most important events for Ukraine’s banking sector. In is not a big secret that some players explore different exit strategies, so their business is potentially for sale. If all of them were to sell now that would mean accepting a big loss, which is a very hard decision, especially when there are few potential buyers. Further changes in the market’s structure depend largely on the government’s strategy concerning its holdings. After the Privatbank’s nationalisation, the government now controls more than half of the banking sector. The government has voiced a strategy of privatising non-core assets, so this could be the next big M&A event on the market. Russian state-owned banks also have rather unclear prospects here, so that might be another possible area for M&As. Let’s change the topic slightly now. How do you see the development of the private sector in Ukraine and its access to funding? Do SMEs have easy access to financing, and what products are on offer? Roman Shpek: When this crisis began, Ukraine had a ratio of
corporate loans to GDP of around 50 per cent, while the ratio of household loans to GDP was 13 per cent. A simple comparison with other countries would suggest that the corporate sector had too much debt, especially when one added any external debt owed by Ukraine’s companies. Now, the ratios are 35 per cent and 7 per cent of GDP respectively: This is mostly because of the fact that about 30 per cent of the total banking sector’s assets have exited the sector due to the failure of so many banks. Tamara Savoshchenko: The number of bankable clients is limited, due to various reasons. We only consider corporates with reliable financial statements as “bankable clients”. Unfortunately, many companies in Ukraine are operating within an informal shadow economy and they cannot provide reliable consolidated financial statements and neither do they have access to bank lending. In addition, the flawed judicial system increases the risks for banks, especially in large and middle corporate segments. At the same time, the SME segment has been frequently overlooked by banks. Traditionally, the banks have chased big clients, as they can add a significant piece to the book, and service costs per client are lower. A lot of banks actively went into the retail business servicing households, especially as households have been the core of funding for most of the financial institutions here. So, SMEs have been frequently overlooked: too small and too hard for the corporate, too specific for the retail. We see a rather big potential in the SME sector, but this also needs an improved market infrastructure and regulation, with better credit bureaus, court practices, coverage opportunities, and, last but not least, a better regulatory environment for SMEs in Ukraine. This being said, we keep coming up with new package offers and overdraft solutions for SMEs, as one of our priority segments. In fact, there’s more to that than just plain old business necessity: the future prospect of Ukraine’s economy depends largely on how the local business evolves. Banks have their role to play in this, so we’ve accepted our share of the responsibility. We are hearing about very good GDP growth, now, in Q4 2016. However, it is clear that the economy was affected significantly. What impact has this had on consumer demand? Tamara Savoshchenko: The recovery of the economy, in 2016, was broad-based. Almost every key sector in the economy posted growth last year. Some industries such as agriculture or construction experienced more of an upturn, some were less vibrant and agriculture became the key driver of economy. Rather important for the country and for banks in particular, investment demand surged by a double-digit rate. Stabilisation of the exchange rate and a slowing of inflation stimulated an improvement in business confidence, which helped to resume many CAPEX projects that has previously been frozen in 2014-2015. We can also see some recovery in household income and consumer demand, despite such strong pressures as the continued large utility tariff hikes. We expect the positive consumer demand trend to continue in 2017, on the back of further growth in household disposable income and moderate inflation. There is also the devaluation of the hryvnia. How has that impacted the demand? Tamara Savoshchenko: Dramatically. In most cases, economic aggregates in USD terms fell much harder than in inflation-adjusted
March 2017 Roman Shpek (courtesy of Ukrsotsbank)
real terms. But the economy has adjusted to the new realities. As the FX market goes through this painful adjustment and local demand recovers, there is also a recovery in imports happening for many products, from FMCGs to durable goods to business machinery. How aware are Ukrainian consumers, today, about banking products: credit cards, consumer loans and mortgages and mobile banking? Do you see prospects for growth in retail banking? Tamara Savoshchenko: In Ukraine, the volume of card payments increased by a factor of 13 (by 1,200 per cent) in 2015 as compared to 2010. So, the market has demonstrated fantastic growth, despite the economic crisis of 2014-15. The proliferation of gadgets has brought about a reciprocal proliferation of online banking. Banks compete not only with interest rates and offline service but also, more and more, with the scope of their e-banking options. Nevertheless, the abundance of card products still remains lower than in CEE countries, meaning there is still much untapped potential on the market. The total debt load of households returned back to the level it was in 2005. Low debt load brings potential opportunities for the expansion of retail lending. As for mortgages, the development of the segment is still hindered by unsettled legal issues, in particular by the on-going moratorium on mortgage collateral collection.
Tamara Savoshchenko: We expect that the sector will continue to expand cashless payments and to increase its proliferation of online banking. Ukrainian banks will focus on consumer lending and the financing of export-oriented businesses, in particular, agriculture. A difficult situation can be perceived as either an obstacle or as an opportunity. How do you see it? Roman Shpek: A difficult economic situation is an obstacle for sure. Ukrainian banks still suffer from a high level of non-performing loans (NPLs). This immense burden of bad debt doesnâ€™t allow Ukrainian banks to expand lending in line with the economic expansion or other fundamentals. What is important, now, is an improved environment that both prevents NPLs from spreading and allows for an easier resolution of current NPLs. Ukraine desperately needs better commercial courts, new bankruptcy legislation, better tax regulations for write-offs and fewer legal opportunities for borrowers to cheat banks by taking loans they do not intend to pay back. If the state delivers such decisions, the banking sector would recover more quickly and may reinforce the, as yet, slow economic recovery by becoming its major driver. Tamara Savoshchenko: In the meantime, the economic crisis really stimulates banks to be more mobile, both literally and figuratively. For example, almost all the largest Ukrainian banks now have mobile applications. Ukrainian banks respond more quickly to needs of their consumers and have fewer service costs. Despite the difficult market environment Ukrainian banks invest a lot into their IT infrastructure, which helps to provide clients with a top-notch service.
Where do you see future growth in the sector?
FDI & BUSINESS Written by
JERRY CAMERON Published on April 11, 2017
Start making connections for the great opportunities Ukraine is currently offering Deregulation and reform became the red thread of all post-Maidan legislation.
The land law will help to improve the land market but its influence on the agricultural industry in general is still hard to estimate, says Andriy Dovbenko, Managing Partner at N&D Law Firm. He spoke to Jerry Cameron about the new regulation that the Ukrainian government is working on, as well as the legal framework for making an investment in the country. It seems that within the last three years Ukraine has introduced more market oriented reforms than in the previous two decades. How do you see that from the legal perspective? In the last few years Ukraine has been definitely shown huge progress in its legal reforms, which are aimed at the establishment of a stable and investment-friendly business environment. Currently, state authorities are working on the implementation of the land reform, along with reforms in litigation, corporate governance and privatisation etc. We expect to have some new laws adopted, by the end of the summer, i.e. on agricultural land circulation and on privatisation. We also expect the existing prohibition (moratorium) on the sale-purchase of agricultural land to be cancelled by the end of 2017. In addition, the National Bank of Ukraine is eliminating restrictions in currency regulation, stepby-step. All of these will allow Ukraine to improve its position in the World Doing Business ranking and will offer investors better opportunities. Therefore, considering latest developments, the legal community feels rather optimistic about further perspectives. Previous governments treated land reform as a hot potato. How could that improve the investors’ situation? Despite the long-lasting land law saga, agriculture is still the
engine of all Ukrainian economy and this sector retains its top position in world markets. Nowadays Ukraine has a lot of free land and cheap lease rental. These factors attract domestic investors, as well as foreign ones, to put their funds into agribusiness. Moreover, in the next three years we do not expect that the government will allow foreign companies or individuals to buy land, because this issue is a means of political speculation. The land law will help to improve the land market but its influence on the agricultural industry in general is still hard to estimate. However, foreigners keep investing in Ukraine’s farming and associated sectors and keep making money. If you look back at the last three years, which areas have improved most significantly, from the foreign investors’ perspective? 99 per cent of business people, the common citizens of Ukraine, international experts and authorities of highly developed countries consider corruption is the cornerstone of all the problems in the country. Of course, the business environment feels this disease very acutely. A lot efforts are being made to beat corruption; lots of resources being spent in order to build a transparent and just governmental system. Deregulation and reform became the red thread of all postMaidan legislation. In our opinion the most successful areas would be a new transparent system of state registration and newly open state registers. Investors are able to check assets’ issues online; register businesses, assets and even vehicle, in a much easier and faster manner nowadays. The deregulation of business is happening as thousands of ancient, corruptogenic and harmful legal norms in a large number of industries have been stopped or changed, and many of the artificial borders are being left in the past. In addition to this, the state procurement procedures have become electronic. The process is much more transparent and saves the state budget millions. Finally, political reform is a good sign for investors too, because no political force or business group has absolute power, so the pressure on business circles is a little lowered. How do you see tax regulations from the business perspective? Which areas are challenging and where are the benefits? I would say that the Ukrainian tax regulations are quite progressive and similar to tax regulations in Europe. Ukraine has joined the OECD/G20 OECD/G20 Base Erosion and Profit Shifting Project (BEPS) Project and has already introduced certain tax changes, aimed at combatting BEPS. Of course, there are national
tax specifics, including tax deductibility limitations, specific transfer pricing rules and electronic VAT administration etc. Ukraine also has a wide network of double tax treaties allowing foreign investors to structure their investments in a tax efficient manner. The tax rulings and advance pricing arrangement mechanisms are in place and allow investors to predict tax issues with some certainty. Certain businesses, e.g. agriculture, alternative fuels, renewable energy sources, the IT industry and start-ups may benefit from tax privileges. Tax incentives can be offered to investors that are involved in important social projects. The challenges many businesses may face when applying the Ukrainian tax regulations include the frequent changes in tax laws. In addition, the tax authorities tend to apply a document-focused and fiscally driven approach to their interpretation and application of tax rules. For these reasons, it is important to seek professional tax advice, to make sure that the investment is structured efficiently from a tax perspective. It is also worthwhile to have professional tax support, when a new business is established, especially where complex or non-standard business transactions and tax disputes are concerned. Can investors be offered incentives? Although, there are a few exceptions — some incentives may be offered to those companies engaged in certain activities, e.g. biofuel production and the development of transportation infrastructure etc. — the state usually does not provide for any special “bonuses” for foreign investors. Currently, the laws of Ukraine provide for the “national” regime for foreign investors, i.e. foreign investors enjoy the same rights as national ones. Foreign investors say legal assistance is of high importance
when entering Ukraine. Why? It is certain that qualified legal advisors will help avoid the corruption-based pitfalls and find the most effective and lawful way to get results. Despite corruption, our legislation has lots of collisions and non-compliances. A legal expert can help to secure the investment, to save money for procedures and to check that your partners are reliable ones. Their experience can get you out of woods and save expensive time too. Of course, you should be careful making your choice of law firm. Whether choosing an international law firm or a reputable local advisor, we recommend paying attention to the firm’s ability to provide legal advice in several types of practice, which are key for the future investment process. Here, I would specific corporate and M&A, dispute resolution, advice on the best strategy to avoid a litigation process in the future, tax and, certainly, industrial expertise. We are sure that the right choice will prove that the investor’s entry into the country is the very best step they have ever made in their business. What would be your message to the foreign investors who are considering entering the Ukrainian market? Well, as a lawyer and also a businessman who runs a business in Ukraine, and who sees how the business environment is changing, on a daily basis, I only have one thing to say — come to Ukraine because now is the right time. As you know, the investment process doesn’t happen overnight and it takes careful consideration and proper planning to enter a new country, whether is it Ukraine or any another country. Start making connections, consult with local legal advisors and look for some of the great opportunities that Ukraine is offering at this historic moment.
FDI & BUSINESS
Ukraine has a chance to become a better place for doing business but it depends on solving the concrete issues within the country.
DMYTRO YAKYMCHUK Project Manager and Analyst Transparency International Ukraine Published on March 1, 2017
Anti-corruption efforts are the starting point for further reforms The fight against corruption is one of the key reforms in Ukraine during the past three years since the Revolution of Dignity. However, despite all the steps that have been taken, the results are still far from what citizens, business and the international community would expect. In the World Corruption Perception’s Index 2016 (CPI) Ukraine scored 29 out of 100 possible points and ranked 131st out of 176 countries. This is an improvement of only two points compared to the 2015 results and, of course, such progress is nothing for a country whose president and prime minister have announced that the fight against corruption is their main priority. In the CPI evaluation Ukraine got negative assessments from the World Economic Forum Executive Opinion Survey and the Economist Intelligence Unit Country Risk Ratings. Businesses witnessed great corruption while allocating public funds and felt the judicial system was unable to prevent this. The results of the European Bank for Reconstruction and Development’s (EBRD) survey “Life in Transition” are not much more optimistic: only nine per cent of respondents felt that the economic situation in Ukraine in 2016 was better than in the four years before and only 11 per cent felt that the political situation was better. These figures are some of the lowest reported in the survey, lower even than the corresponding averages for Eastern Europe and the Caucasus. Moreover, only ten per
cent of those surveyed thought that there was less corruption in 2016 than in the four previous years, before the survey and only 12 per cent reported that they were satisfied with their current personal financial situation. Besides a challenging environment and problems, Ukraine has also made some progress: the national electronic procurement system ProZorro has increased its transparency and is reducing corruption in public procurement. Under a new public procurement law, ProZorro is mandatory for all public tenders over $7,500, conducted in Ukraine. The ProZorro system, which is a new business intelligence module, and the new tool Dozorro make it easier for civil society organisations (CSOs) to monitor procurement, in all its phases, at the national level in Kyiv and at the regional and municipal levels. Because of these tools, violations in procurements has become easier for business and civil society to detect in comparison to the paper tenders and it has also helped to reduce corruption in procurement. ProZorro has become a flagship product and a success story for Ukrainian reforms, but it is not enough. One of the important issues is monopolies. Ukraine is a country with great economic potential. Several big oligarchs and several dozen smaller ones are constantly trying to get a monopoly control of everything they can reach (companies, state-owned enterprises, some spheres of economics, political parties and officials). The economy is also monopolised. It happened long ago, not as a result of the successful business of some entrepreneurs, but because of access to key officials, who were responsible for the redistribution of property. Unfortunately, the Antimonopoly Committee, which has had the task of authorising the business concentration during the whole period of Ukrainian independence, has not prevented those processes but, rather, has facilitated them. That is why oligarchs own not only some powerful enterprises but also even entire industries. The object should be to detect and to stop monopoly dominance. However, the officials who are responsible for that, are frequently too dependent and try to protect the oligarchs who in turn appointed them. Oligarchs must be obliged to work under similar conditions as other entrepreneurs and should be deprived of access to, and influence in, the executive authorities of any level. The Antimonopoly Committee must be strong to be able to conduct such an effective policy. Parliament is considering a draft law on changes in the penalty system for violations of the conditions of competition. The law aims to limit the abuse of power, while charging penalties for breaking the rules of fair competition. The need to adopt such a law appeared after the European Union Association Agreement was signed. But the penalty procedure is changed in the draft law and the previously heavy penalties that were in place to prevent violations will now be smaller and will be allocated under the consideration
March 2017 of public officials. This produces certain corruption risks, in itself, and reducing the penalties for violating competition conditions is effectively profitable for the oligarchs. Since 2015, several new anti-corruption authorities have been established in Ukraine: the National Anti-corruption Bureau, the National Agency on Corruption Prevention, the Special Anti-corruption Prosecutor’s Office and lastly, we are awaiting for the establishment of the Specialised Anti-corruption Court. However, state authorities and civil society are not alone in actively taking part in limiting and fighting corruption. As part of an the Anti-corruption Initiative and with the assistance of international society and the EBRD, Ukraine has the Business Ombudsman Council (BOC), who strives to promote positive changes in the country, to help business directly and to protect them from unfair treatment. Ukrainian enterprises perceive corruption as one of the obstacles for developing a good business environment. Companies who have faced corruption name the Fiscal Service and customs as the worst offenders. The creation and receipt of documents concerning land and property or the use and issue of permits are the areas where bribery is most rife. The BOC receives complaints from entrepreneurs (mostly small and mid-sized business) from all regions of Ukraine. The majority of subjects for the complaints included the actions of: the fiscal authorities, law enforcement agencies, state regulators, local councils, and municipalities’ as well as anything to do with legislation drafts and amendment. In 2016, the BOC prepared recommendations to the Government of Ukraine related to competition protection and oversight, reducing the risk of corruption and attracting investment to the construction industry, challenges for government and business in dealing with local government. According to the BOC report, Government agencies have implemented 87 per cent of the recommendations. The BOC signed the Memorandum on Partnership and Cooperation with several authorities, including the Ministry of Justice, the State Fiscal Service, the National Anti-corruption Bureau, the National Police and the National Agency on Corruption Prevention (NACP). The Memorandum is the basis for cooperation between institutions in order to identify and eliminate the risks of corruption. On the BOC’s recommendation, the NACP can perform inspections of local councils, state companies and their management. The NACP can also provide legal protection to the companies in cases where they are being pressured by state officials. Ukraine fulfilled all requirements for the fourth IMF tranche of $1 billion. The conditions for the fifth tranche include legislation on pension and land reforms and the creation of an anti-corruption court — the final element in the system of anti-corruption bodies in Ukraine. There are still many unprofitable state enterprises, so privatisation must also happen, but it has to be organised on fair and equal terms and with no risk of corruption. The absence of an efficient judicial system and actual impunity prevents the achievement of real results in combating corruption. The sanitisation of judges, a reboot of courts and the anti-corruption court will complete the system of the state anti-corruption authorities. The economy is expected to accelerate and grow by 2.5 per cent in 2017. Ukraine has a chance to become a better place for doing business but it depends on solving the concrete issues within the country.
FDI & BUSINESS Written by
JERRY CAMERON Published on March 15, 2017
Why is corruption so extensive in Ukraine? Partially, it is because of its post-soviet establishment, which still has a big stake in Ukrainian policy, and partially it is because of the oligarchic model of economy.
The public property damage in corruption cases that have been investigated by the National Anti-Corr uption Bureau of Ukraine (NABU) only amount to UAH 83 billion (around $3.7 billion), says Artem Sytnyk, the director of the NABU. He also spoke to Jerry Cameron about the origins of corruption, its size and the challenges the NAPU is facing in fighting it. Ukraine has introduced some measures to fight corruption but it is still an important issue which very often scares foreign investors off. Why has the country had such historical problems with corruption?
Governmental support is vital to fight corruption The background of corruption is the same in any country in the world — when a public servant uses his power and influence for his own benefit. Why is corruption so extensive in Ukraine? Partially, it is because of its post-soviet establishment, which still has a big stake in Ukrainian policy, and partially it is because of the oligarchic model of economy. But this is not news. In my opinion, the key reason is a complex of impunity. For the 25 years of its independence, Ukraine hasn’t had and successful examples of a highly ranked official being punished for corruption. However, what international investors should also know about Ukraine is that after the Revolution of Dignity a new generation of politicians and civil activists have emerged who regard corruption as one of Ukraine’s biggest challenges. Due to their efforts, and supported by the international community, the country managed to establish two independent bodies to fight top-corruption, in 2015 — the National Anti-Corruption Bureau and the Special Anti-Corruption Prosecutors’ Office. How big do you estimate the size of corruption and the black market in Ukraine to be? In which areas/sectors is it most prevalent? Our investigations show that state-owned enterprises are the main sources of corruption.
(both photos: courtesy of NABU)
March 2017 They work as a hub through which the money is taken out of the state budget and then used for various purposes: political corruption, corrupting judges and prosecutors and all the rest. As for the size, public property damage, in cases investigated by the NABU, only amounts to UAH 83 billion (around $3.7 billion). Those are just crimes that are subject to the NABU (not all corruption offences are subject to the Bureau). Most of them have been under investigation since November 2015. In the majority of top corruption cases, the investigations, which started before, are still being investigated by the General Prosecutor’s office. Where do you see the greatest challenges when it comes to fighting corruption? The greatest challenge is the lack of a political desire in our elite to change the rules of the game. We’ve been asking the Parliament, for more than a year, to provide us with autonomous wire-tapping. It’s the same with the creation of anti-corruption courts. Our cases are stuck in unreformed courts — we passed over 50 cases to the courts, but in current situation a trial would take many months or even years to begin. That is why we are advocating for the creation of independent anti-corruption courts, which would specialise in cases investigated by the National Anti-Corruption Bureau and the Special Anti-Corruption Prosecutors’ Office. So far we don’t feel this initiative is supported by the governing coalition in parliament.
On your website you talk about eradication and prevention. How do you want to achieve that goal? We are creating precedents. In investigating top corruption cases, we are breaking the impunity of government officials. That is why ‘eradicate’ goes first. The more corrupt officials we arrest, the more convictions they receive, and the better the prevention we provide. An inevitable punishment is the best vaccination against corruption. Which countries is Ukraine looking at to reference for good practice? Of course, the experiences of our colleagues from Romania, Poland and Latvia are very helpful. However, when we set standards for fighting corruption, we do not set standards for a particular country, we set standards that have already been approved by the international community — the International Convention on Combating Bribery, United National Convention Against Corruption, Transparency International practices and others. In a best case scenario, when and how do you see the first results of your current actions and is it possible to eradicate corruption in Ukraine? I have not heard of even one country in the world where they could declare that they have has completely eradicated corruption. This is a permanent process. Our results in Ukraine will depend not only on NABU actions (and we’ll do our best, of course) but also on the political appetite of the elite and their ability to provide the necessary legislative amendments, which includes the creation of the anti-corruption court, and providing NABU with autonomous wire-tapping etc. I would say that 2017 will be crucial. Either MPs support us and we make a surge in fighting corruption, or this process will be protracted for years to come. I’m not sure that the window of opportunity for our country will be kept open for such a long time.
FDI & BUSINESS
Protecting intellectual property to encourage business confidence
KATERYNA OLIINYK Head of Intellectual Property Practice Arzinger Law and Head of the IP Committee Ukrainian Bar Association Published on March 2, 2017
The fact Ukraine’s inclusion as one of the countries where particular problems exist regarding the protection or enforcement of IPR or market access for persons relying on IPR has probably discouraged foreign companies from investing in Ukraine.
The protection and enforcement of intellectual property rights (IPR) in Ukraine has received significant attention over the last few years, particularly within the context of Ukraine’s inclusion in the Priority Watch List of the United States Trade Representative’s (USTR) “Special 301” Report, as one of the countries where particular problems exist regarding the protection or enforcement of IPR or market access for persons relying on IPR. Ukraine has been listed on the Priority Watch List every year since 2012. Certainly, this fact has probably discouraged foreign companies from investing in Ukraine, which otherwise has significant intellectual potential and is internationally recognised as a prominent source of IT specialists. In 2015, IT was the third largest sector in Ukraine by export volume, reaching $2.5 billion and generating three per cent of the country’s GDP. In the face of negative perceptions of Ukraine’s IPR landscape, the Ukrainian government has identified a number of concerns to which it has sought to respond through various legislative and other initiatives. In order to secure an effective administration and a straightforward state policy regarding IPRs in Ukraine, the Ministry of Economic Development and Trade has implemented the Reform of the System of the Legal Protection of Intellectual Property. The Reform provides for the transformation of the current three-level IPR system into two levels and the creation of an Intellectual Property Office under the Ukrainian Ministry of Economic Development and Trade.
Additionally, the reform implies significant alterations in the system of collective management agencies. This is being done to ensure a fair and transparent system for the collection of royalties for the use of the copyrighted works, and their subsequent distribution among the copyright holders. This is intended to boost the creativity of the Ukrainian media industry and to secure the rights of foreign media companies in the Ukrainian market. The next prominent step made by the government, within the framework of overall judicial reform, was the establishment of the Higher Intellectual Property Court inside the Ukrainian court system. The legal community welcomed this court, expecting it to enhance the level of consideration of IPR disputes in Ukraine. Established in June 2016 by the law, the new court is expected to begin to hear cases in the summer of 2017. Other legislative initiatives relate to introduction of changes into Ukrainian law with respect to combating on-line piracy. The Ukrainian Ministry of Economic Development and Trade developed a draft law to implement a notice-and-takedown procedure and a “safe harbour” principle similar to those provided in the US Digital Millennium Copyright Act (DMCA), as workable mechanisms for combating on-line piracy. After several iterations, the draft law was included in the Ukrainian legal bill “On the State Support of the Cinematography in Ukraine,” which passed two readings in Verkhovna Rada. It was vetoed by the Ukrainian president, but remains under consideration by Verkhovna Rada, which intends to address the president’s observations and vote on the amended version of the law within months Another initiative aims at combating patent trolling. Under local laws it is currently possible to register, for instance, a toothpick or one-time metal hanger for clothes, or spare parts for vehicles as industrial designs, or to obtain a utility model patent for a known pesticide composition just by adding other already existing additives. Such patent trolls then use the border measures to prevent real manufacturers and fair users import those products, or they use the utility model patent to circumvent the original manufacturer’s patent protection. Thus, the draft legislative acts were developed and make changes in the regime of protection of utility models and industrial designs to avoid the abuse of patent rights. The goal of yet another initiative is to enhance the system of grants for the legal protection and enforcement of trademark rights. For the time being there are some legislative initiatives which provide for the implementation of post-grant opposition procedures (in contrast to the current system of challenging trademark rights in the courts only). Additionally, the government is considering the option for shifting from the international regime on the exhaustion of trademark rights to a national one in order to secure more effective mechanisms for combating grey/parallel import problem. These are the ways the government is currently seeking to secure an adequate level of protection of intellectual property rights in Ukraine so they can protect investments into the Ukrainian economy and lower the risks involved in doing business in Ukraine. Thus, 2017 should be an exciting year in the field of intellectual property in Ukraine, with many stakeholders involved in reforming the law and the IPR systems.
Ukraine’s reputation for cheap labour may not ring true in the long-term Estimates say that every fifth Ukrainian is thinking about leaving the country. Since gaining its dependence Ukraine’s economic and political priorities have been to attract foreign investors. Ukraine is a country with a population of 45 million. The country’s leadership’s main arguments to attract foreign investors have been its abundant and cheap labour force as well as a large market and fast growth of consumption. But is that supply of labour sustainable? In the short-term perspective, perhaps yes. However, in the-long term perspective, these arguments may appear to be too narrow. In order to be more attractive to investors, Ukraine needs to be even closer to the European Union and in order to benefit from the Deep and Comprehensive Free Trade Areas (DCFTA) / Association Agreement, it needs to have a stabilised political, economic and financial system and, above all, to root out corruption. The labour market in Ukraine is very unstable at the moment and there are several reasons for that. One of them is that Central European countries such as Poland, the Czech Republic and Slovakia are interested in importing Ukrainians for their production. This applies to both qualified staff (engineers-constructors, turners, welders) and unqualified workers, for the spadework. The instability of the country also contributes to the fact that people are willing to work abroad, promoting an outflow of labour from the country. Estimates say that every fifth Ukrainian is thinking about leaving the country. Since mid-2016, we have seen an increase in demand for workers in other countries. As an example, in 2015 one or two our clients wanted our firm’s assistance to acquire workers from Ukraine. In 2016, we had about six/seven of such enquires. In 2017, there were four applications in the very first month. As far as unqualified staff is concerned, there is also the issue of seasonality, which means a large outflow of workers from midspring to mid-autumn. Sometimes they go to work in countries such as Egypt or Turkey, or to do seasonal work across the border in Poland, e.g. fruit picking. During that period, almost all the manufacturing companies of the Western region face a shortage of workers. At the same time, the level of wages may vary significantly, for the same position, if one speaks about office staff. As for the unqualified jobs, their level of wages is not as low as the foreign investor might expect. Where the labour force and its cost-effectiveness is concerned, it is necessary to look at what point it is cheap and qualified in detail. If Ukrainian labour was qualified, the productivity would be much higher, and wages, naturally, would be much higher than they are today. It is also a fact that the country cannot afford such burdens on the budget as the “luxury” system of education that was inherited from the Soviet Union. In order to bring it into line with the needs of a neo-colonial type of economy, educational reform is now starting to happen in the country. Together with the current demographic crisis, it will be impossible to recreate the highly skilled labour force, in the medium-term, in Ukraine. Already, some experts predict that the country will need to import labour from those countries where it is in quan-
INNA KHARCHENKO General Manager Adecco Ukraine/Avanta HR Solutions Published on February 26, 2017
titative excess, and its cost is even lower than in Ukraine. This will inevitably lead to an overall reduction in the cost of internal labour because employers will be guided by the lower limit of the expected level of wages instead of upper level. A new Labour Code, to “improve the investment climate in Ukraine”, means not much attention is paid to this inexpensive labour. In fact, it is not the cheapness of the labour force that is the most important and essential index for true foreign investors. It is taken into account but it has never been not will it be a decisive factor in the choice of a country to invest in. As for office staff, many of our customers’, i.e. foreign companies, first contact with Ukraine is by hiring an employee using an out-staffing service. In this way they save themselves the need to create a simulated employee, or to delve into the intricacies of Ukrainian law in the sphere of labour relations. The task of this person is to test the market, by selling the company’s products or services, as well evaluating all the risks. They help investors decide whether to get into this market and to set up legally and recruit staff or if the market is still not ready and will not give desired volume then, in that case they can continue out-staffing. For real foreign investor cheap labour isn’t the most important thing; it is the outlet. It is not a problem to set up a new plant in Ukraine but it is more difficult to find a market for these products, if the investor doesn’t have that planned out already. This is the most important thing, because the aim of any overseas investment is not to provide jobs for the citizens of Ukraine, or any other country, but to get profits for the investor.
FDI & BUSINESS
complicated by the disruption of economic ties that was caused by the occupation and the breaks in production and supply chains which had existed for decades.
JERRY CAMERON Published on February 22, 2017
(photo: courtesy of UCCI)
We are worried that at present many Ukrainians, including young, educated, intelligent people are trying to find work abroad.
Although in Ukraine SMEs make up 99.9 per cent of all registered enterprises in the country, there are limited possibilities for their growth and competitiveness. Dr Gennadiy Chyzhykov, president of the Ukrainian Chamber of Commerce and Industry (UCCI), spoke to Jerry Cameron about the role Ukrainian SMEs play in the economy and the challenges they have been facing since the Maidan.
The chamber of commerce has nearly 10,000 members, which gives it a great perspective. What challenges have your members had to face over the last three years? These last three years have been, arguably, the most difficult years for Ukraine, in its modern history. The general situation in the country has severely affected the economic situation as a whole as well as the activities of most businesses. Major factors that influenced the work of our companies were the foreign aggression and the illegal occupation of eastern parts of Ukraine’s territory as well as the constant military activities. There were also the perennial problems related to the business climate: continuing corruption, the need to enforce the rule of law and the unstable tax system etc. The work of our businesses was also greatly
In an interview, the deputy governor of the National Bank told Emerging Europe that the war with Russia has resulted in a forceful reorientation of foreign trade. How do you see that, and how can the DCFTA agreement with the EU help increase trade with the Block? This is actually one more major problem on top of the ones I listed earlier. What you call “a forceful reorientation of foreign trade” was really one of the greatest challenges for our businesses during these last three years. Just look at the statistics — in 2013, our exports to Russia equalled $20.5 billion; in 2015 — just $7.8 billion. In 2016, according to the latest estimates, it is expected to decrease further, by another 40-45 per cent. This means that we have lost about $15 billion worth of exports. Russia introduced a transit ban on Ukrainian goods that were destined for CIS Central Asian countries. As a result, we have also lost several billion dollars’ worth of potential exports to these countries. Finding new markets became a major challenge, indeed, for our entrepreneurs. This was not a simple task, especially for the engineering industry, as they used to make products specifically for the CIS market, using CIS standards and regulations. But by diversifying the production and export geography we have managed, though rather slowly, to find new markets in Asia, the Middle East and Europe. Last year the share of Ukraine’s export to EU member countries reached more than a third of our total export. So you’re saying the Deep and Comprehensive Free Trade Area (DCFTA), which is part of the Association Agreement (AA), helped in the process? Yes, the DCFTA agreement with the EU is very helpful, for our entrepreneurs, for developing our business with EU countries and with other countries of the world. This is because this agreement provides for an approximation of the work of Ukrainian producers and their production regulations and practices to the EU norms and for the modernisation of our industry. It also helps to make products marked “Made in Ukraine” more competitive, not
SMEs should play an important role in the economy and export development
only on the European, but also on the world markets. The DCFTA agreement also provides technical assistance for Ukrainian exporters to help them enter the EU market. Our chamber of commerce understands the needs of its members in their respective services and provides them to current or potential exporters. The European Office, which was created at our chamber of commerce, with the help of the German government, is very active in this field. When we speak to foreign investors they often mention corruption as a challenge. You have also brought it up. How do you see that affecting the ease of doing business? I personally believe that corruption is the single biggest evil in our society. The most recent Transparency International Corruption Perception Index 2016, published in January, put Ukraine at the 131st place out of the 176 countries monitored. This is a very poor performance. Corruption cannot be tolerated in a normal society, as it distorts all human norms, moral values and possibilities for business development. Naturally, it also makes potential foreign investors think twice before coming to Ukraine. We urgently need to stop talking about fighting corruption and to start enforcing the rule of law; to start putting all corrupt officials, irrespective of their positions, into prison. Small and medium enterprises are a good measure of the economy. How do you see the potential of the SME sector and its prospects for further growth? We all know that SMEs play a fundamental role in Europeâ€™s economy. They are considered key to economic growth, innovation and job creation. Our chamber of commerce takes special interest in export development of Ukraine and we have noted that out of the total number of exporting firms in the EU,
more than 80 per cent are SMEs. For this reason, we believe that SMEs in Ukraine should also play an even more important role in the economy and in export development. But they need a lot of help in finding their niche in the market and in developing, promoting and marketing their goods inside the country and abroad, as well as arranging financing etc. We also need to improve the business environment for SMEs in the country. The chamber of commerce is trying to help our entrepreneurs by representing their interests in governmental bodies and working together to bring these businesses on the European and world markets. How do you see the entrepreneurial spirit of young Ukrainians? Are they interested in setting up their own businesses? I think the IT sector could be setting an example here. In general, we Ukrainians are a very creative, inventive and industrious nation. This is especially true when we talk about our young people. There are quite a few of them who want to try organising their own businesses themselves. Our chamber of commerce understands their needs and we are helping them by organising business incubators, special conferences and courses for young entrepreneurs as well as assisting them in looking for financing for their innovative projects. But we are worried that at present many Ukrainians, including young, educated, intelligent people are trying to find work abroad. Many of them may not return. This could be very detrimental to the future of Ukraine. During our EBRD Emerging Europe Outlook on Ukraine conference in London in November, we are going to focus on manufacturing and energy as the two key sectors with the greatest opportunities in Ukraine. How do you see those sectors and what other sectors have great potential? I believe we should focus on modernising our engineering industries. We should use the possibilities that we still have in the space and aviation industry; we should develop shipbuilding and, taking into account our potential in agriculture, we should look at the production of a full range of agricultural machinery. There are also good opportunities for the development of pharmaceutical production, tourism and the creation of modern healthcare facilities in Ukraine.
FDI & BUSINESS
Provided that the economic situation in Ukraine remains potentially stable, the demand for high-quality office spaces from Ukrainian companies is likely to grow.
In 2016, the total stock of office space in Kyiv amounted to 1,783 square metres. The new supply was insignificant, a mere 38,000 square metres and was the marketâ€™s lowest increase since 2008. 2016 was characterised by an increase in the number of lease transactions in Grade A and B business centres. Against the background of the stabilisation of the military conflict in the east of Ukraine and the absence of significant Ukrainian hryvnia exchange rate fluctuations, there was a gradual recovery in demand with an increasing number of companies that were willing to consider relocating to alternative premises. The renewals to relocations ratio, in the total transaction volume, is approximately 50/50. Many companies have relocated to higher quality offices, whilst remaining within the same rent budget or, in some cases, even achieving lower commercial rents. Renewal deals were signed with more favourable conditions for tenants. The total vacancy level dropped from 17.5 per cent at the beginning of 2016, to 14.4 per cent by the end of the same year. In Grade A office buildings, vacancies dropped from 26.8 per cent to 19.8 per cent. Because of the high vacancy level, particularly in Grade A business centres, and the high level of competition between properties, landlords have offered more attractive conditions providing space that includes a basic fitout or â€œturnkeyâ€? solution and some have extended free rental conditions (for up to one year). Tenants have increasingly insisted on either capping the currency fluctuation margin, to take exchange rate fluctuations into account, or the implementation of other mechanisms
to control currency fluctuation risks. Where lease terms are concerned, relocation deals were mostly signed for five years (there were a few examples of seven-ten year term transactions, but they are more of an exception than the market practice). New high-quality office spaces with extras such as modern engineering systems, excellent transport accessibility, sufficient parking space and large average area of floors are still in the favoured choices in office demand. The demand for office space in 2016 came mainly from IT (41 per cent), pharmaceutical (21 per cent) and manufacturing companies (15 per cent). The IT sector retained the largest share in the demand structure. Similar to 2015, most of the users of high quality office space were international companies which accounted for approx. 76 per cent of the total up-take. The Ukrainian market is still promising for them and also looks promising to them taking into account the possible recovery predicted for the next few years. The prime headline rents in Grade A offices have remained unchanged since 2015, at $28 per square metre, per month. One of the trends from 2016 was the active opening of co-working spaces. As a result of development in the information industries and an increasing number of independent experts, co-working centres have become an excellent alternative to conventional offices. The large number of such platforms also affected the decrease of vacancy levels. Overall, the demand for high-quality office spaces remains quite high. Provided that the economic situation in Ukraine remains potentially stable, the demand from Ukrainian companies is likely to grow, as well. Taking into account economic instability and the lack of debt financing, the supply of new office space in Kyiv is limited. Provided that all the announced business centres are commissioned on time, new office supply will amount to approximately 65, 000 square metre s within the next two years. Making use of the market opportunities, multinational companies will continue to relocate to a higher quality offices, in an effort to improve their current conditions. The declining vacancy trend for Grade A and B office centres will continue in 2017 and 2018. In the mid-term perspective, we expect that the Kyiv office market will follow a stage of gradual recovery.
ALEXANDER NOSACHENKO Managing Director Colliers International in Ukraine Published on March 1, 2017
Office space remains available in Kyiv
Ukraine is energy independent in some sectors and awaiting change in others Written by
ANDREW WROBEL Published on March 7, 2017
The basic condition for any investment is legal and political stability. We would say that political stability is already in place, but the legal stability is currently not yet there entirely.
Janez Kopač (courtesy of DMG Events)
Ukraine, similar to Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Moldova, Montenegro, and Serbia, is a contracting party of the Energy Community, whose goal is to extend the EU internal energy market beyond the European Union, by attracting investment, creating an integrated energy market, securing supply and enhancing competition. Janez Kopač, director at the Energy Community Secretariat, and Karolina Cegir, a gas expert in the organisation, spoke to Andrew Wrobel, about how Ukraine’s energy sector is integrating with the EU’s. Is Ukraine coming closer to the EU’s energy market? Karolina Cegir: Well, some people would say that the process is too slow, and others that it is very fast. If you look at what has been done in the last three years in Ukraine’s gas market, there is quite a lot of change. Supply has been diversified switching import dependence from Russia from 100 per cent to 0 per cent by handling reverse flows from Slovakia, Poland and Hungary, which enables a much greater flexibility in deliveries. What is needed now is to let new suppliers into the market. Naftogaz is still the main player, of course, but there are companies with big capacity and with transmission contacts in Ukrainian market. What about market liberalisation? Janez Kopač: Most of required secondary acts have been adopted, some have been partially implemented and some have been fully implemented – but nevertheless, regulators and transmission system operator (TSO) continuously work on improvements and amendments. Right now, they are talking about how to switch from monthly to daily balancing with serious consultancies support and with comprehensive working groups to put this into the transmission code, and in parallel, to buy additional software to allow this in this particular sector. So, what are the biggest challenges right now? Karolina Cegir: As far as gas is concerned, the main pending issue is unbundling. This is going on right now, with some delays, and the unbundling of TSO is the main issue. Janez Kopač: If we talk about energy in general, then we have the electricity market, which is still a single buyer model. This means
everything is regulated and the Third Energy Package compliant electricity market law was approved in the first reading, but now the second reading keeps being postponed. Even if it is adopted relatively soon, it still has a transitional period, which means that the real transitional period will only start in the mid-2019. But of course, the whole fact of switching from the Pre-First Energy Package model into the Third Energy Package model in two years is quite brave, but this step has to be made. If we talk about energy efficiency, you won’t believe this, but it is politically the most sensitive issue in Ukraine because of resistance, not because of support. The certification of existing apartments or
buildings according to the energy performance of the buildings directive has not passed parliament already after three tries. So, despite the fact that macro-financial assistance has €600 million pending on this decision, there’s a no-go, funnily enough. How about energy security? Janez Kopač: There is no outstanding security of supply issues as far as gas is concerned, at all. Ukraine hasn’t needed any gas from Russia since November 2015. Ukraine decreased consumption tremendously and they have enough from their own production and import via Western borders. In electricity, they are self-sufficient. They do not allow imports of electricity from Russia, neither from Slovakia, which would be possible. Even if you talk about EU member states or Energy Community Contracting Parties borders – Slovakia, Hungary, Romania, and Moldova – the import of electricity should be allowed because it is part of the Energy Community Treaty’s obligations; but it is still prohibited. However, currently, they have another political issue with the supply of coal from the occupied territories in the east. Due to some recent political reasons, it is currently prohibited. This is why they could have some blackouts in the future. When you look at the potential for renewables; the agricultural sector in Ukraine is massive. How do you see this part of the sector developing? Janez Kopač: The Renewable Support Scheme is very generous, too generous and too expensive. I am not talking about the biomass element, but about the solar panels and the wind turbines. This
type of electricity production is subsidised twice as much as in, for example Germany, so the tariff envisages that for electricity coming from solar panels you will receive approximately €150 per megawatt, while in Germany at this moment I think they have reached €75 through auction. So they will have to reform the support scheme because it is simply not sustainable. Karolina Cegir: It seems that it has never been strategy-driven; they haven’t checked the potential and put a proper framework in place to develop this potential. For biomass, I would say this is even below the visible horizon as far as the potential for development of Ukraine is concerned. We have recently discussed the regulations regarding alternative fuels amendments and I would say there are not enough resources or knowledge, or even expertise available, nor is there really this horizontal change that should be in place for things such as agriculture and energy together. But on the other hand, it is a pity for Ukraine, there is a huge agricultural production that is being exported for biofuel production in Germany. Do you see room for foreign investment, that is, international investors in the energy sector in Ukraine? Janez Kopač: The basic condition for any investment is legal and political stability. We would say that political stability is already in place, but the legal stability is currently not yet there entirely. In the gas sector, it is much better. In electricity sector, nobody knows what will happen with the reform and when it will happen. Ukraine is a country of huge opportunities, but first the legal framework has to be settled. Potential investors have already understand the position and are just waiting.
ENERGY Written by
ANDREW WROBEL Published on March 25, 2017
Naftogaz – a good start has slowed but optimism remains high From 1 April 2017, the market was supposed to be fully liberalised but it’s already clear that the government is not ready to do it.
Yuriy Vitrenko (courtesy of Naftogaz)
Ukraine hasn’t bought Russian gas since November 2015. In January 2017, Gazprom charged Naftogaz $5.3 billion for gas it had not purchased, under a take-or-pay clause covering the second through to the fourth quarter of 2016. The applicability of the take-or-pay principle is currently being reviewed by the Arbitration Institute of the Stockholm Chamber of Commerce within the context of the arbitration proceedings between Naftogaz and Gazprom that were initiated in 2014. Naftogaz doesn’t intend to pay the invoice until the final decision has been reached in the arbitration. Yuriy Vitrenko, Group Chief Commercial Officer at Naftogaz, spoke to Andrew Wrobel, about the reforms of the Ukrainian gas market that have already been introduced and the challenges that the sector is facing now as a result of a slowdown in further reforms. How do you see the position of Naftogaz in the market? Are you looking for partners? There are many value chains that are fragmented in Ukraine’s gas market. We are a major player in upstream and in the wholesale market but we are almost not present in retail. At the same time, another group controls some 85 per cent of the retail segment. We would rather prefer to have a vertically integrated business, across the value chain. This will have a positive impact on the sustainability of market development, including fostering competition. I would also note, that we would like to gain more experience in gasoline or LPG or natural gas retail and we might need partners for these particular fields. As for gas transmission; Ukraine is looking for a partner to operate the system. Our gas transmission business is a cash cow.
It generates sufficient cash flows to cover its investment requirements, so it is not an issue of investment. This business will be fully unbundled from Naftogaz to implement the Third Energy Package. However, we, as a market player, need a reputable and experienced western company to co-manage the system and to bring trust, commercial know-how and technologies. In the upstream business, we are comfortable with the geological risks in Ukraine and we have the funds, but we may need the right technologies. We have a huge subsidiary that produces gas in Ukraine, and we could consider, for example, bringing reputable international partners into certain fields in order to develop those fields and improve the efficiency. What is your view on the reforms in the energy sector, particularly the ones regarding Naftogaz? In an interview, Elena Voloshina, country representative of the International Finance Corporation in Ukraine, says there is a certain amount of progress being achieved in the implementation of the Naftogaz corporate governance action plan and an independent supervisory board of Naftogaz has been established, but further changes are needed in Naftogaz. For the last three years, I think I can praise our achievements. There has been tremendous success. For example, three years ago we were fully dependent on gas supplies from Gazprom. Today, we are not buying gas from Gazprom at all. In the past, we were hugely loss making. Naftogaz had a deficit of $10 billion. It was a huge burden for the state budget. Now, we are by far the biggest tax payer. We have profitable operations and we are a driver for gas market reform. Ukraine has moved from hidden subsidies to explicit or targeted subsidies supply of
March 2017 gas to households. These particular reforms have saved the state budget at least $2 billion per year. Energy efficiency has also increased, unfortunately not because of technological investments or enhancements, but more because of behavioural factors. It is very important that people have started to think about how much gas they consume, even if it has happened because of the price increase. Consumption decreased by some 20 per cent for past two consecutive years and imports decreased by 2.5 times. Sometimes it’s even hard for us to believe what has been achieved. At the same time, and to be open and objective, we must admit that reforms have slowed down significantly recently. In 2016, we didn’t see much progress. The slowdown is very frustrating because, after such a rapid start and with a very clear picture where we were heading to, it’s now really frustrating that we are stuck half-way.
Then, there is the corporate governance reform which is another important process. This idea of this reform is to insulate Naftogaz, the state owned company, and other state-owned companies in general, from political meddling and graft. There was a lot of international attention on this reform. There were some, again, public statements and finally, again, there was some success. Unfortunately, while I cannot say that the implemented steps are complete window dressing, there was no real change in substance. So, yes, our supervisory board was elected and appointed; it includes a majority of independent members but the government has so far failed to delegate its authority to this board. The opportunity for potential political meddling and graft was left open. There’s the formally approved Corporate Governance Action Plan. All of its stages were supposed to be completed in the first half of 2016. However, only 50 per cent of the first stage has been
So what has made these reforms slow down? First of all, there is the gas market reform, for example. There was this shift from hidden subsidies to explicit subsidies. From 1 April 2017, the market was supposed to be fully liberalised but it’s already clear that the government is not ready to do it. We won’t have competition in retail for households, or for heating companies. That’s very frustrating again, because prices have increased, but at the same time the competition was not enabled. Then, we implemented the European primary legislation; the so-called gas market law. In fact it’s a transposition of the EU third energy package which makes the Ukrainian market easy to operate for European companies. However, Ukraine did not implement the standard European network code and opted to have some transitional Ukrainian network code.
finished up until now. There are also delays in the implementation of the unbundling plan which was adopted in the summer of 2016. What is the potential of the Ukrainian gas market? What will the market look like in ten years’ time? First of all, there will be no pricing regulations. It will be a liberalised market with free competition. We also expect that the Ukrainian gas market will be fully integrated into the EU market. So the existing bottlenecks at major interconnectors will be removed. We also expect that there will be international partners co-managing the Ukrainian gas transmission system, meaning that European companies will be comfortable in using our GTS and coming to operate in the Ukrainian market.
Energy tariff reform in Ukraine: estimated effects and policy options
VASILY ASTROV Senior Economist Vienna Institute for International Economic Studies Published on January 12,2017
Partly due to the steep rise in the gas price, residential gas consumption declined by about one-third, between 2013 and 2015 and following another tariff hike, which was carried out in the spring of 2016, it declined again by another nine per cent.
For a long time, energy sector reforms have been viewed as one of the most important challenges facing Ukraine. Their most visible manifestation so far has been in the steep hikes in energy tariffs for households, to ‘market’ levels, above all for natural gas and central heating. One stated motivation behind the implemented tariff hikes has been to provide incentives for energy-saving. Additionally, they have been demanded by the International Monetary Fund (IMF) as a condition for extending its loan programmes to Ukraine, since 2014, primarily because of their importance in budget consolidation. The magnitude of gas tariff hikes in Ukraine, and the short time span over which they have been implemented, have been unprecedented. Within a period of less than two and a half years, they rose nearly ten times (e.g., in Poland in the early 1990s, the tariff hikes were of a similar magnitude but were carried out over four years and accompanied by growing household incomes). Parallel to that, the government has markedly
upgraded the system of direct energy subsidies for poorer households, which is supposed to cushion the impact of the tariff hikes. Partly due to the steep rise in the gas price, residential gas consumption in Ukraine declined by about one-third, between 2013 and 2015 and following another tariff hike, which was carried out in the spring of 2016, residential energy consumption declined again by another nine per cent, according to our estimates this, despite the aforementioned energy subsidies. This reduction in energy consumption essentially means a sacrifice of those households’ living standards, since improvements in energy efficiency via energy-saving investments are constrained by a shortage of funds and, in any case, would take time to materialise. Because of the higher energy payments, private consumption of other (non-energy) items has also suffered, which represents a clear social loss for Ukraine’s economy. At the same time, our analysis demonstrates that the magnitude of the gas tariff hikes that was implemented in Ukraine has clearly been excessive when viewed from the production (cost) side. Under plausible assumptions about the dynamics of domestic gas production, residential consumption and gas import prices in the years to come, we arrive at the conclusion that the first two rounds of gas tariff hikes (implemented in
2014-2015) should have been more than sufficient to restore the ‘financial health’ of the state-owned gas monopolist Naftogaz and to eliminate its need for government subsidies in the longer term. The latest tariff hike (spring 2016) will only increase the rents accruing to Naftogaz (and, via higher tax revenues, to the government at large) still further—essentially at the expense of the population. Furthermore, our estimations suggest that this higher annual rental income will most likely amount to some two per cent of GDP. It may prove to be even higher if the gas import price (to which the domestic gas tariff for households is tied) rises above its currently low level. This rent is raised under a wholesale price which, for the (largely domestically produced) gas, has now been set on a par with imported gas. After the recent sharp reduction in gas demand this imported gas is only needed in limited quantities, to cover the households’ needs. Two policy options seem to have the potential to amend this situation. The first
one, which is already being implemented, stipulates that the government compensate the rising energy prices to the poorer households, somehow, in the form of energy subsidies. This approach is recommended to be continued. However, the provision of energy subsidies is likely to be quite costly and is difficult to administer efficiently; even more as it tends to grow in scope. Apart from that, it is difficult to grasp the rationale for a policy which imposes high energy prices and then compensates the rising costs of living by covering parts of households’ increased energy bills. An alternative policy would be to try to roll back the energy tariffs that were imposed on the household sector. As long as Naftogaz profits permit it, the authorities may order the reductions in the prices charged. This would be consistent with normal practices that are already well established in mature market economies where various public
institutions mediate between the mass of powerless consumers and the few giant, powerful corporations, that can exploit the inelasticity of demand for their products by unrealistically raising their prices in to earn undeserved monopolistic rents. In Ukraine’s case, it should be relatively easy to roll back the energy tariffs as long as Naftogaz remains state-owned. If the gas sector were privatised, in line with the EU Third Energy Package, this would make the task more difficult, and the realistic prospect of emerging private monopolies, which also make this more difficult to regulate.
The article is based on the forthcoming WIIW Study “Energy Tariff Reform in Ukraine: Estimated Effects and Policy Options” by Vasily Astrov and Leon Podkaminer.
A very good prospect for future biogas development Ukraine has the right prospects for biomethane production GEORGIY GELETUKHA Head of the Board Bioenergy Association of Ukraine Published on March 1,2017
The National Renewable Energy Action Plan (NREAP) till 2020 establishes the general goals for the development of the renewable energy sources’ (RES) sector in Ukraine. According to Ukraine’s commitments as an Energy Treaty member, the RES share in the gross final energy consumption should reach 11 per cent by 2020. Biomass-to-energy usage is among the key conditions for the fulfilment of the goals that were established in the NREAP. The major input for biomass is foreseen to be in the heating/cooling sector; it should be 5,000,000 toe (tonne of oil equivalent) per annum in 2020, which constitutes 85 per cent of the total RES input in the given sector. In addition, the installation of energy equipment with capacity of 950 МWе is planned, which will operate on biomass and will use 390,000 toe of biofuels per annum in the transport sector. This also includes 290 МWе from biogas. However, by the end of 2016, the installed power capacity reached only 39 MW for solid biomass and
20 MW for biogas. Altogether, 1,775 GWh of power was produced in 2016, including 4.5 per cent from solid biomass and 5.1 per cent from biogas. There are several examples of agricultural biogas plants in Ukraine. They include biogas plants at animal farms and at sugar factories. There are also some food industries which get biogas from wastewater treatment. Some examples of landfill gas projects were also developed on municipal solid waste landfills. Despite the, so far, limited number of implemented Ukrainian biogas plants, the technical scope covers a wide range of industries and different types of raw material for biogas production. For example, Ukrainian biogas plant are already implemented at pig, cattle and chicken farms; at sugar plants; breweries and other food production enterprises, using a broad diversity of raw materials such as pig and cattle manure, chicken
March 2017 litter, maize and sugar sorgo silage, sugar beet pulp, food treatment waste and wastewater. Ukraine has the largest area of agricultural land in Europe and also one of the highest agricultural areas per capita. The total amount of arable land area accounted for 32.4 million hectares. The total biogas potential from agriculture waste, MSW, municipal and industrial wastewater is estimated at 3.2 billion cubic metres CH4 per year. Several assessments of the potential for methane production, from energy crops in Ukraine, varied in a broad range from 3.3 till 27.4 billion cubic metres of CH4. These variations mainly depended on the agricultural land use and the crop yields. The most popular crop for biogas assessment is maize silage. Among other possible crops are sugar beet, sugar sorgo, grain crops and grasses. The most powerful and effective support mechanism
is a â€œgreenâ€? tariff for electricity generated from RES. The tariff rate for biogas is 0,1239 â‚Ź/kWh. Therefore, it can be deducted that there is still a considerable untapped potential for a wide spread implementation of biogas and potentially biomethane projects. In general, biogas market in Ukraine can be considered as forward-looking, with a fairly wide awareness of the participants. As the last amendment to the green tariff system included a significant increase of the tariff for biomass/biogas projects and scrapped some barriers such as the restriction of raw materials, it is expected that the number of biogas plants will increase sharply in the coming years. Ukraine has the right prospects for biomethane production. There is a high local consumption of natural gas and Ukraine has a critical dependence on gas supplies from external markets. The presence of a significant number of agricultural holdings also provides the financial and land potential for large-scale biomethane biogas projects. Ukraine has developed a transport infrastructure for NG which includes both main pipelines and a distribution pipeline network. Ukraine also has a tradition of using compressed NG as motor fuel for trucks and buses, hence the presence of a developed network of CNG filling stations.
ROMAN OPIMAKH Executive Director Association of Gas Producers of Ukraine
Ukraineâ€™s gas industry risks stagnation without investments
Published on February 23, 2017
Without the assistance from the government, the president and the parliament, the noisily communicated plans will remain on the paper.
The Concept for Development of Ukraineâ€™s Gas Production Industry by 2020, which was approved by the government in September 2016, predicts that natural gas production should increase to 27 billion cubic metres within four years, compared to the current 20 billion cubic metres. Are these plans feasible? Let me just lay out a few facts: Ukraine is among Europeâ€™s topthree countries as far as natural gas reserves are concerned. However, the extraction rate is significantly lower than the world average and amounts to a mere two per cent, which indicates a poor technological development of the industry. At the same time, the government assumes that by 2020, investments in the industry will exceed $5.5 billion. Exactly how new private capital and modern technologies will be attracted to the industry remains unclear. According to Deloitte, the tax burden on natural gas production in Ukraine is more than twice as high as the average European rates (almost 30 per cent as opposed to the average of 12 per cent in the Old Continent). The current multi-rates tax system is absolutely incomprehensible to investors, especially foreign ones, and this leaves a huge gap to be exploited for non-transparent double standards. In addition, the legislative system is overcrowded and does not have a single decision-making centre. The turnaround time for the whole process, from receiving a permit for subsoil use to the legal setting up of the tract of land under the drilled well, is over around three and half years. It also requires the receipt of numerous permits in the domains of various authorities. The lack of a transparent and competitive environment facilitates corruption. This results in slow dynamics for industry development and a lack of foreign investors. This means that if it maintains the current tax regime, Ukraine will ultimately lose the competition for international investments. At the same time, the main driving force for growth in natural gas production growth should be an increase in investments from internal and external sources, the drilling of new wells on brown- and green-
fields and the attraction of modern technologies. The first milestone in the trust-based relationship between Ukraine and the investors, both domestic and international will be the implementation of an encouraging royalty. In December 2016, the government and the parliament decided to support the natural gas production industry by implementing a motivating flat rate royalty of 12 per cent on natural gas produced from wells, which started drilling after January 1, 2017. However, this arrangement does not include joint venture agreements. The implementation of this initiative will attract over $1 billion of new investments in the industry. Those investments will facilitate a 35 per cent growth of production by 2020, which will result in UAH 14 billion in taxes and approximately 16,000 new jobs. The year 2016 results show that the gas production in Ukraine has risen by 0.5 per cent and the dynamics of commercial upstream companies have been steadily falling for two years in a row. This is not strange. Both internal and external market conditions are extremely unfavourable for the investor. So, what is the scenario for Ukraine’s gas production development in 2017? UkrGasVydobuvannya, which is the country’s biggest hope, and for the benefit of which the Government has started the necessary reforms, has declared that it plans to increase its production by 500 million cubic metres – to 15.1 billion cubic metres. For private upstream companies, low natural gas prices will continue to negatively affect the commercial attractiveness of production. With the current fiscal regime and the existing regulatory obstacles, projects with even a slight risk factor will be discarded. Thus, there is a high probability that the independent gas production sector will enter a period of stagnation, in 2017. Regarding new investors, Ukraine has really big problems with them. It is worth mentioning that not a single international company has entered the upstream industry and, conversely, several of them have left. What’s next? It is important to urgently develop an effective tool for achieving the goals that are outlined in the government’s Concept Plan. In order to do this, it is necessary that the government make decisive moves aimed at attracting larger investments. It is also important that new foreign upstream companies arrive in the market, which will be capable of attracting capital and the necessary qualifications, combined with advanced technologies. Without the assistance from the government, the president and the parliament, the noisily communicated plans for implementing the key points of the Concept will remain on the paper.
The political economy of independent Ukraine: late starts, false starts, and last chance?
OLEH HAVRYLYSHYN An economist and a former Deputy Minister of Finance of Ukraine. Published on February 2, 2017
As so often in the past quarter century, Ukraine is again in the news internationally, with questions being asked about how President Trump’s apparently friendly attitude towards Putin might affect the issues of Crimean annexation and the Russian intervention in the Donbas. Such a threat to the sovereignty of a nation that declared independence from the USSR only 25 years ago, gives cause for good analyses of how Ukraine has developed. Despite 1991’s great expectations of a successful transition to a strong market economy, Ukraine has, in fact, dramatically fallen behind its neighbours such as Poland. At the outset, these two broadly similar economies had about the same levels of GDP per capita, but today Poland’s is three-four times higher. Arguably, such a weak performance contributed to Ukraine’s vulnerability and this was exploited by Moscow, pursuing Putin’s policy of renewed imperialism. The country’s economic performance has been very disappointing, and is far from meeting the prognosis of a famed 1992 Deutsche Bank study that stated that Ukraine had by far the best prospects for economic success after the dissolution of the USSR. The GDP per capita that fell behind most other post-communist economies, was not only the common measure of well-being, but also other indicators of social and material living standards were used such as the UN’s Human Development Index. Contrary to the claims of many critics of rapid, shock-therapy reforms, it is true that today, Ukrainians live much better than in the Soviet period with larger apartments, far more automobile ownership, higher consumption of high-quality of food products, considerable travel abroad and so on. Those facts and the unquestioned acceptance of Ukraine as a sovereign nation by the world, officially and on the street, are very positive achievements. But using the standards of living from the Soviet days is a pretty minimal benchmark. Compared with many of its neighbours, especially in Central Europe, Ukraine’s economic development has been among the lowest of the two dozen post-communist nations. Compared to the expectations of experts such as those at Deutsche Bank and, more importantly, the people who voted overwhelmingly for Independence in December 1991, its performance has been very poor.
Why did Ukraine not do better than this? Many of its early leaders explained the difficulties by pointing to three impediments: firstly, this “new” nation needed to build up its state institutions first, as unlike Poland and others it did not have them under Soviet rule: Secondly, Ukraine was “burdened” with large, inefficient industrial and military factories which were difficult to convert and thirdly, it was very difficult to pursue market reforms since Ukraine did not have the necessary experts, economists and financiers who knew how to create a market economy. However, none of these explanations is convincing, and indeed it is best to think of them as “excuses” used by the “new-old” ruling elite of converted former communists. Their main desire was to delay any real changes to the market long enough so they could become the new capitalists, using their insider privileges to obtain preferences in economic activity and bargain-basement prices when privatising state factories. The consensus conclusion of transition experts is that the countries which have performed best and minimised the inevitable social costs of transformation, were those that started market reforms early and then pursued them resolutely. Since 1991, the European Bank for Reconstruction and Development has measured progress to the market with its Transition Progress Indicator (TPI); the harsh fact is that Ukraine was one of the greatest laggards in reforms, with virtually no forward movement in the first three years of independence during the Kravchuk Presidency. The main reason for the poor economic performance was that delay and not the three excuses out forward by the political leaders. Alas, it was worse, because the delay also opened the door wide for insider deals and for rent-seeking new capitalists, of whom the early nineties embryos of some of them had grown into fully-fledged oligarchs. In parallel, the lack of transparent competitive market operations also led to an environments where the level of corruption grew steadily to become one of the worst in the world, as assessed by the World Bank and Transparency International. Those who follow Ukraine today are well aware that pervasive, persistent and pernicious corruption is the number one problem in the country. In what sense were the political leaders’ explanations wrong? Firstly, while common state institutions did need building-up, this certainly could have – no, should have included building up economic strength. Its lack was also reflected in a weak military which was surely also a factor in Moscow’s easy occupying stroll into Crimea in 2014. Secondly, the alleged burden of inefficient industries and a big large and complex military had another side to it: Ukraine had one of the strongest pools of human capital and the scientific endowments from all the nations of the region were second only to those in Russia. Instead of using this as an excuse, leaders who lead might have parlayed the country through early transformation into a competitive highly-skilled IT environment and a sophisticated manufacturing strength. Thirdly, while on the face of it, the assertion that Ukraine did not have many experts and/or academics who are familiar with
March 2017 market economics seems true to different degrees throughout the Socialist Camp, but this did not deter Central Europe or the Baltic countries from undertaking rapid reforms. In fact, one only needs a very small number of key leaders to head up ministries and the Central Bank or to act as advisers. Furthermore, a closer look at the earlier times in Ukraine confirms that there were indeed a handful of people with such capabilities, who somehow were found in order to serve in the (temporarily) reform-oriented government of Kuchma in 1994. Together with a more complete retrospective review of developments since 1991, it becomes necessary to revise some of the conventional interpretations; only four main ones are noted. Firstly, correct data for economic variables dispels the notion that the income of Ukrainians is still lower than in the Soviet period; official statistics from then are simply not comparable to market-based GDP and various direct measures of consumption clearly show living standards are far higher today. That is to say, even the partial move to a market economy has produced benefits. Secondly, the explanations for Ukraine’s poor economic performance as given by political leaders are unconvincing and the main reason Ukraine has fallen so far behind other post-communist countries is the very long delay in any reforms and their slow progress afterwards. Thirdly, the rise of an oligarch class was not a matter of bad luck where greedy new capitalists took advantage of others, but was clearly due to the delayed and incomplete economic reforms; the same can be said for the growth in corruption. Fourthly, the commonly accepted view that the oligarchs were created under President Kuchma is only partly true; the beginning of all capitalist fortunes in Ukraine, large and small, already began
under Kravchuk, though Kuchma’s turn away from an initial reform policy was critical in nurturing them to full a bloom of multi-million and billion fortunes. Edmund Burke famously said; “those who forget history are bound to repeat it”: Following his suggestion consider the three key lessons of this history for the new Government after the EuroMaidan victory in February 2014. When there is an opportunity where society and politicians are ready to make reforms, they should not be postponed while looking for a non-existent optimum strategy, but should be made quickly, comprehensively and then continued resolutely. Concerns that rapid reforms will hurt the population has absolutely no basis in the history of transition; the countries that moved earliest and fastest suffered the least amount of social costs. Finally, opponents to reform with vested interests will never state this openly and all their “excuses’ for going slowly should be ignored. This should be done in order to convey, to the privileged few, be they large oligarchs or merely millionaire capitalists, that the game of rent-seeking through government privileges is finished. Where evidence for illegal activities is available, prosecution through the courts is an important supplement to policy reforms. In a word, the economic outcome since independence is comprised of capitalism for the few and low incomes for the many. If a short and succinct explanation of this inadequate performance is wanted, one can do no better than cite the renowned Austrian economist of the early 20th century — Ludwig von Mises, who just happened to have been born in Lviv in 1881: “The worst evils which mankind has ever had to endure were inflicted by bad governments.”
European volatility makes economic development slower for Ukraine FABIAN ZULEEG Chief Executive European Policy Centre Published on February 15, 2017
In the current geostrategic environment, it is impossible to divorce political development from economic development. The prospects for the global economy and, by implication, for individual economies are intricately driven by significantly changing and unpredictable geopolitical trends. The main effect of these developments is a rise in volatility. This does not mean that, in all cases, the current trends will have negative impacts. In many cases, we will also see positive surprises, accompanied by, for example, a (temporary) boost in consumption and investment. But, in the end, uncertainty and volatility will carry a cost, not least in terms of confidence and in an increasing tendency to seek safety by withdrawing behind one’s own borders.
This increasing tendency towards more closed economies and societies is also threatening the rules-based international system. There is a realistic risk of a challenge to the multilateral trading system, with the WTO potentially being undermined by trade wars. Even if this is not the case, it is likely that in such volatile times, investment will tend to seek safe havens in economically and politically stable countries. This movement will be even more pronounced if there is uncertainty over the future of the global security architecture, and geopolitical tensions in critical regions. Questions on the future of NATO, and the role of Russia, expose the precariousness instability of the current strategic context in the regions surrounding the EU. There is also significant uncertainty
over the economic and political development of the European Union. The rise of populism, fuelled by an increasing polarisation within European societies, is creating political risks that are especially pronounced for the EU, which does not have a sufficient political connection to Europe’s citizens, making it vulnerable to anti-establishment, anti-globalisation and anti-migration rhetoric. More closed and nationalistic leaders are vying for power, and, increasingly, these arguments are reflected in the mainstream. Europe remains gripped by a poly-crisis — economic/Economic and Monetary Union (EMU), migration, Brexit, security — that is very difficult to resolve in light of fragmentation, and increasing distrust between member states, as well as vis-à-vis the EU’s institutions. This
Europe remains gripped by a poly-crisis which also makes the EU less able to engage with its neighbours, as shown by the ‘moratorium’ on further enlargement.
also makes the EU less able to engage with its neighbours, as shown by the ‘moratorium’ on further enlargement. The reluctance to further enlarge the EU also comes from a widespread perception that, in the past, countries were allowed to enter the EU before they were fully ready. As ex post mechanisms are much weaker than ex ante conditionalities, many believe that countries can be permitted to enter the EU only when they have clearly managed to create the stable institutions that are needed in the long term. Given these global developments, as well as the current state of the EU, the economic environment will be very challenging for countries that have to deal simultaneously with significant external and internal political and economic vola-
tility, as well as having weak institutions. Despite Ukraine’s economic potential, the economy remains inherently unsustainable and it is heavily dependent on external finance, including that from the IMF, EIB and ECB. While there will continue to be financial support, it remains questionable whether this will reach a sufficient scale, nor does it represent a sustainable solution to the structural economic challenges. In addition, while a number of important economic reforms have been carried out, broad-based recovery and growth have been held back by several factors including weak external demand and the conflict in the East of the country which have restrained investor confidence and productivity.
While Ukraine is now implementing a Deep and Comprehensive Free Trade Area with the EU, economic integration will be limited by low investment flows and the difficult global economic environment. Nevertheless, the process helps Ukraine approximate its legislation and technical standards to those of the EU. In the end, this points to relatively slow economic integration and development. A crucial pre-condition of reaching even limited growth rates will remain the further strengthening of internal institutions — not least the judiciary — as well as (painful) structural and sectorial reforms. However, in the current more negative global environment, even a modest and slow economic development process might be seen as a success story.
CHRISTOPHER A. HARTWELL President Centre for Social and Economic Research (CASE) Published on January 10, 2017
Ukraine’s future holds both promise and pitfalls for the economy, with these challenges and opportunities not only connected to events of 2016 but going much further back into the country’s turbulent past. In fact, the challenges that Ukraine faces in 2017 are the same as those that have plagued Ukraine for centuries, namely the difficulty in building functioning and sustainable economic institutions. An example from the waning days of 2016 proves the tenuous state of Ukraine’s economic institutions. PrivatBank, Ukraine’s largest bank, was nationalised in late December after “failing to fulfill its recapitalisation programme,” while other banks have been closed by financial regu-
Ukrainians may have to fall back on a trait they cultivated during their long periods under domination from Poles, Russians, and their own people: self-reliance.
The turning of the calendar to a new year is a natural point to reappraise the legacy of the year just passed; searching for clues as to what will come and what must be avoided in the future. Such an exercise is particularly useful in the case of Ukraine, which has a large milestone coming up. February 2017 marks three years since (now) former President Yanukovych fled to Russia with large quantities of Ukraine’s treasury, a signature event which also sparked three years of tangible economic reform and political change.
Falling into old ways in 2017? Ukraine’s struggle for functioning economic institutions
March 2017 lators due to the financial risks on their balance sheets or their lack of assets. PrivatBank was deemed â€œtoo big to failâ€? and will be bailed out by the Ukrainian budget. The financial sector in Ukraine has been on thin ice ever since the global financial crisis, but the roots of its problems go back to independence and the capture of the state by politically-connected oligarchs. Indeed, the vast bulk of Ukraineâ€™s financial sector has been used to service powerful regional interests: financing business deals with deposits (PrivatBank itself is owned by Ihor Kolomoisky, owner of Dnipro football, a former Governor of Dnipropetrovsk, and a rival of Ukrainian President Poroshenko).
The overall financial sector, which is often buttressed by state handouts and loose monetary policy, has seen some improvements since the Maidan revolution, mainly because of the improved management of the National Bank of Ukraine and the pressure from external donors (above all, the IMF) to clean up the sector. However, major challenges still remain, as PrivatBank demonstrates. Unfortunately, as I show in my latest book, the difficulty Ukraine faces, in building the requisite economic institutions for a market economy, is not a recent phenomenon and it has often faced the same issues as the financial sector (that is, being subordinated to political interests). Property rights, an independent judiciary, and
financial institutions have always been low on the priority list for Ukrainian governments, with even the first modern Ukrainian state, in 1654, being predicated on a feudal structure (the only difference being that the lords doing the exploiting were Ukrainians, rather than Poles). Years of occupation and incorporation into the Russian Empire has meant a long detour away from building property rights and a professional judiciary. Throughout Ukraineâ€™s long existence, the emphasis of Ukraineâ€™s leaders has been on distributing the rents from economic activity rather than optimising that activity.
This lack of understanding of even the most basic of economic institutions, property rights, has continued, unabated, into the independent, post-Soviet Ukraine. As I have written before, the continuing moratorium on the sale of agricultural land is a direct repudiation of property rights, aggregating the ability to tell landowners what they can and cannot do with their land to the government. Additional threats to basic economic institutions continue to abound, such as a recently-enacted ban on uncut timber exports, extending a moratorium on unprocessed roundwood
that was imposed in 2015, but which became a major bone of contention with the EU. Such random prohibitions or the imposition of quotas, licenses, and required permissions have been a permanent feature of Ukraine’s economic history, showing a cavalier disregard for the fundamental institution of international trade. Despite great leaps in macroeconomic stabilisation and some progress in changing the political system since 2014, there remains an entrenched bias towards intervention with no heed paid to the consequences. One excuse used by many to put the brakes on economic reform is perhaps the key issue facing Ukraine in 2017, namely the ongoing Russian invasion of the Donbas, a military incursion that has increased in intensity in recent weeks. While the difficulty of fighting a protracted war in the east has directed much of the government’s attention and sapped some of the energy that could have been used for reform, the reality is that Ukraine would be better served by accelerating economic reforms as a way of strengthening the military campaign. In reality, a strong military does not equate with a strong state; in fact, in order to build a strong military, the opposite is often true, as a strong state tends to focus on a myriad of issues rather than remaining dedicated to its proper role of defending the country’s borders. A sprawling public bureaucracy that decides which wood
should be exported is a bureaucracy that is not flexible enough to deal with the urgent needs of national defence. Removing the hand of the state from the economy will also unleash the creative forces that have thus far been held back, in addition to freeing up resources at the government level that can be directed to the fight in the east. In the end, if the necessary reforms stagnate at the national level, Ukrainians may have to fall back on a trait they cultivated during their long periods under domination from Poles, Russians, and their own people: self-reliance. The movement that Ukraine needs to overcome its institutional paralysis may be: an emphasis on local solutions to problems such as corruption and an ineffective judiciary, creating de facto decentralisation and circumventing the slow-moving apparatus in Kyiv. Such an approach will not create the broad-based reforms that the country still desperately needs, but may allow for the emergence of property rights that will then form a basis for Ukraine’s future. Unfortunately, such reforms will not survive without at least benign neglect (if not outright support) from Kyiv, making progress in 2017 all the more important. As the song says, Ukraine has “wandered many a weary foot, since auld lang syne,” but still has more ground to cover.
Between the East and West, geographically and politically KONSTANTYN FEDORENKO Junior Research Fellow Institute for Euro-Atlantic Cooperation Published on March 13, 2017
For populist purposes, several oppositional parties are declaratively pro-European and, in fact, they strongly oppose some of the EU- and IMFrecommended policies. The story of Ukraine’s 2013-2014 anti-government protests, which started because the then-president Victor Yanukovych declined to sign an Association Agreement with the European Union, is definitely still remembered in Brussels. However, as time passes, the memories of these dramatic events are being increasingly replaced by criticism of Ukraine’s current inability to deliver effective reforms. Where then, does Ukraine stand, today, in its relationship with Europe, how well the country is doing and what does it need? Granted, the majority of Ukrainians are still supportive of European integration, today. When they were asked, in September 2016, to choose only one international economic bloc to join — either the European Union or the Russia-led Customs Union — 51 per cent of Ukrainians would rather look westwards, with only 19 per cent leaning towards the latter. In 2011, these figures were almost equal — 42 to 40 per cent respectively — which indicates a major turn towards Europe during the last years. Rating dynamics show that the decisive turning point in the geopolitical preferences of the Ukrainian people came in early 2014. Suit is therefore likely that the change can be attributed to Russia’s meddling within Ukraine during Euromaidan; the occupation of Crimea and the active role of Russians
in the Eastern Ukraine armed conflict. Moreover, one portion of the population that was in the now-uncontrolled territories of Crimea and Donbas (historical strongholds of pro-Russian views) was not able to participate in the polls. During that same year, a referendum showed that the share of Ukrainians who would support joining NATO had also grown. However, even these figures show that Ukraine’s support of European and, even more so, NATO integration is not even close to unanimous. Two foreign policy alternatives — re-aligning with Russia and leading a multi-vector, self-centred foreign policy — are debated and supported by several actors in the opposition. Both of these approaches have their roots in Ukraine’s modern political history. Victor Yanukovych, the ousted former president, was particularly perceived as a pro-Russian figure — although some claim that he was forced to take this position by Kremlin. Conversely, Leonid Kuchma, the head of state from 19942004, was a prime example of a supporter of multi-vector foreign policy that never acceded fully to demands of either the EU or Russia, whilst trying to benefit from both. The latest party rating’s poll shows that two pro-Russian parties would enter the next parliament, if the elections were held now, as they have scored 17.6 per cent of the vote, together. They both support restoring ties with Russia and, in case of the former, openly aim to freeze the fulfilment of the EU-Ukraine Association Agreement. Even more importantly, for populist purposes, several oppositional parties are declaratively pro-European and, in fact, they strongly oppose some of the EU- and IMF-recommended policies. The most descriptive example is the widespread opposition to a hike in utility tariffs to their market level; something clearly prescribed by both the Association Agreement and IMF recommendations. Such measures, while necessary for the economic development, will also lead to a welfare drop in an already impoverished Ukraine, thereby bolstering support for
the anti-European platform. So far, there has not been any conclusive evidence that Brexit, or the rise in anti-EU moods across Europe in general, have influenced the Ukrainian voter. However, these events might have contributed to a popular image of the EU that is feeble and, as such, does little to help Ukraine. Between September 2014 and September 2016, Rating Group polls showed that, if faced with a choice between the EU and the Customs Union, fewer Ukrainians would support European integration: 51 per cent against; 59 per cent for. Many of them have apparently become undecided or have switched to some third option, which usually means an idea of self-reliance and a denial to enter any economic union at all. One of the reasons for this shift might be that accession to the EU is presently not even on the table — a position that has been repeated by EU officials on several occasions. This, of course, might be practical for European leaders, since Ukraine is currently one of the weakest economies on the continent. It faces the challenges of corruption, poor govern-
March 2017 ance and, not to mention, the armed conflict. Furthermore, as it is facing today’s internal crisis today, the Union apparently does not plan on taking in new members in either the short- or mid-term perspective. However, several experts argue that merely a non-binding offer, of a possible membership, if Ukraine fulfils the entrance criteria would be a stimulus for its development. As of now, Ukrainian authorities have repeatedly shown their willingness to introduce reforms, mostly on a conditional basis — in particular, when such reforms were required to receive financial support tranches from the IMF, or to advance dialogue with the EU on short-term visa-free travel. When faced with no direct impetus — for instance, while implementing the Association Agreement — little progress is made. Today, Ukraine is in dire need of investment; something that may boost its economic growth multi-fold — as it did with the other Central-East European states, earlier. The country started to recover at an estimated annual rate of 1.8 per cent GDP in 2016, and in January 2017, it showed a 5.1 per cent GDP increase as compared to January of 2016. Industrial production and exports have returned to steady growth. So have the consumption expenditures; as an example of this: a record number of passengers used the country’s main airport in 2016, surpassing pre-conflict levels. Cheap labour and good-quality human resources can also serve as attractive investment factors. At the same time, institutional factors need to be overcome, such as an over-regulated playing field for businesspeople that results in widespread corruption as well as an equally corrupt judiciary. In turn, without foreign investment, it would take Ukraine many years to even return to its 2013 indicators, while the gap between Ukraine’s economy and that of its central-eastern European neighbours would grow larger. The other thing Ukraine needs right now is security. As realistically NATO membership is excluded; Western partners will not commit to protecting a state if it leads to a proxy war with Russia. However, some Western countries are providing military support to Ukraine, in form of non-lethal weapons, equipment, medicine and training. Moreover, they have maintained economic sanctions on
Russia, which is understood to not fulfil their obligations, according to the Minsk peace agreements. Just as Donald Trump scored a surprise victory in the US, some Ukrainian politicians, and pundits alike, seem to be afraid of a possible compromise between US and Russia — a deal which would sacrifice Ukraine’s interests in favour of a global peace and cooperation arrangement. These fears have been partially dissipated recently, as some of Trump’s appointees took a harsh stance on Russia, and there is still no sign of a motion to cancel anti-Russian sanctions. However, with the new man in the White House, a great degree of unpredictability remains. While receiving investments and maintaining security are Ukraine’s key interests in cooperating with the West, both of them risk suffering because of the current instability in the European Union. In such circumstances, European investors might be less inclined to take the additional risks of investing in an unfamiliar territory. As for security, this strongly depends on the EU’s capacity to maintain its sanctions against Russia. Anything that undermines the EU members’ ability to speak with one voice, and that increases tension between them, could end up in a failure to prolong the sanctions, leaving Moscow much less constrained. Brexit, in particular, was seen as an undesirable event in Kyiv, both because the United Kingdom was one of Ukraine’s traditional advocates in the Union, and also because it could lead to further disagreements between the member states. Yet today, it seems that the Brexit has not caused the once predicted calamity which could finish off a united Europe. In addition, the short-term visa-free travel within the Schengen zone that Ukraine will likely receive in a mere few months — something expected by many Ukrainians — might serve to reinvigorate the relations between Kyiv and Brussels. With its strategic location between the East and the West, its vast human and natural resources and its immense space for growth, Ukraine stands as a prime example of untapped socioeconomic potential in today’s Europe.
ANTONIA COLIBASANU Senior Geopolitical Analyst Geopolitical Futures Published on March 9, 2017
Russia wants a formalisation of the status quo, which would require both sides to admit that neither can make the other do what it wants.
The stalled conflict in Ukraine will be formalised Geopolitical Futures (GPF) forecasts that the frozen conflict in Ukraine will be formalised in some way in 2017. The increased fighting in Ukraine, since 29 January, poses a potential challenge to this forecast and therefore warrants a closer look. At the end of January 2017, Ukrainian president, Petro Poroshenko, cut short his visit to Germany amid news of heavy fighting in eastern Ukraine, near the town of Avdiivka. Both sides — the Ukrainian army and Russian-backed separatists — accuse each other of starting the most recent fighting. To understand why this is happening now, it is first necessary to understand what is happening and then to take a step back and to understand the strategic position of each of the major players. This line of analysis leads to the conclusion that at present, the forecast remains on track. Under attack It’s not unusual for Ukrainian forces and Russian-backed separatists to shell each other in Donbas, but in terms of casualties and the number of attacks, the events at the end of January represented a significant uptake. Shelling has been ongoing in Avdiivka, north of Donetsk, since 29 January, peaking on 2 and 3 February. Attacks on the Oktyabr coal mine and the city’s coke chemical plant cut the energy supply for local residents (power has since been mostly restored). Donetsk Filter Station stopped operating due to the destruction of the electricity infrastructure. Since the first of February, a water pipeline leak near Avdiivka has disrupted the water supply to residents of Mariupol. On the night of the fourth
of February, more shelling damaged the electricity infrastructure for the city of Horlivka. Hostilities also escalated further in Luhansk and Mariupol. Over 33 people have been killed and dozens more injured since the violence began to escalate last month. Both Ukraine and Russia have increased their military presence along the contact line. The OSCE Special Monitoring Mission to Ukraine has confirmed that Ukraine increased its defences with more troops and large-calibre artillery, including battle tanks, were seen moving toward Donetsk and Mariupol. Since 31 January, these have been the main fighting locations. On 4-5 February, armoured combat vehicles were spotted near Donetsk, Mariupol and Luhansk. Russian media reported that two Tochka-U missile systems were moved to the area of the Avdiivka coke plant, and six more of those systems were delivered to a railway station in the village of Novobakhmutovka, near Yasynuvata. On 25 January, Ukraine’s Ministry of Defence warned that Russia was building up its defence along the Ukrainian border, in the Rostov region as well, increasing the number of troops and artillery units and creating combat and logistical support units for a new division, as well as their encampments. Seeing a big picture Fighting appears to be tapering off, but it is important to understand why it intensified in the first place. If you listen to reports from both sides, they devolve into a “he said-she said” situation. A more effective way of understanding what is going on
March 2017 is to step back and think about the strategic positions of Russia, the United States and Ukraine, and what each currently needs. Russia has no interest in a flare-up in the fighting in eastern Ukraine right now. The Russian economy is struggling, and there are signs of internal political shuffling that suggest President Vladimir Putin may feel a need to consolidate his rule. Besides these domestic issues, Russia does not have the requisite manpower necessary to take Ukraine by force. Russia wants a formalisation of the status quo, which would require both sides to admit that neither can make the other do what it wants. If that is accompanied by a removal of economic sanctions it would be a bonus, but what Russia cannot tolerate is a Western-backed and armed government in Kyiv that is hostile to Russian interests. Russia knows it cannot change the situation in Kyiv, but an agreement that preserves the status quo, and that limits the amount of military assistance the West offers Kyiv, would give Russia time to deal with its internal issues and to develop its forces while playing the long game in Kyiv. The US also does not want the situation in Ukraine to get worse. The administration of President Donald Trump has made crushing the Islamic State a top priority and is interested in exploring a limited cooperation with Russia towards achieving that end. The US has what it wants in Ukraine: a pro-Western government in Kyiv. The US does not have the will nor the ability to intervene in pushing pro-Russian forces out of the country’s east, and at this point exacerbating instability in the region has reached a point of diminishing returns. The status of a few regions in eastern Ukraine is not a pressing concern and, if anything, obstructs the US’ goals. An increase in fighting between Ukrainian and proRussian forces is exactly what the new US administration does not want right now. Ukraine’s perspective The outlier here is Ukraine, which undoubtedly hears some of the statements Trump has made on Russia and is terrified by them. For Ukraine, a formalisation of the status quo is already a loss, but the notion that the US and Russia might cooperate in Syria, and that this understanding might extend to concessions in Ukraine, is a very real threat. To make matters worse, from a Ukrainian perspective, Kyiv’s EU allies are not in a position to help, either. They, too, have an interest in formalising the frozen conflict. The Europeans perceive the removal of sanctions as an economic opportunity. Furthermore, both Germany and France have elections this year, and their leaders are focused on internal problems, which means they have less bandwidth for an interminable conflict in the east. Reports have increased since last September of Ukrainian army incursions into the “grey zone,” the area between the government and separatist forces along the contact line, which the two sides have fought over since the signing of the first failed peace agreement in September 2014. Reports on separatist incursions have been appearing since last November. The timing of such movements around the potential, and then reality, of a Trump presidency is more than likely not coincidental. Ukraine wants to make it clear to the new administration that Russia is the enemy and that Ukraine needs US support. Ukraine’s position is helped then, if a small crisis between pro-Ukrainian and pro-Russian forces in the east emerges, especially one that
demonstrates to the world that Russia is hostile toward Ukraine and that Ukraine needs Western security assurances now more than ever. None of this means that Ukraine started the most recent round of fighting. It just means that from a strategic perspective, Ukraine is the only actor in the conflict that currently benefits from an upscale in fighting. Whether or not it was the pro-Ukrainian forces that fired first, once the fighting began, it was in Ukraine’s interest to publicise it and to condemn the pro-Russian forces, as loudly as possible. US and Russian perspectives The problem for Ukraine is that its interests are not the same as US interests. Ukraine wants to reunify the country and expel Russia from its territory. The US is primarily interested in weakening Russia, and the fate of Donetsk and Luhansk is immaterial to that goal. The US is not going to abandon Ukraine, but that is an easy thing to say and a much harder thing to be sure of if you are in Kyiv reading American newspapers and following various White House statements. The key thing to keep in mind is this: The US is not ready for — nor does it desire — a fight in Ukraine. Russia is similarly ill-prepared and not spoiling for a fight. If anything, Russia hopes to keep things quiet so it can reach an understanding with the US and European countries. As long as this is the case, a small flare-up in eastern Ukraine will be of limited significance and eventually will fade away. The Ukrainians will loudly trumpet the conflict to any willing to listen. But as long as the major powers are not interested in all -out war or conflict, and as long as the conflict in the east stays relatively small, it will remain frozen. If either the US or Russian position changes, or if forces on either side escalate the fighting far more seriously than what has been observed even in the past week, GPF’s forecast will require revision. However, the current fighting is well within the bounds of our expectations.
FRÉDÉRIC SCHNEIDER Published on November 14, 2016
Western Ukraine could be an entry point into the country When Ukraine makes the headlines, it is generally because of the war, which started in 2014, in the eastern part. This has hugely influenced the political and economic situation of the country, including the ease of doing business. However, it’s unjustified to think that, given the circumstances, investing in the whole country makes no sense. “We don’t even feel that there is a war in western Ukraine; we have the impression of living in a peaceful country,” assures Lars Vestbjerg, general manager of the Danish company, Sika Footwear, and president of the Danish Business Association, but he admits there are repercussions. “Some of our employees had to leave the company to go to the front. Moreover, a five-per-cent military tax has been introduced on all imported goods,” complains the Danish entrepreneur. Nevertheless, most of the country works in the same way as before the Russian intervention. The lack of a war isn’t the only difference between western and eastern Ukraine. As Mr Vestbjerg explains, Lviv is western-minded, as a city, including its inhabitants, authorities and mayor. “I was involved in various discussions in Kyiv some time ago. I noticed there that the Russian-speaking Ukrainians are more eastern-oriented,” he adds. West and East are not the same The contrast between these two parts of the country has historical roots. “This divide between east and west in Ukraine is not a new phenomenon and actually goes back hundreds of years. It starts at the time when western Ukraine was either part of Poland proper or was administered by Warsaw, while eastern Ukraine was either a no-man’s land — “Ukraine” means “frontier” after all — or was in Russia’s orbit,” says Dr Christopher Hartwell, President of the Warsaw-based Centre for Social and Economic Research (CASE).
He argues that this difference has very concrete consequences for business because “this split in the heart of the country has led to very different attitudes towards basic economic institutions such as property rights and free trade.” In 2014, the Ukrainian economy contracted by seven per cent. The following year GDP declined by 12 per cent. However, this data doesn’t reflect the situation in the whole country. In Donetsk and Luhansk, which are engaged in the military conflict, the whole manufacturing sector has contracted by 32 and 42 per cent respectively. Yet, even though the instability of the country led to an unavoidable decrease of the gross regional product of the western oblasts, in 2015, they seem to be recovering, now. This is because of the favourable business climate. Even the central authorities recognise that Lviv has a special role to play in Ukraine. Lviv is the largest city in the west but only the seventh in the entire country, with 750,000 inhabitants. “Lviv is the Piedmont of Ukraine. It’s leading the economic revival; creating well-paying, high-tech and modernised jobs,” says Daniel Bilak, chief investment advisor to the Prime Minister of Ukraine and director of the Ukraine Investment Promotion Office, which was set up at the end of October 2016. Western Ukraine’s multiple assets “Western Ukraine is a region of unbelievable opportunities,” argues Belgian businessman, Filip Schelfhout, managing director of TPF-Ukraine, which is a specialised development company for residential projects. It is true that the west has a lot of assets. First of all, there is the attitude of the local authorities. “We are making use of all possible methods to attract FDI: personal contacts, conferences, networking, bilateral chambers of commerce etc.,” Mayor of Lviv, Andriy
There are competitive opportunities in many sectors including: logistics, food processing, equipment and machine building, the financial sector, textiles, pharmaceuticals, the wood and paper industry, metal and plastic production Sadovyi, told Emerging Europe recently. “So far, everything has been very well prepared with great support from the local authorities. We have enjoyed this support since we established our branch here,” confirms Remon Vos, CEO of CTPark, a Czech company that builds premium business parks and which just started operating in western Ukraine. Andriy Pavliv is the CEO of the Ukrainian information technology company N-IX and chairman of the supervisory board at the Lviv IT Cluster. He says that he even feels discriminated against because he is not a foreigner: “Authorities are focused on helping European and international investors. So, it is easier for foreigners to do business here than for local entrepreneurs.” Location is another advantage of western Ukraine according to CTPark’s Mr Vos. “Lviv is strategically located close to the Polish border,” he says. Mr Vestbjerg agrees with this analysis, stressing that the city is only 70 km away from the EU. “So, it is easy to transport goods to our sales’ markets. Imagine that you have a glass factory in eastern Ukraine. Before your trucks even reach the Polish border with your products, they will have been broken into small pieces, because of the bad quality of the Ukrainian roads,” he argues.
Close to European markets “The proximity to the European Union provides good opportunities for the localisation of production here, for trans-border cooperation and tourism,” enumerates Anton Usov, chief spokesman for Eastern Europe and the Caucasus of the European Bank for Reconstruction and Development (EBRD). Mr Vestbjerg adds lower production costs to the list. “Spending on both wages and energy is very low here, while facilities are almost the same as in the rest of Europe. I would recommend setting up a branch in western Ukraine to any company that needs a lot of manpower. With the hryvna’s devaluation, salaries went down by 36 per cent between 2010 and 2015, if expressed in euros,” he adds. Olha Syvak, Chief Investment Officer of the Lviv City Council, is conscious of the fact that lower labour costs are an essential argument for investing in Ukraine. “Investors look for profit, so they need to reduce costs. However, they don’t come to Lviv for the blue collars only, but also to hire engineers and other educated workers,” she tells Emerging Europe. Maryana Lutsyshyn, the Lviv team leader of the European
Business Association (EBA), stresses that the foreign companies that they advise “appreciate western Ukrainian workers because they are wise and hard-working and they show a sense of self-initiative.” Indeed, the local population is very well educated. According to the Mayor of Lviv, there are 170,000 students in 38 higher education institutions. Olha Syvak confirms that the level at the Lviv Polytechnics is very high and that some 4,100 IT specialists graduate from Lviv universities every year. IT and tourism IT is one of the booming sectors in the region, which had led to the creation of an IT cluster. “Lviv is playing an increasingly important role in the IT industry, both internally and internationally,” says the EBRD’s Mr Usov. The Lviv IT Cluster gathers together 45 companies (more than half of them are foreign) that employ 8,000 IT specialists. Consequently, every second IT worker in the city works for one of these companies and 15 per cent of all Ukrainian IT specialists work in Lviv. Stepan Veselovskyi, CEO of the cluster, explains that the IT sector expands by 20-30 per cent per year, while its growth for the whole country is only five per cent. “There were just 50 companies in this industry in 2008. Now, not less than 192 IT enterprises have their offices in Lviv. Some courses are even organised by universities to switch to IT and in the last three years, the number of people attending them doubled.15, 000 people work in the sector, 56 per cent of whom are engineers. This boom in information technology has enabled the creation of 60,000 jobs in other sectors,” he adds However, this industry is not the only one that is progressing fast. “Tourism is the other sector chosen by Lviv as strategic for development in the next five years. It is also on a good path. You know: when there is demand, there is supply,” Ms Syvak tells Emerging Europe. “Lviv is the last undiscovered city in Europe. However, the city is ‘Open to world!’ as our slogan says. The Alfa Jazz Fest, a classical music festival, an IT Forum, a media forum – these are just some of our events. In the last few years, some 30,000 new jobs in tourism have been created in the city, which proves the enormous potential of the sector in Lviv. So there are opportunities for foreign investors. I see more new hotels, new restaurants, a congress centre, and an exhibition centre opening,” says the Mayor of Lviv. Even though Ukrainians still represent the majority of tourists to the city, “I hear Japanese, Chinese, English and German being spoken in the city centre,” says Mr Vestbjerg. Of course, the pleasant appearance of the city isn’t only an argument to come here as a tourist but also for investment. “Ukraine co-hosted the Euro 2012 football championships; the Eurovision song contest will take place in the country next year. However, Ukraine doesn’t focus enough on positive events that happen in the country to promote it,” regrets the Danish businessman. Actually, Lviv looks like many western European cities. “Lviv is like Girona in Spain. There are similar small picturesque streets, but the prices are very different,” jokes EBA’s Ms Lutsyshyn.
Much more Infrastructure is a challenge as well as an opportunity for investors. Dane, Mr Vestbjerg, is not the only one to complain about the poor quality of transport for example. “There is still a lot of work required in the city but we have also done a lot: we have a new airport and a stadium,” boasts Mayor Sadovyi. “The problem is that there is no direct connection with London and there aren’t enough flights to Munich, Vienna, and Warsaw. If a western businessman wants to come to Lviv once every two weeks, it is a problem,” complains Mr Pavliv. Ms Syvak acknowledges that the railways also need to be modernised. “However, we, as a city and region, can’t finance it entirely. We need support from the central state because it would require €500 million’ worth of investment. Interestingly, Chinese investors are keen to contribute to this project financially,” she says and indeed, the new Silk Road that China is trying to revive is planned to cross Ukraine. “In addition, there is a growing demand for public transport. Because of this, companies have started producing trams, trolleybuses and electronic buses, which are high-tech and based on Ukrainian know-how. Most of the Ukrainian factories produced military equipment in the Soviet era. They now require reconversion and this represents a potential opportunity for foreign investors, according to the chief investment officer of the city,” she says. Many discussions with experts, civil servants and businessmen are proving that the range of industries offering investment opportunities is almost unlimited. “There are competitive opportunities in many sectors including: logistics, food processing, equipment and machine building, the financial sector, textiles, pharmaceuticals, the wood and paper industry, metal and plastic production etc.,” the Mayor assures. “We also see big opportunities in export-oriented organic farming in western Ukraine,” adds the EBRD’s Mr Usov. “Companies such as Nestle, Leoni and Fujikura are investing in Lviv, which confirms the city is a very interesting location for manufacturing companies,” adds CTPark’s Mr Vos. Overcoming challenges But it’s not all roses. Mr Vestbjerg remembers that his beginnings in Ukraine were very hard. ”Back in 2003, I was trying to set up my factory. I had problems with getting all the right permissions. Civil servants told me that I had to pay some fictive taxes. They basically wanted me to pay bribes or to close my company in Ukraine,” he adds. “The system is more transparent now. There is not much corruption, but there still is a lot of bureaucracy,” says N-IX’s Mr Pavliv. TPF-Ukraine’s Mr Schelfhout is much more critical. “Efficiency is much lower in Ukraine because of the omnipresent corruption. Actually the situation has worsened in that regard in the few last years. For example, we have been fighting for two years to build a sound screen. The authorities say that it will only be possible if we choose the subcontractors they want to impose on us. Moreover, having a university degree in Ukraine doesn’t necessarily mean that one has any concrete knowledge because some diplomas are for sale,” he adds.
Add to that, most of the investors are not used to the local business culture. “There are constant changes in legislation and taxation, especially at the end of the year when the budget is issued. So, it is hard for an enterprise to plan its activities for the next three, five or even ten years. What is more, there are often two possible interpretations of the law,” regrets EBA’s Ms Lutsyshyn. “The local authorities want to help but collaboration with the central state isn’t always smooth,” Ms Syvak assures. Most often they do help which shows these drawbacks can be overcome. N-IX’s Mr Pavliv believes that it is better for a foreign investor to set up only one branch, a subsidiary or even better to find a local partner, rather than set up a company in Ukraine. It would at least partially help them to avoid all these inconveniences. Additionally, entrepreneurs who are active in Ukraine recommend uniting with other foreigners; for example, Mr Vestbjerg founded the Danish Business Association. ”There are 200 Danish companies in Ukraine. When we started uniting, we felt stronger. The authorities no longer treat us in the same way.” “When investors come, they need to know the local reality, the market and the existing obstacles. That’s why the European Business Association is useful,” explains EBA’s Ms Lutsyshyn. What’s on the horizon? Is it the right moment to invest in Ukraine? What will the future of the country look like? Those who already operate in the
market see unlimited potential. “When I see the potential here, I believe that if you have the right skills, you would have to be lazy not to succeed here,” assures TPF-Ukraine’s Mr Schelfhout. The Danish entrepreneur, Mr Vestbjerg, says that it is the closest market that will not join the EU in the ten next years. He considers this an asset because it means that labour costs will remain low while possibilities to export to Europe will be high. On the same time-scale, the mayor imagines Lviv to be “amongst the leading European cities and governed by the same rules that are observed across the European Union, whether we are a member of the Bloc or not.” Anders Aslund, a senior fellow at the Atlantic Council, says that after Ukraine’s deep and comprehensive free trade agreement with the European Union comes into force, the border will effectively be open. “The wages vary sharply however. In neighbouring Poland the current average wage is $1,100 per month, while it is only $200 per month in Ukraine. This is an absurd discrepancy. Therefore integration into Europe should develop and hasten Ukraine’s integration into the European supply chain, in the same manner as Poland has done, so successfully,” he tells Emerging Europe. However, the decision to invest must be taken soon because the modernisation of western Ukraine is leading to an increase in prices. “Rent prices have doubled in the last two years in the Lviv city centre. That’s the dark side of the IT revolution,” concludes IT Cluster’s Mr Veselovskyi.
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Kyiv’s mayor is used to fighting to attract attention and interest Written by
EVA KELLER Published on March 22, 2017
I fight to attract investors and I present myself as a bodyguard for foreign investors in Ukraine.
Vitali Klitschko (courtesy of Kyiv City Hall)
Set up 1,535 years ago, Kyiv is one of the oldest cities in Central and Eastern Europe. Not only is it Ukraine’s capital, and the country’s largest city, but it also enjoys a special administrative status and is considered a region. On 21 November, 2013, Kyiv and its main square Maidan Nezalezhnosti (Independence Square) witnessed a wave of demonstrations, from people demanding closer European integration, which led to the 2014 Ukrainian revolution. Today, life in Kyiv is back to normal and welcomes both foreign investors and tourists. “We live in TV screens and when people see there is a military conflict in [eastern] Ukraine they think it is exactly the same in Kyiv, but Kyiv is a safe city. [It is] 800 km away from the conflict zone. Last year, 60 per cent of all investment went to Kyiv. It’s a sleeping elephant. We have huge potential in the city and it is not developed,” Vitali Klitschko, Mayor of Kyiv, told Emerging Europe.
Between 2004 and 2007, Kyiv’s GDP grew by an annual average of over 13 per cent. The largest drop of 18.3 per cent took
place in 2009, and was a result of the global economy crisis. In 2010, it began to grow again and in 2013, increased by over six per cent. After Euromaidan, it fell again in 2014 and 2015 by 3.9 per cent and 6.5 per cent, respectively. In 2015, cumulative foreign direct investments (FDI) in Kyiv dropped by one per cent to $22.6 billion. The percentage of Kyiv’s population who were economically active decreased to 1,46 million people accounting for 51 per cent of the city’s resident population in 2015. “The last couple of years have been quite difficult for the [Kyiv] economy. Last year the [Ukrainian] economy grew by about 1.5 per cent. For Kyiv this means a 30 per cent increase in the city’s budget,” says Mr Klitschko. The mayor believes his city has enormous potential for development and investment. It offers opportunities for projects related to real estate, medicine, education, sport and recreation, transport, energy and energy efficiency. Mr Klitschko invites investors and makes a promise to them. “I present myself as a former champion in boxing. I fight to attract investors and I present myself as a bodyguard for foreign investors in Ukraine. Giving every investor a secure feeling is my goal,” he adds. As a former tourist guide, he also believes in the city’s potential as a tourist destination. In 2015, the foreign tourist inflows increased by 16 per cent to 1.1 million. According to the Office of Tourism of the KCSA the largest number of tourists came to Kyiv from Russia, Israel, Belarus, the US and Germany. Now the mayor’s goal is to attract more cultural, musical and, most of all, international sports events to Kyiv. Just like the Eurovision Song Contest they will stand a high chance of not only encouraging international crowds visit Ukraine’s capital and enjoy music but also to prove that this 1,500 year old city has much to offer.
March 2017 Written by
Lviv is the pearl and the soul of Ukraine
Published on November 1, 2016
This city is already a success. Coming to Lviv is in fashion.
First of all, I would like to briefly circle back to our previous meeting, in March, in Cannes. I remember you said Lviv has this irreplaceable ambiance and back then I thought ‘okay, every mayor says the same about their city’ but it seems that it is true. I have visited Ukraine, and Kyiv in particular, and the two cities seem completely different. Well, I would say that Kyiv is the heart of Ukraine and Lviv is the soul of the country — you can transplant the heart but not the soul. Where does this special atmosphere in Lviv come from? If you look back a hundred years you’ll see that the city was part of six different countries and this means that there are people of different nationalities and different religions living here peacefully, side by side. There are around 170,000 students in 38 higher education institutions so Lviv is also a young city, even though having said that, the city celebrated its 760th anniversary, this year. All together this helps to create this fantastic atmosphere. I think tourists see that. Last year, the city had two million visitors. Tourism and IT are the leading sectors in the city but let’s look at tourism. How do you attract visitors to the city? Let me show you the big picture here. The first thing we started doing was promoting the city to its residents. This is because when one comes to a city and sees that its residents love it and that they are positive about it, one realises that there is something interesting about the city. I came to City Hall at the time when Lviv was celebrating its 750th anniversary. We immediately created a logo with five towers and a slogan — Lviv, open to the world! Our next stage was to promote Lviv in other Ukrainian cities and this has continued until now — in fact the majority of our tourists are from Ukraine. We haven’t started promoting the city in Europe. As you know, Ukraine is facing a difficult moment in its history, as part of its territory is occupied and this is not something that attracts tourists. So I’d say Lviv is the last undiscovered city in Europe and that
Andriy Sadovyi (courtesy of Lviv City Hall)
Lviv is the important cultural, economic and scientific centre of western Ukraine. Its architectural charm and cultural heritage have earned the city the nickname, Pearl of Ukraine. It is also a modern city that is looking towards a bright future thanks to the development of the IT sector. Andriy Sadovyi, Mayor of Lviv, spoke to Andrew Wrobel about his city’s key sectors, his future vision for the city and the amazing ambiance that makes Lviv a must-see on the European tourist map.
the people who come here for the first time fall in love with Lviv. The city is beautiful, it has the amazing ambiance that we have already mentioned, the food is great and the prices are very low. We are hoping that Ryanair will start direct flights to Lviv, in 2017, and we will do our best to provide the best service possible for those who come. We want those visitors to tell their friends about Lviv. By the way, do you like jazz? Absolutely! Cassandra Wilson, Wynton Marsalis, Dee Dee Bridgewater, Charles Lloyd and many many other have performed here at the Alfa Jazz Fest, which is held every June. The Guardian rated the event as one of the top five festivals in Europe. This is not the only event that takes place in the city. There is a classical music festival, an IT Forum, a media forum and plenty of other events. Speaking more generally, people always look for new things. We offer quality products at a low price. Another important aspect is safety — Lviv is much safer than many European cities. People see that to the point where sometimes hotels have no rooms available. When we first started negotiating with Ryanair, a few years ago, we talked about an additional 500,000 passengers a year. The City Hall has set out a target of eight million visitors per year. Isn’t that rather too much when compared to the current two million? Well, we understand it is more than we can handle at the moment and it is not a target that is easy to reach. I would like each
REGIONS person that arrives in the city to taste Lviv, to experience all its flavours. Next year we’re planning to open an Intercontinental hotel in the city. Other international hotel chains, such as Radisson and Marriott, are in the process of signing their franchise agreements. So what opportunities do you see for foreign investors in the tourist sector? I see more new hotels, new restaurants, a congress centre and an exhibition centre opening. So I understand you would like to see more international conferences and events taking place in the city? We already organise a lot of such events but our next step is to hold even more of them. I have already said that we can offer high quality at a very competitive cost. We are aware that we still need to learn, which is why we are networking; we belong to international organisations in order to use the experiences of others. Within the last few years, there have been some 30,000 new jobs in tourism created in the city, something which proves the enormous potential of the sector in Lviv. We haven’t discussed IT yet. That is another sector that is booming here, isn’t it? It is. There are 140 IT companies and the number of new jobs in IT is growing at 20 per cent per year. The sector accounts for some 14 per cent of all business activity in Lviv and it is bound to go up even higher. Increasingly, there are more and more IT specialist in the city. Young people are coming here from other Ukrainian cities, as life is comfortable here and it is close to the European Union. It is mostly outsourcing at the moment but there are more and more start-ups. Of course, this didn’t originate from nothing. Science and engineering have always been popular and very well advanced in Lviv thanks to the university and the polytechnics. We are facing a staffing challenge in city hall as it is hard to keep employees here because everyone wants to work for an IT company. Salaries in the IT sector are growing. They are now at a similar level to neighbouring Poland but our costs of living are significantly lower. I would like to come back to foreign investors again. What is the city doing, now, to attract more FDI? We are making use of all the possible methods: personal contacts, conferences, networking, bilateral chambers of commerce, etc. I would also like to emphasise that the Lviv’s economy is based on the dynamic development of a large number of small and medium businesses. There are about 10,000 small and medium firms in the city, which cover more than 65 per cent of the city’s total production. There are competitive opportunities in many sectors including: logistics, food processing, equipment and machine building, the financial sector, textiles, pharmaceuticals, the wood and paper industry, metal and plastic production, tourism and hospitality etc. You have said there are 170,000 students in Lviv. How would you describe the labour market in the city? I am still not completely happy with the level of education that our students gain at our universities. For example, the IT sector collaborates with universities because they want to make sure they will have highly specialised future employees. But there are other areas, for example manufacturing, that need qualified manual workers. That is why we are reforming our vocational schools. We, at city hall, are interested in providing investors with the nec-
essary and qualified labour force but we would also like our workers to earn more. Higher salaries translate into a higher income for the city and a higher budget means more future investment, including in infrastructure. There is still a lot of work required in the city but we have also done a lot: we have a new airport and a stadium. I run the Union “Self Reliance” party, but I have stayed in the city instead of going on to the parliament, in order to continue the work.
That proves your commitment and belief in the city, doesnâ€™t it? This city is already a success. Coming to Lviv is in fashion and I want to show Ukrainians that everything is possible and that I believe we can repeat the success in other cities and in the entire country, as much as it is possible taking the circumstances into account. So how do you see the city in ten yearsâ€™ time?
The city is amongst the leading European cities such as Barcelona, Prague and Vienna. It is modern and safe. It is governed by the same rules that are observed across the European Union, whether we are a member of the Bloc or not. We used to be part of Galicia, together with Cracow in Poland, and I would love to have more visitors than the Polish city. I am joking, of course. But speaking seriously, I see how much they have achieved since Poland joined the EU. We havenâ€™t had that opportunity.
INTERNATIONAL RELATIONS Written by
Ukraine is offering Europe unique combat and technological experience
NIKODEM CHINOWSKI Published on August 24, 2016
Ivanna Klympush-Tsintsadze (courtesy of Ukrainian government)
There is no competition between the European and Euro-Atlantic dimensions of Ukraine’s strategic course towards Europe, that is, as we move towards the choice of a Westernised civilisation as averse to historical Russian values.
Ivanna Klympush-Tsintsadze, Ukrainian Deputy Prime Minister for European and Euro-Atlantic Integration, spoke to Nikodem Chinowski about the prospects for integration with NATO and the European Union and about the development of the Ukrainian economy, a few days ahead of the 25th anniversary of the country’s independence. Let me start with a very general question — what are the main goals for Ukraine’s current government, in terms of international relations? Well, I would say that EU and NATO membership is the top objective for the current government but Ukraine’s foreign policy is guided by a number of key priorities.
The strategic goals of Ukraine’s foreign policy include: European and Euro-Atlantic integration; strategic partnerships with the United States of America and the European Union; cooperation with the Commonwealth of Independent States and the member-states of GUAM (the Organisation for Democracy and Economic Development for Georgia, Ukraine, Azerbaijan and Moldova); active engagement with the UN and other international organisations; an effective participation in the global economy with the maximum protection of national interests and the transformation of Ukraine into a regional power. You have named EU and NATO membership as top priorities. Which of those two seems more important for Ukraine? Can one say that military cooperation with the West is currently more important than economic issues and cooperation with the EU? There is no competition between the European and Euro-Atlantic dimensions of Ukraine’s strategic course towards Europe, that is, as we move towards the choice of a Westernised civilisation as averse to historical Russian values. The highest priority remains the ratification and full entry into force of the EU-Ukraine Association Agreement. At the same time, the NATO-Ukraine Distinctive Partnership is an inalienable part
March 2017 of Ukraine’s strategic course towards EU membership and it is an essential element for security in the Euro-Atlantic area and beyond. The strategic nature of NATO-Ukraine Distinctive Partnership has framed relations and the practical cooperation between Ukraine and NATO, and will continue to do so. Right from the very beginning of the Russian aggression, NATO expressed its firm support for Ukraine’s sovereignty and territorial integrity, at the same time condemning Russia’s illegal and illegitimate “annexation” of Crimea and the ensuing violence and insecurity that Russian and Russian-backed separatists caused in eastern Ukraine. Remember that Ukraine, NATO and the EU work together actively in order to bring their people closer to each other, to protect human rights and freedoms and to preserve peace and stability in the common Euro-Atlantic home. But coming back to your question, I must say that both — economic and military cooperation — are equally important for Ukraine’s people. It’s our fight against Russia’s intervention and domestic democratic reforms. Let’s now imagine Ukraine as a member state of the European Union — how far into the future must one go to see this image become reality? When can Ukraine expect to be recognised as a candidate for future membership of the European Union? President Petro Poroshenko set the year 2020 as the target for the EU membership application. Do you see this possible or does it seem too optimistic? Well, on the 27th of February, 2014 the European Parliament passed a resolution that recognised Ukraine’s right to “apply to become a Member of the Union, provided that it adheres to the principles of democracy, respects fundamental freedoms and human and minority rights, and ensures the rule of law”. The European Commission president, Jean Claude Juncker said recently that Ukraine would not be part of the European Union for the “next 20 or 25 years”, ahead of a Dutch vote on whether or not Ukraine should be granted an EU association agreement. The EU leadership has praised the Ukrainian authorities’ efforts to implement constitutional reform, anti-corruption legislation and deregulation reform. Ukraine will carry out the required reforms in order to apply for EU membership. Ukrainian Prime Minister Volodymyr Groysman predicts that our country will join the EU within the next ten years. How would you define the biggest obstacles on the way to join the EU? Is a free-trade agreement still any key issue that may block further negotiations? I would say that some things that could continue to complicate Ukraine’s membership to multinational unions, however, are the presence of pro-Russian rebels in the country’s east and Russia’s control over the peninsula of Crimea. Russia is doing its utmost to stop the expansion of the EU’s influence into the east and, hence the promotion of democracy and the principles of a rule-of-law state. Ukraine is still a long way from becoming an EU member but it is already making very significant steps in the right direction, including a long list of internal reforms. Only a major disaster can prevent Ukraine from joining the EU in the coming years. Now the same as far as NATO is concerned — what is a time-line for Ukraine joining NATO?
Relations between NATO and Ukraine date back to the early 1990s and since then they have developed into one of the most substantial of NATO’s partnerships. A sovereign, independent and stable Ukraine which is firmly committed to democracy and the rule of law is key to Euro-Atlantic security. Since 2014, and in the wake of the Russia-Ukraine conflict, cooperation had been intensified in critical areas. Priority is being given to supports for comprehensive reform in the security and defence area, which is vital for Ukraine’s democratic development and for strengthening its ability to defend itself. In response to the Russia-Ukraine conflict, NATO has reinforced its support for capability development and capacity building in Ukraine. NATO membership is a strategic goal for Ukraine. Ukraine welcomes NATO’s open-door policy and NATO’s 2008 Bucharest summit’s decision was that Ukraine will become a member of the Alliance. We expect that NATO’s door will remain open to “European democracies willing and able to assume the responsibilities and obligations of membership” as it is described in official NATO documents. We also expect that decisions about enlargement are for NATO itself to make. Preparation for a future NATO membership is an important direction for Ukraine’s foreign and domestic policies. The longterm goal of Ukraine is to achieve complete compatibility with NATO and the armed forces of its member states. Is there any particular date set by Ukraine’s government? There is no timeline established for Ukraine’s plans to join the Alliance. Our first priority is a deep and profound reformation of the country, the institution of European democratic values and the security of the nation. Why do the EU and NATO need Ukraine in their structures? What are the main profits that Ukraine can offer those organisations? NATO and the EU are interested in a democratic, free and independent Ukraine, which is a key factor for Euro-Atlantic security. This is also in the core interests of the Ukrainian people. It is about not only about what NATO or the EU can do for Ukraine, but also what Ukraine can and already does for Europe. It is important to note that Ukraine has the unique experience of having fought the largest army in Europe. No single European state has yet fought a modernised Russian army. Ukraine has had a successful experience of countering Russian hybrid warfare tactics for the past two years. We do not expect NATO forces to fight for us. Ukrainian troops are able to defend Ukrainian sovereignty and we have contingency plans for different scenarios in the conflict. However, Ukraine and NATO could be a strong defender of the eastern flank of Europe, together. We already have a history of successful cooperation in NATOlike joint military exercises. Let me give you the example of the Lithuanian-Polish-Ukrainian brigade that participated in the largest war-games in Poland Anaconda in 2016. We must intensify and develop this combat experience, over both urban and rural terrain, further. The Donbass front (otherwise known as the “ATO”) combines military and police operations; this is different to what NATO armies are trained for. Ukraine can contribute to NATO’s collective security with the combined experience of the Ukrainian troops, security service and military intelligence.
Ukraine is already contributing to NATO and the EU defence. Despite the Russian aggression, we are participating in NATO-led operations such as “Resolute Support” in Afghanistan and KFOR in Kosovo. Ukraine also contributes to the NATO Response Force and to the EU Battlegroups, the Visegrad Battlegroup and the Balkan Battlegroup. So Ukraine’s membership in NATO and the EU is aligned with the core interests of Europeans. So let’s now move to the Ukrainian economy for a moment. At what stage of economic cycle is your economy, in the second half of 2016? Can we expect any rise or decline in terms of GDP? Despite the large scale economic crisis, all our efforts in macro financial stabilisation and the development of a good business environment are already producing moderate forecasts for economic growth. We are hoping for at least 1 per cent GDP growth by the end of the year. The forecasts for the next year are brighter. I believe that our economy will benefit, already as early as this autumn, from our efforts at reform in the financial sector and our improvements in the business environment. All these efforts to ensuring better conditions will be reflected in next year’s WB Doing Business rating, as a number of legal measures have also been adopted in 2016. What is the Ukrainian government’s policy relative to your currency, the hryvnia? What will you do to keep it stable compared to the euro and dollar? The National Bank of Ukraine is the body responsible for this issue and it has undertaken some extremely ambitious reforms of
monetary policy. The bank is moving its policy from controlling the exchange rate to inflation targeting. After the devaluation in 2014-2015 the hryvnia exchange rate has stabilised. I believe that external geopolitical and geo-economics issues today may present the biggest challenges to stability of the currency. The stabilisation of the local currency is a key factor in attracting foreign direct investment. How else would you attract FDI to Ukraine? The implementation of the Deep and Comprehensive Free Trade Agreement (DCFTA), which is part of the Association Agreement between the EU and Ukraine, is one of the most important ways to attract foreign direct investment into Ukraine. We are seeing that even just the fact an Association Agreement existing between Ukraine and the EU is drawing interested foreign investors here. Another very important issue which I should stress is that our government is working on the creation of Foreign Investment Support Office to help investments from the very beginning up to their successful placement. It is important that we provide macro financial stability and we are in the process of implementing anticorruption and judiciary reform. Which sectors might foreign companies find attractive in Ukraine? I think that almost everybody knows that the most attractive sector of the Ukrainian economy is agriculture. However, we believe that more important features of Ukraine are its creativity and the intellectual capacity of our people. Here, we are talking not only about IT industry but also about science and technologies.
A roadmap for reform in Ukraine and a promise of EU support Ukrainian people sacrificed their lives for freedom, democracy and dignity and we, as the European Union, highly value this. In December 2016, the European Council reconfirmed its commitment to international law and the territorial integrity of Ukraine, as well as the conclusion of the EU-Ukraine Association Agreement, including the establishment of a deep and comprehensive free trade area. Ratification of the EU-Ukraine Association Agreement in all 28 EU member states has always been our goal. Let’s not forget, that the aim of an association agreement is to support partner countries on their path to becoming stable and prosperous democracies. The European Council adopted a legally binding decision of the leaders to facilitate the ratification, also in the Netherlands. This decision addresses all the concerns expressed by the Dutch voters earlier in 2016. Now, the responsibility lies with the Netherlands. The ratification is important not only for Ukraine, but also for Europe’s geopolitical standing and credibility. As concerns the Deep and Comprehensive Free Trade Agreement; it is in force, it is legally binding and it is being implemented progressively. The achievement of a closer political association and economic integration with Ukraine is a medium-term project. The Association Agreement is a very good roadmap for this and, if fully implemented by both sides in the next seven to ten years, it will bring very visible and qualitative changes to Ukraine. First of all, it will mean the implementation of a variety of economic and sector reforms in Ukraine: from energy and the environment to decentralisation and better administration. Secondly, it will help Ukraine approximate its legislation and technical standards to the EU ones, which will open up the EU’s single market to Ukrainian businesses and will remove non-tariff barriers. Despite a very challenging business and investment climate coming from initial illegal annexation, we are starting to see improvements in bilateral trade with the EU (growth in the last 12 months stands at approx. 3-4 per cent). It is also important to stress that the EU is not only focusing on support for long term economic reforms, but it is also paying a great deal of attention to horizontal problems such as the fight against corruption; public administration reform and support for small and medium businesses, which will benefit from the launch of the EU4Business programme. Since 2014, €2.21 billion in loans has been disbursed to Ukraine by the EU. Subject to the effective implementation of policy measures detailed in the Memorandum of Understanding and related to Macro-Financial Assistance III, two further tranches
HUGUES MINGARELLI Head of the EU Delegation to Ukraine Published on February 12, 2017
of €600 million each are expected to be made available to Ukraine by the end of 2017. In the 2015-17 period, the EU will provide a major €300 million support package with its priority focussed on the reform areas that were established together with Ukraine and the EU member states. The focus for 2015-16 was on transparent and accountable governance in anti-corruption, public administration reform, rule of law and decentralisation. 2017 will focus on energy efficiency, public finance management and economic recovery to the conflict affected regions in the East. I also believe that visa-free travel will further facilitate people-to-people contacts and will strengthen business, social and cultural ties between the European Union and Ukraine. This will help the efforts of the Ukrainian authorities to carry out far-reaching and difficult reforms with a significant impact on the rule of law and the justice system. Additionally, Ukraine has realised a very demanding roadmap, in particular in fighting organised crime and corruption, in order for its citizens to be able to travel to the EU without a visa for short stays of up to 90 days in any 180-day period. These reforms have brought Ukraine closer to the EU and will facilitate our cooperation for the years to come. Ukrainian people sacrificed their lives for freedom, democracy and dignity and we, as the European Union, highly value this. Ukraine is one the largest European countries and at the very heart of the continent. With modernisation and a successful transition in the sights of the current Government — it will occupy a much more significant place in future trade and investment relations with the EU. We share the same European values and respect for human rights and fundamental freedoms and we are committed to political association and deeper economic integration. In short, the European Union is committed to a strong and deep partnership with Ukraine and we stand by the Ukrainian citizens in their endeavours to build a better country. The European Union remains firmly committed to Ukraine’s sovereignty and territorial integrity. It does not recognise, and continues to condemn, the illegal annexation of Crimea by the Russian Federation. The EU will continue to fully implement this non-recognition policy and has imposed restrictive measures against the Russian Federation, in response to the illegal annexation of Crimea and the deliberate destabilisation of Ukraine.
Finalising the DCFTA is expected to bring multiple benefits to Ukraine
PAWEŁ ZALEWSKI A former Member of the European Parliament Published on February 28,2017
The Deep and Comprehensive Free Trade Area (DCFTA) negotiations between the European Union and Ukraine began in 2018, after the country joined the World Trade Organisation (WTO). Despite having started on the wave of the Orange Revolution of 2003-2004, they were continued, or even accelerated, by President Viktor Yanukovych, who was elected in 2010 and is known for his pro-Russian. The EU’s objective was to create conditions that would allow the integration of the Ukrainian economy with the European common market and, consequently, contribute to the country’s geopolitical stability. Even though the negotiations focussed on economic issues — frequently at a very detailed level — they quickly became very political. On the one hand, the economic-related negotiations constituted the most important part of the Association Agreement (AA), which was the main instrument of the
EU’s Eastern Partnership project. On the other hand, Ukraine’s adoption of the Agreement determined the direction of the country’s future development, excluding a potential integration with Russia, Belarus and Kazakhstan, within the Eurasian Economic Union (EEU). The negotiations were concluded before the end of 2011, with agriculture being the most contentious issue. Kyiv agreed to lower grain export quotas in exchange for higher meat export quotas. Additionally, as far as geographical indicators were concerned, Ukraine gave up the use of names that were already reserved by European products in return for subsidies for Ukrainian producers. At the end, both parties agreed there would be no export duties or energy subsidies. In 2011, when it became was clear that the AA/DCFTA negotiations had been successful, Russia started to put unofficial pressure on the government in Kyiv in order to get Ukraine to join the Russia-supervised customs’ union. In the summer of 2013, Russia realised the Kremlin’s pressure had not been successful and as Yanukovych’s government continued to finalise the dialogue with Brussels, Moscow barred Ukrainian trucks from crossing the border. Immediately following that, Russia started their negotiations with Kyiv, offering a loan and lower gas prices if Ukraine cancelled the Association Agreement / DCFTA. As a result, President Yanukovych withdrew from the Association Agreement with the EU, during the Eastern Partnership Summit in Vilnius, in November 2013. This decision devastated a great number of Ukrainians, who saw the association with the Bloc and the adoption of the European standards, listed in the DCFTA, as the only way of restoring the rule of law and fighting widespread corruption in the country. That disappointment led to demonstrations and, once these were dissolved, to a permanent protest on Kyiv’s Independence Square (Maidan Nezalezhnosti). The protesters demanded that President Yanukovych step down and
The EU’s objective was to create conditions that would allow the integration of the Ukrainian economy with the European common market and, consequently, contribute to the country’s geopolitical stability.
that the negotiated AA/DCFTA be introduced. The fighting in February 2014, which resulted in hundreds of casualties, caused President Yanukovych and the majority of his ministers to flee abroad. An interim government was established and President Petro Poroshenko, who was elected in May 2014, fulfilled the people’s demands and signed the Association Agreement on 27 June 2014. The agreement with Ukraine is the only AA/DCFTA agreement, whose lack of implementation led to widespread demonstrations, the sacrifice of a great deal of protesters’ lives and a change of government. The Association Agreement came into force, provisionally, on 1 November 2014. Since then, the European Union has used the DCFTA unilateral trade measures in the sections related to tariffs and the European market quotas. After the “Revolution of Dignity” Russia started another diplomatic offensive, whose objective was to block the DCFTA agreement from entering into force. The Kremlin’s argument was that the provisions of the agreement are contrary to the provisions of the Commonwealth of Independent States Free Trade Area (CIS FTA). In order to put additional pressure on Ukraine, Russia suspended Ukraine’s participation in the CIS FTA. Both the EU and Ukraine proved there were no contradictions in either agreement and they resisted adding additional elements that would make the existence of the DCFTA pointless. Eventually, the DCFTA entered into force provisionally on 1 January 2016. Currently, the Agreement will enter into force completely, as soon as it has been ratified by the European Union and Ukraine and, because it discusses aspects other than the common trade policy, also by all member states, except the Netherlands. The Dutch Parliament ratified the agreement but a referendum followed, on 16 April, which rejected the ratification. In order to respect the nation’s decision and to simultaneously enable the implementation of the agreement, Mark Rutte’s government suggested an adoption of the agreement under one condition: that the AA/DCFTA would not directly lead to Ukraine’s membership in the EU nor would it bind the EU to defending the country. Such a ratification act draft, despite having the support of the parliament’s majority, will probably not be adapted before the parliamentary elections scheduled for 15 March 2017. The DCFTA Agreement with Ukraine was meant to be the first, exemplary trade deal with Eastern European countries within the Eastern Partnership scheme. It was also intended to lead to the adoption of some 60-70 per cent of European standards in areas such as trade, finance and economic collaboration, macroeconomic policy, state administration, nuclear policy, consumer protection, environment, labour market, education, health care and social issues. It not only assumes the removal of tariffs, with the exception of quotas for agricultural products exported to the EU market, but also the removal of non-tariff barriers, the liberalisation of sale of services and the protection of intellectual property rights. According to the European common market’s regulations, Ukraine
is expected to adapt its law related to state aid and competition. Both parties will allow their firms to take part in public tenders. The deal also includes Ukraine’s commitment to the continuous transit of gas to the EU; although the terms of collaboration in the energy area had already been set in the Energy Community Treaty, which Ukraine adopted in 2009. Even though the costs of standard unification are short-term, and higher for Ukraine, the country is bound to receive a great deal of benefits, such as access to European products, services and capital, and better conditions for European firms to invest in Ukraine. The European Commission assumes that European investments, the transfer of technologies and corporate governance will lead to diversification in the Ukrainian economy and will help the country increase the export of value-added and innovative products, as opposed to its current dependence on the export of agricultural and industrial products. In a long-term perspective, the DCFTA is also expected to help increase small and medium firms’ (SMEs) share in the GDP, at the cost of large oligarchic corporations. The Association Agreement will also improve the efficiency of public administration and will significantly lower corruption. On top of that, as part of the DCFTA, Ukraine will receive macrofinancial and technical support to harmonise its law with the EU’s. Ukraine’s economic situation deteriorated significantly following Russia’s aggression in Donbas, the occupation of Crimea and the lack of access to the previously important Russian market; all of which resulted in a drastic devaluation of the hryvnia. Despite not being able to offset the economic loss, the EU’s unilateral trade preferences, the lowering of tariffs and the opening of the EU market all helped increase Ukraine’s export to the European market by 5.2 per cent in 2015. In spite of political conflicts, the Ukrainian authorities managed to carry out reforms in the banking sector, gas, public procurement, crime fighting (by establishing a new police force) and corruption. The new electronic public procurement system, ProZorro, enabled transparent transactions worth hundreds of millions of Euros. At the same time, the electronic system of disclosure for financial statements revealed the financial means of over 100,000 public figures. A National Anticorruption Bureau of Ukraine and specialised anticorruption departments within the prosecutor’s offices have been established. These measures allowed Ukraine to receive financial support from both the EU and the International Monetary Fund (IMF). Although the implementation of the DCFTA’s provisions is delayed because of Russia’s political and military pressure, as well as the existing political and economic crisis, the Agreement is high on the agenda of the majority of political forces in the country, with the exception of the pro-Russian Opposition Bloc. The agreement’s success, apart from internal determination, very much depends on the European Union’s support for the reformers’ forces and the rejection of Russia’s pressure; they still haven’t abandoned the idea of making Ukraine part of their customs’ union.
Ukraine and Canada a history of settlement and a future for investment
ROMAN WASCHUK Ambassador of Canada to Ukraine Published on March 20, 2017
I have been in Ukraine since October 2014; I arrived soon after the Revolution of Dignity began. The revolution created both a strong desire for reform and a call for social justice, but at the same time it also led to the occupation of Crimea and the beginning of the Russian-backed aggression of Donbas. As a result, Ukraine has needed to deal with a very broad range of challenges, and all at the same time. This has meant that despite the efforts of many ambitious and smart people, reforms haven’t moved as quickly as many Ukrainians had hoped. Nevertheless, more has been done in these past three years than in the previous twenty-four years. It’s certainly encouraging and we’re beginning to see the results now. On the economic side, we can see the growth going ahead in bounds. Ukraine did not have a viable army in 2014; certainly not one that was combat worthy. Civil society and the population stepped in to remedy much of that, and the state has been catching up. It plays more a role as a deterrent, which we hope will make a peaceful solution more viable. Obviously, many issues remain outstanding both with Russia, for example, as well as the international court and the challenge that was launched at the beginning of March in the Hague is evidence of that. Ukraine’s relationship with the EU continues to be redefined and Canada has been a strong partner throughout. Our economic relations are fairly modest. In terms of exports from Canada, 2016 was a record year and the best since 1991, reaching 265 million Canadian dollars. According to our statistics, Ukraine’s exports to Canada were 107 million Canadian dollars. We are confident that more can be done now, with our Canada-Ukraine free-trade agreement. The International Trade Centre in Geneva did a study, and Canada ended up in the top ten underserved markets when it comes to Ukraine, in terms of not fully using the existing potential. Because of that we believe that both the attention and the publicity surrounding the free-trade agreement, as well as the provisions of the document itself, will help remedy that. In order to help that process along, we’ve launched a Canada-Ukraine Trade Investment Support Project with the Conference Board of Canada and the Canada-Ukraine Chamber of Commerce which aims to help build Ukraine’s capacity to use these opportunities.
I think the other key element, which is not yet covered by the current version of our free-trade agreement, is trade in services but we are open to negotiating this over the next couple of years. When it comes to Canada, certainly sales of software and computer services probably are, by all accounts, greater than goods’ exports at this point, both in terms of product development, outsourcing and maintenance. There is a lot of activity, and sales into Canada. Certainly, I would say over 100 million Canadian dollars a year, if not 150 million. Thanks to the Ukrainian diaspora in Canada there’s a widespread awareness of Ukrainians, and by extension, Ukraine. It’s not something you need to explain to most Canadians. That makes Canada a little different from many other countries, and it means there are already people there with cultural empathy and openness to the market. On the other hand, it also comes with some disadvantages. Some of these people, with personal links to Ukraine, tried to do business in the early years, of the 90s. Many of those business ventures did not work in the Wild West atmosphere that existed at the time and the bad memories of some of those smaller-scale (and larger-scale) problems persist. So, we need to overcome those. In the past year and a half we’ve seen the arrival of major Canadian players, such as Fairfax Financial, investing in Ukraine. We’re seeing bigger players with deeper pockets who are willing to take on board the Ukrainian risk in order to also take advantage of the Ukrainian opportunities. I am of Ukrainian origin myself. I was born in Toronto and I lost some of my illusions about Eastern Europe there. I try to encourage people in Canada, from whatever background, to take a realistic view of the market. Does Ukraine have an image problem? I think there’s no doubt that there are perception issues out there. In territorial terms, the military conflict concerns approximately about seven per cent of the country, if we include both Crimea and the Donbas, and three per cent, if just the Donbas. Certainly, one of the things that I remind my Canadian country people about is that it is 1,300 km from the western border to the line of contact in the conflict zone, and that’s a very long distance, indeed.
Poland’s business experience makes it a good neighbour to Ukraine
JAN PIEKŁO Polish Ambassador to Ukraine Published on January 24, 2017
It’s fair to say that the beginning was tough and not really promising, which was the result of a deep economic crisis which followed the transformation in both countries.
Poland’s role in relation to the Ukrainian context is often discussed in the political sphere and there are important reasons for that. Not only was Poland the first country to recognise Ukraine’s independence in 1991, but since then it has also repeatedly and continuously supported Kyiv in its pursuit of European and Euro-Atlantic integration and after 2014, it provided help when military conflict broke out in the eastern part of the country. Yet, there is another chapter in Polish-Ukrainian bilateral relations; one that is linked to economic collaboration and its impact on Ukraine. It’s fair to say that the beginning was tough and not really promising, which was the result of a deep economic crisis which followed the transformation in both countries. In 1992, trade between Poland and Ukraine equalled a mere $285.4 million, but in 2008, it skyrocketed reaching a record year of $8.8 billion. This was followed by a series of shocks related to the global financial crisis of the same year, and the military conflict in Donbas, which led to a recession in Ukraine, which was immediately reflected in the bilateral trade figures. We are now seeing a gradual increase in trade and, according to our initial estimates, from 2016; it has reached $5 billion. Bearing in mind the size of the two economies, it is clear that figure could be multiplied, but there is also good news — Poland has been one of Ukraine’s top five trade partners for the last few years, as well as it largest trading partner amongst the EU member states. Interestingly, that trade is extremely diversified and is not limited to low-processed materials (metallurgy and agriculture), which is a problem that Ukraine experiences in its trade with a number of other countries. When one talks about economic collaboration, I must not forget Polish investments, which might not be significant if presented in relative figures, but they are noticeable. Firms such as Kredobank in the banking sector or PZU, in insurance, are great examples of how successful Polish firms can be in this market, if they run their businesses in a prudent and transparent manner. Both organisations were able to operate painlessly throughout the crisis, and even strengthened their positions on the market; they are on their way to becoming leaders in their industries. Two other Polish companies, Barlinek and Cersanit, have built new production facilities and are leading players in the wood processing
and sanitary fittings’ sectors. Apart from these large investments, the majority of Polish firms operating in Ukraine are small and medium-sized. Some statistics even claim that there are 3,000 of them across the country, which is unprecedented when we look at foreign investors in Ukraine, as other countries are represented by a handful of large businesses. Polish SMEs have the unique experience of transplanting the best practices of doing business in Poland onto the Ukrainian soil. All these facts prove that the effects of bilateral relations are, at least, satisfactory. However, there are still plenty of areas where our collaboration could be intensified, for example, when it comes to large infrastructural investment projects which could increase the two countries’ integration. The first steps have been already taken: for example, a fast rail connection was launched between Kyiv and Przemyśl at the end of 2016. It has proved to be very successful and similar connections are now being planned with other cities across Poland. We are also discussing energy connectors (gas and electricity), which could further integrate Ukraine with the other members of the Energy Community and thus increase energy security in the region. Yet another area, where we see growing collaboration, is the defence sector. After Ukraine discontinued its collaboration with the Russian Federation, the country needed new partners. Both Poland and Ukraine have the necessary potential that could be employed in joint projects. Additionally, Poland could become a ‘gateway to Europe’ for the Ukrainian sector and technologies. I believe that these areas will be the ones that we will focus on in the next quarter of the century. There is no doubt, that for both countries intensifying collaboration in these sectors will strengthen the relations of the two neighbouring economies.
Denmark in Ukraine: fostering a better business climate for both sides
LARS VESTBJERG Founder and President Danish Business Association and General Manager Sika Footwear in Ukraine Published on February 9, 2017
We still see challenges and currently the biggest one is to be able to supply blue-collar workers for production companies, both for incoming investors and the existing ones.
I first arrived in the Western Ukrainian city of Lviv at the beginning of 2003. Lviv is about 75 km away from the border with Poland and some 600 from Kyiv, Ukraineâ€™s capital. With its low labour and energy costs, Ukraine offered, and still offers, enormous opportunities for foreign businesses to grow and I went for it. However, there are two sides to every coin; corruption and the share of dealings in the black market were very high. Everyone talked about it but not much was being done to combat it. At that time, there were quite a few Danish firms already operating in Ukraine but it seemed that increasingly more were spotting opportunities: the initial number of businesses with Danish capital, 15, in 2003 increased to 55 by the end of 2010. There was one important contributor to this development: the IFU, or the Danish Investment Fund, which has helped Danish investors with financing in developing countries. The IFU takes risks that banks would normally not dare to bear. The thing that makes Denmark a strong investor in other locations is that we tend to cluster together in small areas which leads to our building a strong community. However, even in such favourable circumstances investors need a business organisation that voices their needs and concerns in a dialogue with the authorities, especially when the investment climate needs improving and reforms have to be implemented. Such an organisation would also collaborate with the existing business community. In 2003, we had the idea to set up a Danish business association but it soon turned out that foreign investors
March 2017 of other nationalities were also eager to join, so that is why we established the European Business Association (EBA). I managed this association, in Western Ukraine, between 2005 and 2010. After that, I started another organisation, this time truly focusing on Danish companies, the Danish Business Association. I did this because Danish representation in the Western part of the country was large enough to warrant being under one umbrella and there was strong support from the Danish Embassy in Ukraine. When I started working for the EBA, the challenges were huge. There were no real procedures for discussing the investment climate with the authorities as they were not prepared for it. I believe that we made a difference by helping the state authorities to see business from an investorâ€™s point of view so that we were able to improve the situation jointly. As a result, things became better and better, year by year, but unfortunately, the problems have never been fully resolved. It has been somewhat easier with the DBA, as we focus on one specific market and do our best to cater to the needs of Danish investors, working with one Embassy and one foreign government, whose representatives have visited Ukraine. The organisation has had a huge impact on relations between Ukraine and Denmark and the Ukrainian authorities understand that our collaboration can foster further growth. In 2010, just three months after DBA was established, we signed our first memorandum of understanding involving the State Administration, Tax Administration, Custom Office, Frontier Guards and Lviv City Hall. We are ready to continue that dialogue in order to help Ukraine become more investor-friendly. 2016 was a very good year. The investment climate improved significantly from the Danish investorsâ€™ perspective and there are just a few small problems that remain to be solved. The state administration continues to hear and understand our challenges and in return, we are trying to reach out to prospective foreign investors and share our positive feedback and experience of doing business in Western Ukraine. Of course, we still see challenges and currently the biggest one is for Lviv to be able to supply blue-collar workers for production companies, both for incoming investors and the existing ones. Due to the development of the IT sector in the city Lviv has been attracting IT specialists. We believe there needs to be a balance, as manufacturing is also strong in the area. Finally, and of course, there is the never-ending story about black-market companies who are not paying their official obligations to the government and that has to stop. We Danes, run fully transparent companies and pay all official taxes, pensions and social security, etc., but we cannot compete with those who choose not to pay.
KERRY HALLARD CEO Global Sourcing Association Published on March 22, 2017
Many firms and organisations have already capitalised on the potential on offer in Ukraine. In recent years Ukraine has shown it has much to offer the IT sourcing sector, from a highly skilled workforce of young professionals to a busy community of foreign investors and the support of the Ukrainian government. The country can also boast a fantastic education system with around 36,000 graduates a year in technical studies, which is, of course, perfect for the IT industry. This is supported by a strong professional sector, offering businesses the full range of the services required to set up and grow operations in Ukraine. Ukraine’s pool of skilled technical engineers allows it to stand out from the competition in the Central and Eastern European bloc. It’s Ukraine’s history of heavy technology that has provided such a fantastic foundation for the growth of new technological skills. The government in Ukraine continues to take steps towards improving education, and thus creating a long-term future for the industry. NGO’s have stepped in, to help the Ukrainian technology future; the BrainBasket Foundation aims to train 100,000 new IT professionals by 2020 and to turn the IT sector into the number one export industry in Ukraine. Ukraine has a vast and varied labour force to support business in the country. Salaries are competitive, although it can be a challenge to retain highly skilled workers who are otherwise hoping to emigrate to
Ukraine continues to make waves as an IT outsourcing destination
March 2017 Western Europe. The demographics of the labour pool are in Ukraine’s favour, however, with many of its engineers being below the age of 30. English proficiency is good in Ukraine, especially in the commercial hubs which improves the ease of doing business. Living costs are very low, easily beating competition from the Central and Eastern European region. While there are cheaper outsourcing destinations – such as India, the Philippines or China — Ukraine claims to provide a superior price to quality ratio. Ukraine is ranked number 80 out of 190 countries on the ‘Ease of Doing Business’ report from the World Bank, having moved up 20 positions since
2014.The World Economic Forum ranks Ukraine 68th out of 140 in its Global Competitiveness Index, with high scores in education, business sophistication, health care and innovation. Its competitive local market also distinguishes Ukraine from some of its geographical competition. Ukraine has a favourable tax regime, especially for the IT sector, in order to encourage the industry to grow. When coupled with its geographic location, at the edge of Europe, the low costs make Ukraine a perfect base for IT or BPO projects. Data Management and telecommunications are the strong sectors in Ukraine at the moment with Ukrainian developers often working on mobile, software, and enterprise and web projects. A continued investment in infrastructure is allowing for improved technology services that complement the existing IT industry.
In other words, they have all the right components in place to ensure sustainable inwards investment, nurture talent and thus they offer a serious viable alternative to the UK sourcing market, especially in the midst of Brexit uncertainty. Many firms and organisations have already capitalised on the potential on offer in Ukraine. Ukrainian firms are behind the software used at many major companies such as Ford, Boeing, Volvo and Scandinavian Airlines. Of course, there are complications. Ukraine has experienced significant political and economic challenges since the recent revolution and geopolitical crisis in the region. However, the military conflict was contained to only three per cent of Ukrainian territory, in the eastern part of the country, and has left many commercial hubs untouched. The new government is working to make commerce and trade in the country better by enacting business encouragement policies that are broadly supported by international bodies. Despite the aforementioned complications, the country has consistently featured in Gartner’s top 30 offshoring and outsourcing destinations for the past six years, and is ranked as number one for outsourcing markets in Eastern Europe, by Outsourcing Journal. Closer to home, of course, the Miratech Group has been a previous Winner of the GSA’s European Outsourcing Project of the Year (2015), and has been an omnipresent finalist in several GSA Award programmes, over the years, including the upcoming Professional Awards 2017 (Finalist for Best Nearshore Team category). What’s more, Ukrainian company, Ciklum, was also a European Service Provider of the Year finalist in the GSA 2016 Awards, while SoftServe and OBH were also recognised in the European IT Outsourcing Project of the year category, for the development of the Sense360 smartphone application. The country has numerous demonstrable examples of having provided best-practice sourcing solutions for its clients. Ukraine has all the features of an attractive destination for IT operations and business process outsourcing. If you look behind the headlines, have a bit of patience and understand the facts, you will see that Ukraine is a worthwhile potential partner that will only continue to grow.
The Innovation District IT Park will help Lviv become CEEâ€™s IT hub Written by
EVA KELLER Published on April 2, 2017
With the fast-developing IT sector and most IT firms occupying refurbished Soviet-era office buildings, demand for modern office space is sky-rocketing, says Volodymyr Zhenchak, CEO and the owner of Galereja Centre Ltd, which has developed the Forum Lviv shopping centre, and vice-chairman of the board of the shopping centre. He spoke to Eva Keller about Innovation District IT Park, which his company is developing and looking for partners for.
(all photos: courtesy of the Innovation District IT Park)
March 2017 Today, there are about 15,000 IT specialists in Lviv alone, or 60 in every 1,000 inhabitants. Over 80 per cent of companies intend to increase the number of their employees in Lviv, within the next three years. How does that translate to the available office space in the city? Yes, indeed there are about 15 000 IT specialists in Lviv alone, and for the past three years the annual growth of employees in IT companies has reached around 20 per cent. We expect that by 2020 there will be at least 25 000 IT specialists which, of course, will mean additional office space will be needed in the city. The IT industry, together with tourism, agriculture and manufacturing, are the key sectors of our region. So, what is the current office space situation? Well, currently about 90 per cent of office space in Lviv is made up of old buildings from Soviet Union times that have been refurbished. The existing office space cannot meet the demands of IT companies, whose employees want to work in
modern, well-equipped offices. This seems like a big problem for IT companies. The construction of the Innovation District IT Park in Lviv was announced in September 2016. What is structure of the project and how will the IT Park respond to the demand for more office space? Yes, the construction was announced in 2016, together with the IT Cluster, which unites 60 of the largest IT companies. For us, such a close cooperation with the IT Cluster is critically important in order to carry out the project in the best possible way, in a number of areas: the concept, the
ICT engineering support and the project’s promotion amongst IT Cluster members. We are planning to build 110,000 sq. m GLA (gross leasable area) of office space. So far, and within just a few months, we have signed letters of intent for 40,000 sq. m with four companies. We already see that the implementation of the entire project will not meet the demand of IT companies within the next five years, which means that even more space is desperately needed. You have looked at a number of similar examples such as the High Tech Campus in Eindhoven, Inforpark and Graphisoft in Budapest. What are the key findings from there? Of course, we have studied progressive experience all over the world. We understand what the main components are which should be included in this project and what will create additional value for it. We have hired Bose International Planning & Architecture to design the concept. The company has a lot of experience in creating urban development projects, including projects for big IT companies such as Amazon. The project is supported by the City of Lviv and the Lviv IT Cluster. Are you looking for an equity partner and an international developer, now? Yes, this project has won the wide support of the Lviv Municipality, the IT Cluster and the Ukrainian Government. However, even though we already have experience in implementing commercial real estate projects, such as Metro, Auchan and our last project shopping centre Forum Lviv which we completed in partnership with Multi Corporation with a loan from the European Bank for Reconstruction and Development (EBRD), we clearly understand that for such a complex project we, as local partner, need to have powerful equity partner and international developer beside us. At the moment we already have preliminary consent from a large European institutional bank which will finance 50 per cent of the project’s value. We have also completed the process of land allocation and have started the process of design, and we are looking for the right partner.
Andrew Pavliv, CEO and co-founder of N-iX and Lviv IT Cluster Chairman I am confident about the Innovation District IT Park. It is the biggest infrastructure project in Lviv, in the last decade, and we are happy to join it. The N-iX office will be located in this innovative district, in a few years’ time. Why have we signed the contract? We believe that it will help us to develop more dynamically, since there a unique ecosystem for the successful development of business and technologies will be formed, there. Another reason is that we focus, not only on our own development, but also on the development of the IT industry in Lviv, which is why we want to contribute to building this ecosystem.
Oleh Denys, Executive Vice President at
Our company values an innovative approach to work. This is the main reason why we have decided to join the Innovation District IT Park. We see respect for business partners, responsibility and most importantly - a global goal, here. This is proof of the development of Lviv’s IT industry and provides IT companies with a quality space for generating new ideas and cooperation. We believe that working side by side with the talented people, who will work in the IT Park, will contribute to our development and, thanks to that synergy, we will be further investing in the development of IT in general.
So, what is the timeline of the project? We expect to open Innovation District IT Park to its residents and clients in 2019. How can the development of the project contribute to the growth of the IT sector in Lviv? It is clear that the most important element of the IT Industry is the person. As for today, the salary of IT specialists in different companies in Lviv is at almost the same level and the average is €1,500. It is important therefore that we provide the necessary support to facilitate the growth of that sector. Taking all that into account, we are creating the IT Park, which will accommodate a university for IT specialists, the Ukrainian Catholic University intends to be part of the IT Park and a hotel. We have already received proposals from hotel chains such as the Marriot, Accor and CarltonRezidor. Lviv is a western gateway to Ukraine as it is located only about 50 km from the border with the European Union. The city also hosts Central and Eastern Europe’s largest IT conference (IT Arena). We believe that with the support of the Lviv Municipality and the IT Park, Lviv will become the CEE region’s IT hub.
Oleksandr Kachmar, ES Head, Ukraine at GlobalLogic The IT industry in Lviv is growing annually by several thousands of new employees. This means that all these people need to be accommodated somewhere and provided with a comfortable space to work (IT companies are already renting 71 per cent of the office GLA in Lviv). This new space hast to promote personal and professional growth and to help IT professionals create innovations. The IT Park will be exactly this kind of space. This is why we did not hesitate for a second, when we heard about the possibility of renting offices there. This is where the development of the IT industry will soon be happening and I am confident that GlobalLogic will play an important role in this process.
March 2017 Written by
Ukraine outsourcing’s value is now in its technological expertise and reliability
Published on April 12, 2017
If the IT sector gets support at a general governmental level, it will contribute more and more to Ukrainian economics.
Low prices in the IT outsourcing sector stopped being Ukraine’s advantage a few years ago. Now, the country’s value is the services’ quality, which is incomparably higher compared to lower-cost Asian countries. Buyers look at Ukraine for technological expertise and reliability. Winning points “Customers are unable to find a lot of people who have the same specific knowledge and skills in other regions. We are always proactive with our customers, offering them advice on how they can improve their products with new technologies, processes or R&D,” says Ruslan Zakharchenko, CEO at Eleks. Yevheniy Rodin, CEO at NewGround, adds the easier communication and better transparency that are to be found in Ukraine compared to other regions. Vladimir Kuzmenko, Head of PMO at NIX Solutions, says the advantage Ukrainians have is being smart, and thinking wide. “Going into the deepest details of technologies on one side, and thinking about the business needs and their optimal implementations together with the client on another,” he adds. Oleg Nesterov, the Founder and CEO at MindK, says that many Ukrainian companies have already started switching from the so-called ‘body shopping’ to providing solutions or developing their own products as well as providing developmental services on top of those products. “With such an approach, low cost is not the main advantage of working with Ukraine,” he adds. “Over the past five years the Ukrainian IT market has enhanced its position on the world map. There was extreme growth in the number of IT service providers. Nowadays, there are more than several thousand Ukrainian companies providing not only outsourcing development services but also their own products, which correspond to modern trends and needs,” says Oleksandr Nikitenko, CEO at Sirin Software. No massive pay rise ahead Eleks’ Mr Zakharchenko says that some 15-20 years ago software development jobs in Ukraine were mainly done by people with scientific (mathematics or theoretical physics) backgrounds. “The
industry itself was very much a niche industry. Gradually though, as the share of IT in the country’s export has continued to grow, the demand for professionals has also grown dramatically,” he adds. According to Serg Kondratuk, CEO at Quartsoft, today, an average specialist in Ukraine makes about $20-40 per hour. “Keeping rates at this level makes cost competition reasonable up to the level of $50-75 per hour, when it gets closer to rates in the EU and the US for the same technology stack. There is still room for growth for smaller companies and those in the region,” Mr Kondratuk adds. Eleks’ Mr Zakharchenko, NIX’s Mr Kuzmenko and NewGround’s Mr Rodin don’t predict a booming salary growth in the near future. MindK’s Mr Nesterov says that salaries in the IT sector keep growing at a moderate pace and this growth will continue for the next few years. “Salaries now are close to the top, considering the current rates for our services. Meanwhile, Ukraine is likely to introduce European taxation practices and as a result the net income may even decrease slightly. More taxes usually mean the country is able to provide its citizens with more services of a higher quality, so, despite this probable decrease, the standard of living should improve,” says Mr Zakharchenko. Government’s support needed “The current labour market has problems retaining senior staff because of the unstable political situation in Ukraine. Such situation caused brain-drain e.g. to Western Europe. Junior staff demand increases and this has been stimulated by a variety of educational courses, IT-hubs and of course by the number of graduates annually,” says Sirin Software’s Mr Nikitenko. Newground’s Mr Rodin says that because of significant growth of the IT market and the attractive image of IT jobs, lots of people are shifting from other industries and specialties to the IT sector. “That might create a percentage of low-skilled candidates, but it still doesn’t mean the quality of services in Ukrainian companies would become lower. Every year more and more students choose to study technology. So, the tendency of the IT market to grow will continue,” he says. Does the government support the development of the sector?
Mr Zakharchenko says that the government explicitly declared its support for the IT industry. “One of the most significant demonstrations of this support was the adoption of the law that simplified the export of services. Additionally, the number of state scholarships for IT professions has been significantly increased in 2016,” he adds. “If the IT sector gets support at a general governmental level, it will contribute more and more to Ukrainian economics. However, any additional restriction or tax growth will cause a decrease in the number of specialists and capital outflows, which might pose great risks to the economic growth of the Ukrainian IT sector,” says Sirin Software’s Mr Nikitenko. Consequently, there will be fewer exports of IT services. In 2016, the IT industry accounted for 17 per cent of the export of services in Ukraine and there are prospects for more, as Ukraine’s IT outsourcing is bound to develop further in the future. Responding to future needs Changes might affect companies, as there is a strong trend towards globalisation. “We are seeing big companies acquiring small ones and all the staff becoming available on the labour market. At the moment, companies with about 100 employees have the ability to shortlist the project for relevant candidates with corresponding experience and reasonable rates, whereas big
companies consume the all resources available,” says Quartsoft’s Mr Kondratuk. MindK’s Mr Nesterov predicts moderate growth in outsourcing and more rapid growth in product development services and solutions. NewGround’s Mr Rodin says new industries and technologies will come with new trends. “We will see plenty of new opportunities for building solutions, that have never existed before. It is also possible that more coding will be done by robots. However, the demand for high-quality specialists with knowledge in core technologies will remain, for sure” he adds. “We see that every industry is trying to apply IT to boost their productivity and to make their business approaches more effective. For example, nowadays IT is changing business models in logistics and transportation; it is being widely adopted in the legal sphere and is changing the consumer experience in retail tremendously. The majority of industries are going through a transformation caused by the development of technologies and thus drive this progress further and further,” says Mr Zakharchenko. “New areas of technologies are being developed today, such as augmented reality and virtual reality, the Internet of Thing and artificial intelligence. With them, the demand for qualified IT resources will grow, as new tech areas will require new people: smart enough to learn quickly, educated enough to think both deep and wide and experienced enough with current tech stack. We Ukrainians are such people,” says NIX’s Mr Kuzmenko.
Ukraine’s NIX Solutions expands to Israel and beyond Written by
While we are seeing (positive) changes in Europe in the direction of the CEE region, Ukrainian IT companies have already taken sizeable steps forward themselves.
Our aim is to teach customers how to outsource their IT demands, how to change internally if needed, how to overcome their fears and negative experiences with the correct solutions, says Igor Braginsky, the Founder and President of NIX Solutions. Dr. Braginsky spoke to Jerry Cameron about the company’s development, and how entering Israel has helped the firm conquer international markets. It seems you have quite a large network of representatives all over the world. Well, yes, you could say that. We have created a partner-companies chain; we have local representative companies in Israel, the US, Scandinavia and across Western Europe, so we now work with our clients face-to-face which is much more effective. Israel, which is known for its start-up and innovation scene, sounds particularly interesting. Why did you decide to look at the country? Actually, we have been co-operating with Israel for a long time. Our first customer was an Israeli start-up project in the “dot-com” era. Our collaboration with Israeli companies was a unique experience for us. Israeli business has a paradoxical way of thinking, with passion and challenge, which was precisely what we needed to help run our business, and from where we were able to reach international markets. There was no business at all in Ukraine, at that time. The ”dot-com” crash undermined the conditions of Israeli IT. The quantity of projects reduced sharply and we changed our priorities towards the US and Western Europe. When, in 2014, we decided to develop the company further, we decided that Israel was the best place to create our Sales Office. Israel consistently takes first place in international rankings for entrepreneurship, areas of innovation, scientific research, cyber security, and the number of successful start-ups. Only Silicon Valley surpasses Israel in levels of cyber security and innovations development. Israel also has an advantage in the area of law: Israel is working on all aspects of intellectual rights
Published on April 12, 2017
thoroughly, and also has a number of laws pertaining to cyber technology and cyber security. Clients from some countries find it easier to interact with our Israel office, United Perfectum, when it comes to the legal matters. The Ukraine has some things to learn from Israel, and we are now working on adapting and applying our Israeli experience to Ukrainian realities, in order to improve the conditions of IT business development, and the interaction model area of IT with the government. This experience, paired with the fact that you’ve been operating for over two decades, must be interesting from your clients’ perspective. I would say we are easy to work with. It is the key advantage of being an experienced IT services provider. On top of that, we have hundreds of completed projects, and years of qualitative service to international corporations, which has resulted in unique project and product management experiences. We put a huge emphasis on understanding clients’ needs and processes, and work hard to provide a customised offshore Delivery Centre that works just as well as an in-house team, or even better. It is this business value that our key customers already benefit from. We have named it “knowledge as a service”. In other words, we won the client’s favour by diving deep into their business model. I will give you an example: our first corporate client in the USA started in 2004 as a small team of three QA engineers. Before NIX, they had tried three different vendors and none of them worked. We proved our service model works; the team expanded to 75 in a couple of years and continued to grow organically as the client’s business evolved. How has IT outsourcing changed over the years, from your perspective? Many things have happened over the last 20 years and companies working in IT outsourcing have gained different experiences. Of course there have been some negative experiences as well. Over time, the problems associated with working with outsourcing companies have reduced to two critical points: willingness of the company to work with an offshore team (making it outsourc-
Dr Igor Braginsky (courtesy of NIX Solutions)
ing-ready) and the selection of the correct vendor. Outsourcing is now developing in two key directions: the first, and prevailing one is when a customer hires in-house employees, who are competent in working with offshore teams, and then appeals to the “body shop” to manage everything themselves. We have decided to develop in a different direction: to become a vendor offering managed services. Because there are not many such vendors, people have had to spend money and resources on creating expertise inside their companies, opening new departments just to work with “body shops” as a result. We rid our clients of such expenses, and offer them an affordable cost-effective solution. Thanks to such an approach, all a client has to do is to delineate their general direction, outline their strategies, and we will use our 20 years of expertise to create the most effective IT solution for them. Another aspect of IT outsourcing development is in the technical area. For a long time, clients came to us asking for specific technology, and how many Java-developers or C++ specialists we had actually mattered. More lately, the focus on specific applications, web-technology systems and mobile apps has changed. Attention has shifted to UI. User experience has become one of the most important factors. Gradually, IT has grown to the size of Science: Artificial Intelligence, Big Data, Augmented Reality, Virtual Reality, and FinTech; IT has been implemented in such key areas as healthcare and education. It’s interesting, now to see
what outsourcing of similar projects will look like. For example, we are always ready to offer something interesting. How do you see the Ukraine on the outsourcing map of the region? Well, traditionally a common advantage of Eastern European countries has been good education, powerful academic schools, and large numbers of technical universities and colleges. Ukrainian universities stand out, even here. People from all over the world come here to get our education. Because of this, and other achievements, our second-largest city, Kharkiv, can proudly be called the students’ capital of the Ukraine, and one of the country’s largest IT hubs. Not only technical expertise is important in IT outsourcing now, but also the availability of complex specialists: developers, analysts, and managers with scientific backgrounds. Many of our employees qualified in fundamental sciences, and have diplomas in Physics, Chemistry, Biology, fundamental Medicine and other disciplines. Another advantage of the Ukraine is that we are a big country with a developed, energetic and professional IT community, which managed to succeed well without government help. We now have established work with government departments and we are strenuously working on enhancing our country’s business ecosystem. By the way, we have formed a strong IT community in Kharkiv, one of the biggest cities in the Ukraine. We regularly hold sec-
March 2017 torial summits on the most in-demand technologies, and we are a part of the IT Ukraine Association and the European Business Association IT Committees. We also actively participate in the Kharkiv IT Cluster, and the American Chamber of Commerce in the Ukraine. So tell me what are the key services or products that you think your foreign customers are most interested in? Because of the fact that outsourcing spoilt many people and became body leasing, many clients don’t even understand what kind of service they need. They perceive outsourcing as very risky and don’t expect good results. We offer “knowledge as a service”, giving our clients full access to our expertise. Whether our clients face problems for the first time, or whether their business has suffered from the same fault again and again, we have not only already experienced such problems, but we have studied them and created multiple solutions for different situations. This means we can readily offer a solution to meet our client’s needs. It is similar to any other product or service: you can come to the shop and get a standard grey suit or you can go to a knowledgeable designer and get a piece that will suit you perfectly. Clients are more and more interested in performing teams than in individual contractors, in an agile-oriented team trend with which you can create transparent communications. We can already offer you something more than a classical outsource and clients come for it and turn to us not for a specific product development but for the complex service which for example includes Big Data Analytics, as if we were a local company. Another trend is an interest to software technologies which are very close to the science, for example VR/AR, Artificial Intelligence, Fin Tech. We are already working on a projects with Computer Science background and more and more clients come to us exactly for that. If you look at your competition; what does it look like? Who are your main competitors? Traditionally, the main competitors of Ukrainian outsourcing companies are Indian companies. India has a reputation as a strong centre for world outsourcing but in practice, the Ukraine can offer specialists of much higher status. The advantage of Ukrainian outsourcing makes us strong competitors in a world IT market: in a developed IT community, we have specialists with complex expertise and scientific backgrounds. We don’t just speak English; we have a lot of common cultural values, a similar mentality and a more convenient time zone. We tend to have healthy competition with other Ukrainian companies, and because of this competition, our work conditions only get better and the level of our specialist’s skills only gets higher. Overall, we chose a more difficult way to develop our company and that is why we don’t compare ourselves to others. We are not a “body shop” company; we are a company with a managed service structure. Our pros are: flexibility; specialists with professional backgrounds; 20 years of expertise and a unique approach to each client. We share our client’s point of view in every project, consider our client’s engineering specifics, and we see our success in the success of our clients. Ukraine has great potential to be an IT outsourcing star.
How do you see the development of the sector in the country? The Ukraine is already in the “Top 4 Outsourcing Locations of the World” list, and closer to the top, the better! We offer incredible specialists, who are able to work on complex projects involving scientific tasks, and we can offer IT services of the highest status. Our main priority now, is to improve the Ukrainian business infrastructure. We participate in many programs, co-partner work with government departments, and adapt our Israel experience to make the Ukraine a competitive business partner in IT, and to develop the most comfortable conditions for our clients. We invest in education as much as we can. Our company’s specialists take part in the development of modern educational programs, we hold internships in the company for students, we work with universities and we deliver lectures and much more. We have been collaborating with universities for over10 years and have equipped a lot of professionals during this time. You are a mature company. But tell me how it all started. Well, I founded the company with three of my friends and classmates in 1994, when we were students at the National Polytechnic University in Kharkiv, Ukraine. It was literally a kind of a garage project. We wanted to earn some extra cash on top of the scholarship. We started with selling self-made software for emerging local markets, like offline B2B search engines for store facilities, and accounting and reports for shops and pharmacies. Our company entered the international IT outsourcing industry during the time of the IT boom, in the late 1990s, using local successes and personal contacts in Israel. Was it difficult to run the company in the beginning? It was like sailing a yacht in a storm: all the team together with the captain sharing responsibility for the whole boat. A weak team would disrupt and come to a stop, but a strong team will just sail faster. We learned how to be fast and flexible and to squeeze the maximum out of every opportunity. I’m proud to say that those guys who stood with me in that storm are now the top managers in my business. In the beginning, all of it was one big “sink or swim” challenge: every client and every project was critical for us. After some time, when we reached the Western market, we faced a significant difference in the level of our business progress and we had to catch up very quickly. I’m proud of Ukrainian companies, ours as well, because we’ve come a long way from an incipient business to a strong, durable system with widespread laws, ethics and culture. We’ve now gained a considerable degree of stability and durability, and every new challenge is more of an opportunity to prove ourselves: there is no fear, but there is curiosity, ambition and a will to grow and develop. If you were to give advice to a company from the CEE region starting from scratch right now, what advice would you give them? Every day borders between Western and Eastern Europe become less and less important, as so the differences in business approaches, so I don’t think that an entrepreneur from the CEE region really needs any advice. Whatever you do, do it with passion; that is my recommendation for a budding entrepreneur in any country of the world. You will succeed only if your job brings you satisfaction, and you never think of giving up.
Thinking big; working hard; delivering value to clients and building relationships
Published on April 12, 2017
The popularity of IT is growing, which attracts more students to the IT courses in high school institutions and means the number of engineers graduating university within the next three-five years is increasing.
Ukrainian Quartsoft has recently started its first own product — SoftFarm, an agricultural management system and has enlarged its game development department specialising in Facebook games, e.g. CoralIsle, says Serg Kondratuk, CEO at Quartsoft. He spoke to Jerry Cameron about Ukraine’s IT outsourcing potential, his company’s development and future prospects. Quartsoft has been on the market for almost two decades. What does that mean for your clients? Our company was set up in 1999. I would say Quartsoft’s presence for such a long time, in the outsourcing market, has been a benefit to our clients for the following reasons: We operate as a consultant who does not just do a particular scope of development work but delivers added value by assisting in the decision-making for the technical, managerial and financial sides of any project. Additionally, during these years the company has evolved its communication with the help of: branch offices all over the world (Ukraine, Russia, UK, and the US); language training for project managers and managerial staff that has eliminated the language barrier between the team and the client, and eased payment transactions. This means our clientele use suitable and affordable payment tools to pay for our services. How has IT outsourcing changed over the years, from your perspective? At the moment, there is a great trend towards globalisation. Large companies are boosting their talent acquisition, thus they have to invest in staff education and the staff is gaining more expertise. Smaller companies, such as Quartsoft, are in demand for their ability to deliver values such as management flexibility, speed in decision-making, attention to staff expertise and qualities and the ability to facilitate internal cross-functional relationships. These abilities allow Quartsoft to create scalable project teams with expertise that matches the project requirements and team members exactly, ensuring synergy which is rarely achievable in case of out staffing. Other emerging markets supply developers with lower rates and run aggressive cost competition, though they very rarely add extra value to their services. This situation is not the same with
the bigger projects, which usually go to larger companies, the influence is felt more in short-and mid-term projects where small and middle sized companies have to compete for them. You say your mission is to help businesses, especially new start-up ventures, save the costs and time of implementing their web presence, digital commerce and custom web/mobile applications, by outsourcing their IT projects to an expert team in Ukraine. Why are start-ups your target? Quartsoft aims at start-ups because this is the field where Quartsoft can add the most value to the outsourced development work which is already included in our rates and standard project management procedures. These values are project risk analysis, assistance in decision-making, project bottleneck forecasting and offering recommendations on implementation and design. The longer and more complicated the project is, the bigger the value of a technical partnership with Quartsoft in outsourcing projects. We are not just developers; we are consultants. Our clients rely on us for preparing their minimum viable product (MVP), getting venture financing and scaling their business up. We are also interested in understanding their projects completely and we seek long-term partnership with the people behind every project. You mentioned a few markets of operations. How important is the US market for you, since you have an office there, and which other markets would you like to reach out to? The US market is paramount, as it is responsible for the vast majority of the projects we have handled, from the moment the company was founded. In 2015, we became very interested in the UK, the EU and the Scandinavian market, so we set up a sales office in Kaliningrad and a representative office near London. What are the key services or products that you think your foreign customers are most interested in? We think our foreign customers are most interested in full-stack outsourced web development, which we handle from scratch, starting from the project prototype and functional requirements which are defined at the project’s initial phase. All this is offered with one point of technical contact, which is responsible for consulting,
Quartsoft’s management (courtesy of Quartsoft)
recommendations, team scaling and management and reporting. If you look at your competition: what does it look like; who are your main competitors? Quartsoft competes with companies of about the same size, which is about 75-200 developers with a presence on the target market, either personal or a stable client base with strong references. Ukraine has great potential to be an IT outsourcing star. How do you see the development of the sector in the country? The popularity of IT is growing, which attracts more students to the IT courses in high school institutions and means the number of engineers graduating university within the next three-five years is increasing. The big companies will need to acquire all the available talent, increasing their salaries, offering compensation packages, relocation to EU and other benefits, which will further stimulate the supply of IT graduates. Remuneration packages will increase up to the moment when salaries equal those in the target markets of large enterprises. At that moment the dusk of outsourcing will begin for those companies that only compete on price competition. You are a mature company, and your origins seem as if they happened thousands of years ago, but I’d like to take a step back and look at the origins of the company. How did it all start and where did the idea come from? The company started with the inspiration of and a background ensured by the Donbas State Machine-building Academy. This alma mater had been the major source of talent in the field of engineering for heavy machine-building, programmable lathes and applied information technology, for years. The combination of a strong engineering background, practical multiple technology
awareness, inspiration in automated design and programming, which was popular at that time, became the cornerstone of the company’s success at the beginning. Strong competencies became the pillars of the technical flexibility of the company, such as engineering synergy, a cross-functionality of the staff, a system’s approach to knowledge and expertise, a synergy effect of people with a common rich technical background in various application technologies and cross-platform awareness in our early employees. The four founders of the company created the approach and started the traditions behind our current close cooperation with the Academy and we still strengthen our skills through its graduates today. What were the challenges you faced when you started the company? The same challenges that are normal for many businesses: talent acquisition, keeping talent, team management and procedure development for each critical size of the company while it was growing. If you were to give some advice to a company that is starting from scratch, right now, and is from the CEE region, what advice would you give them? Think big; work hard; be open to ideas and people; drive value to your clients and build relationship networks. How do you imagine your company in, let’s say, 20 years? Quartsoft could build more competence, bring up more talent and work on bigger and more challenging projects on the one hand, and develop its own products on the other hand. It means evolving together with the market.
ICT Not many Ukrainian companies can boast about being as old as the country’s independence. ELEKS is one that can, as the firm was set up in 1991 by Oleksiy Skrypnyk & Son and over the last 25 years it has become one of the country’s largest IT firms. Ruslan Zakharchenko, CEO at ELEKS, spoke to Jerry Cameron about the company’s origin and the experience ELEKS has gained over the years.
JERRY CAMERON Published on April 12, 2017
From a small family firm to a Top 100 Global Outsourcing company
In 2017 ELEKS was included in the list of Top 100 Global Outsourcing Companies by the International Association of Outsourcing Professionals (IAOP). This is only one of the multiple recognitions you have received. Yes, that is correct. In 2017, apart from being included in the list of the Top 100 Global Outsourcing Companies by the IAOP, ELEKS’ was also named one of the Top Enterprise Software Development Firms, according to Clutch. Beside those titles, we have multiple awards in UX and design and for several years in a row we have been selected as a Global Sourcing Association Awards finalist, for demonstrating best practice in outsourcing. Congratulations. Currently, most IT outsourcing companies from the CEE region are quite young. ELEKS has a quarter of a century of experience which, to me, sounds like a very mature company. How do your clients perceive you? It mainly speaks in favour of our reliability and versatile experience. We have been working with some of our customers as an outsourcing partner for more than 15 years, delivering results that range from a single app to software product portfolios with a dozen products. Software products that we have built are serving various audiences, from small departments to millions of consumers worldwide, 24/7. Some products we helped to develop in the 1990’s are still effectively serving their users’ needs, and we stay close-by to ensure things are running smoothly.
In 2016, the number of IT professionals has grown by 12 per cent. The forecasts say that this trend will last in the upcoming years as Ukraine gains more credibility as a top outsourcing destination.
You say that 93 per cent of your clients are ready to recommend your services. Yes. We conduct biannual customer satisfaction surveys and for several years in a row now, 93 to 96 percent of our customers replied that they would recommend ELEKS as a technology partner. You have recently launched a retail Centre of Excellence. What’s its objective? ELEKS has rich retail expertise, so we decided to launch our retail Centre of Excellence to help global retailers meet customers’ shifting needs while delivering high-quality, digital-first products to the market. This company’s division aims to create advanced solutions that enable retailers to adopt digital transformation strategies and to build omni-experience, customer-first systems.
Ruslan Zakharchenko (courtesy of Eleks)
You are a mature company. I’d like to take a step back and look at the origins of the company. How did it all start and where did the idea come from? When the captive Soviet states finally became independent countries, the electrical power grid needed to be carved into separate systems for each of the newly-independent states. Oleksiy Skrypnyk, along with his son, also Oleksiy, created DAKAR, a unique product for power system stability analysis, as well as real-time large power system’s management and load
flow analysis. Today, DAKAR is a successful product that has been implemented in more than 20 Eastern European power systems, although it represents only a very minor part of ELEKS’ business. What started out as just Skrypnyk & Son has developed internationally. What were the challenges the Skrypnyks faced when they were starting the company? ELEKS started as a product company in the post-Soviet environment, where state and privately held businesses were very unfamiliar with the concept of paying for software. This was the main reason for ELEKS’ joining the outsourcing market. There, the company was challenged by the customers’ different mentality. Moreover, the majority of experts had purely scientific backgrounds and had never worked on real-life business problems. The outsourcing projects required a different mind-set and practical thinking. For these reasons, the gap between theory and business needed to be filled quickly. ELEKS has a development and maintenance team based in Lviv and Rzeszów in Poland, but it also has offices in London and Las Vegas. I understand this is to be close to your customers across Europe and North America. Correct. ELEKS’ local presence in the U.S., Europe and the UK reflects the company’s aim to be closer to the customers. It demonstrates our commitment to providing them with unique and reliable software solutions for unparalleled business growth. Beside the development office in Lviv, ELEKS also has development teams in three more Ukrainian cities; Kyiv, Ivano Frankivsk and Ternopil. What are the key services or products that you think your foreign customers are most interested in? It depends on the type of the customer. Big enterprises usually want turnkey solutions, tech companies want us to be at the forefront of technology and innovation while start-ups want us to be fast and reasonably priced. If you look at your competition: what does it look like; who are your main competitors? Our main competitors, if we speak about the UK, are the in-house development teams since many companies have poor experience with outsourcing or want to keep all the development
within their own organisations. We also have competitors in Ukraine, among the companies offering software development and IT services. We are very close in terms of competencies and prices and have to compete, both for customers and human resources. At the same time, we are feeling price pressure from India and China, but we usually surpass them in terms of the real value behind the higher prices. How has IT outsourcing changed in Ukraine over the past 25 years, from your perspective? Overall, the market has matured a lot. Companies have been gradually expanding their portfolios beyond coding by adding QA, business analysis, UX and R&D. As a coeval of Ukrainian outsourcing, ELEKS has passed through all these stages, starting from having one-two people working on small orders, through dedicated teams, to enterprise architecture and complex turnkey solutions that help clients make their business transformations. Ukraine has great potential to be an IT outsourcing star. How do you see the development of the sector in the country? In 2016, the number of IT professionals has grown by 12 per cent. The forecasts say that this trend will last in the upcoming years as Ukraine gains more credibility as the top outsourcing destination. There are quite a few young people looking to start new IT businesses. Would you have any advice for them? I would say that the most important thing is to find the first customer. The next most important thing is to find the second and the third customer. Building a business around one or two customers deprives the company of the necessary flexibility and inner balance. How do you imagine your company in 25 years’ time? It is hard to predict how the technology will develop, but we are sure ELEKS will continue to be an A-class solution provider, following the advances in development and acting as early adopter of new technologies and tools. We will learn them quickly and will apply then in practice: This is what our customers value us for. If we look back at our history in the previous 25 years, this has always been our distinctive feature.
ICT Written by
JERRY CAMERON Published on April 12, 2017
A Ukrainian firm conquering global markets
My dream is to see our company as a solutions partner of giant semiconductor companies, such as ARM, Freescale, Marvell and Intel, etc. they were mostly working for the local market and they had lost many clients because of the crisis so they were looking for new markets, especially in Western Europe and the US. Before the merger, Sirin Software had only developed software for embedded systems and Linux-based solutions, but many of our existing customers were asking for mobile apps or some server-side work, so we decided to consolidate our resources and work together with Lampa Studio. That’s how Sirin Software gained mobile and web expertise.
Sirin Software started in March 2014, and has grown quickly. The company now employs 30 IT specialists. In 2016, it merged with another firm in order to expand its service portfolio. Alexander Nikitenko, CEO of Sirin Software, spoke to Jerry Cameron about how the company was started, the firm’s presence in the US as well as its future expansion plans. In 2016, Sirin Software started to explore new areas in order to reinforce its market positions and it merged with Lampa Studio. This seems like a great achievement for a company that was founded less than three years ago? Yes, it’s an interesting story, indeed. We met with founders of Lampa Studio after the deep economic crisis hit Ukraine and Russia in 2015. Lampa Studio was an expert in mobile development and server-side development services. However,
You are a young company, so let’s take a step back and look at the origins of the company. How did it all start and where did the idea come from? I have an engineering background and I used to work for a number of big software development companies here in Ukraine, before I decided to go my own way. However, while I was working for the other companies I discovered that some of them had issues with managing their projects in the correct way. I noticed that in many teams, management was much more focused on increasing man-hours than gaining more profits. For example, some teams had seven or eight engineers, but only two or three of those engineers were doing the while job, and only they had any strong desire to complete the project. Another thing that was missing was proper employee motivation, and opportunities for people to grow professionally. When I set up a new company, we decided to do things in a different way. We only hired productive and motivated individuals and provided them with best
working environment we could so that they remained constantly involved in challenging projects. We paid special attention to the so-called “soft skills” when hiring an employee. We would rather hire a less technically sharp engineer but with “fire in his eyes”, than hire a “professional” who has excellent technical knowledge but uses it mainly for finding excuses why his work is not completed and avoids responsibility, etc. So what was the first challenge you faced when you started the company? I think the biggest problem is always finding the right people. It is always tough. Not only at the beginning. So when was the moment that you knew — “Okay we’re doing it right and we’re getting there”? I haven’t had that feeling yet, and I think I never will. There’s always something that needs improving. So when you look at the portfolio of your clients, now; where are they based? Well, 85 per cent are US companies but we also have clients from Sweden, Japan and the UK. Interestingly enough, right now we’re negotiating a deal with a client from Indonesia. If you look at your competition, what does it look like? Who are your main competitors? There are several big Ukrainian companies which have embedded software departments. Such shops do almost any type of software development work, but we stay fully focused on embedded software projects. For example, if we have a request to develop a web-service, I would rather recommend a few companies who are experts in that, and who are purely web development companies. However, if client needs to develop a product, which requires electronics (hardware), embedded software (firmware), a cloud-based web-dashboard for controlling and monitoring the devices, a mobile application for some interaction with device — then this is our client. We do web and mobile development work, but
only for satellite products that interact with embedded software. What are the key services or products that you think your foreign customers are most interested in? With this Internet of Things (IoT) trend, I think we may be attractive to companies doing business in telecoms, automotive, Internet of Things, health care, storage and network equipment providers and other domains that need a remote team of engineers. Right now, you have an office in Sanford, right? Which markets would you like to reach out to more? Sanford is one of our locations but we do not have a proper office there yet. Our R&D offices are located in Kyiv and Vinnitsa, in Ukraine. However, we plan to have traditional sales offices in the US and probably somewhere in Western Europe. On your website, you say why Sirin Software and why Ukraine; so why Ukraine? I think there are several reasons. I’m sure that if you simply google “Why hire Ukrainian programmers” you will get pretty similar information. The first reason is a high level of technical education, as we have a number of good universities that offer a great technical background. Another is the location – we’re one hour from most Western European time zones and even closer to the US time zones than South-East Asia. The third
reason is the European mentality. This may sound like a minor advantage but those who have worked with Asian service providers will understand. Of course, there are other advantages such as good quality internet and no visa being required for most foreigners, etc. In an editorial, Vladimir Beck, the chairman of the European Business Association IT Committee, said that Ukraine’s export IT segment showed an increase of 15 per cent in 2016 and he expects a 20 per cent growth in 2017. Do you agree? Well, the IT segment in Ukraine has demonstrated growth, even during the economic crisis, so I more than agree with that. If you were to give some advice to a company from the CEE region that is starting from scratch, right now, advice would you give them? I would like to quote the CEO of Netflix, Reed Hastings, here: “Do not tolerate brilliant jerks. The cost to teamwork is too high.” That is an interesting comment. So, how do you imagine your company in ten years? Probably being in TOP10 global embedded solutions providers. However I’m not sure there’s such a ranking at all. My dream is to see our company as a solutions partner of giant semiconductor companies, such as ARM, Freescale, Marvell and Intel, etc.
VLADIMIR BECK Chairman European Business Association IT Committee & a board member of Sigma Software Published on February 15, 2017
The human factor is boosting Ukraine’s promising IT export sector The export-oriented segment of the IT services’ market grew two and a half times over the past five years.
Ukraine’s export IT segment showed an increase of 15 per cent in 2016, and continued to occupy the third place, by volume of total country exports, after agriculture and metallurgy. While we are speaking about the rates of growth, there are very solid grounds to expect that this positive tendency will be maintained and will grow to an optimistic 20 per cent in 2017. As for today, an efficient IT ecosystem has been already been created in Ukraine and the exporting IT companies are operating on a global market, which continues to grow, so interest in our IT products and services will also increase in the future. This success is stimulated by a disciplined performance formula, which is especially appreciated by customers: the best product (high quality and innovative) at a lower price. One of American news periodicals characterised Ukraine as “a country of talents” in its publication about the convenience of choice for contractors among Ukrainian IT companies. This is an excellent and ample definition. In particular the human capital: qualified IT professionals who can conduct creative activities and create innovation, is moving forward towards a new country economy. For these reasons, IT education has been actively developed in the country: educational programs at IT companies and market leaders, private lessons and schools are being opened; the state order for IT professionals and students admission for the IT areas both have been increased. All these with the object of promoting the demand in the labour market and increasing the concentration of human capital in Ukraine. The second important factor is lower prices. Most IT professionals in our country are in commercial relationships with companies (contractual work), using a model of simplified taxation at the rate of five per cent. In other words, under these tax conditions, Ukrainian professionals services are cheaper in comparison with the same experts from the US or Europe, but more expensive when compared to India and China. Within the context of future prospects for the export sector, the results of last year’s study by PwC, which was initiated by the IT Committee of the European Business Association of Ukraine, should be taken into account. They clearly layout all the possible development scenarios for the IT industry until 2020 including
changes in the tax burden and the operating (business) environment. The presentation included three scenarios: optimistic, realistic and pessimistic. The industry is ready for any scenario, but the perfect one would be a winning option for both sides — a win-win strategy for the IT business and the state. In order to implement it, a longterm projected growth for the state IT market has been already prepared and an optimal taxation model has been elaborated, in order to achieve the best results for private entrepreneurs from the IT industry. A strategy of development for high-tech industries’ has been formed at the country level, where the IT industry is in favour of a development activator. The export-oriented segment of the IT services’ market grew two and a half times over the past five years (according to PwC research). In other words, the carried out by IT companies through the previously described actions. The stability of new orders, from foreign companies, has been demonstrated in recent years, which has also provided quantitative and qualitative growth in the segment. On the other hand, Ukrainian IT companies are ready for new projects. Top service’s IT companies which actively develop education and foster the development of human capital are showing excellent results. For example, they are applying the principles of mentoring and teamwork so that promising newcomers can develop confidence and can grow while working on projects. Undoubtedly, the dynamics of the IT industry, including the export segment, is influenced by internal (tax rate, business transparency, development of IT-education, etc.) and external (political, legislative) factors. In this context, one positive fact is an open recognition of the importance and value of export IT segment, at the state level in Ukraine, by the president. Currently there is more stability in the IT industry than there was one-two years ago and there is reason to believe that the on-going dialogue with the government will result in the implementation of positive legislative changes. For example, this could be in the protection of intellectual property rights and private capital. The export-oriented IT services market segment not only provides the potential for development, but it also acts as the driver of the domestic economy.
See the new Ukraine and benefit from the best by partnering or investing in IT We have our fair share of the southern mentality of relaxing and having fun, which is intensified by our Soviet past.
Saying that Ukraine is an attractive but difficult market is nothing new. Situated in the heart of Europe, it is close, big and well-educated. It is cheap and abundant in resources, both natural and human. It is industrial, agricultural and hi-tech. However, at the same time it is unstable; it is corrupt; it has contradicting laws, unjust courts and a war inside the country. It has a big and aggressive neighbour and weak state institutes. It also has a mentality that was being developed for 70 years on the other side of the Iron Curtain. From the IT perspective one gets comparatively cheap, educated labour as a first point in favour; there are mature companies, with over 20 years of experience in IT Outsourcing and with well-established processes as a second point; and having a branch of your company just a couple of hours’ flight from your headquarters is the third. What are the risks that you are facing? First of all, there is a legal one: we have an unbalanced legal system, with corrupt politicians and courts. Then there is the geopolitical one: the ongoing war with Russia; the economic one: high inflation, weak local currency and, finally, the cultural one: miscommunication, different ways of getting things done and reporting problems. It has fabulous benefits and crazy risks, but is it worth a while? Well, everyone makes their own decisions. In business there are no right or wrong decisions, there are only the ones that bring you money and the ones that don’t. Ukraine has the ability to generate income, but this is not an easy job to do. Generally, one needs to be prepared to either spend a lot of your own time on communication and figuring out how things are done here, or to find an insider, who can help you do it. It is best if you can find a local legal company that you can trust, to cover the legal part of risks, an HR company that matches the same trust criteria, to create a good team and a local partner that will do all the local management work and communication, covering the cultural risks. Thus, the question of finding a good partner becomes a crucial one. Usual ways of partnering are not working here. One really can’t evaluate businesses in financial terms, because most of them
NATALY VEREMEEVA Founder and CEO Cossacks Information Technologies Published on April 10, 2017
are in the shadow economy. Also one can’t rely on your foreign consultants, as they can be easily misled. Let me give you an example of a multimillion contract to which a foreign company invited a foreign consultant. The company’s representative came to Ukraine and on the first night their local partners entertained him with our rich local nightlife. Unfortunately, this professional, from a very well-respected company, spent the rest of his time frivolously and forgot about why he had come in the first place. The foreign company lost several dozens of millions of US dollars on that deal. At the same time, quite often people are not proactive at work and you really need to find a way to educate and motivate your team or partners to go the extra mile that you are probably already used to elsewhere. We have our fair share of the southern mentality of relaxing and having fun, which is intensified by our Soviet past. There were taught that nothing depends on you, you are a small detail in a big machine, so if you do nothing, maybe nobody will notice and you can relax just a little bit more. Fortunately, the new generation is changing this trend with its proactivity and entrepreneurship. In addition, please do not forget that we cooperated with Vikings and even invited them to rule over us, so we have something of their national character as well. It is possible to get the right work/fun balance in your team, especially if you are prepared to play the long game and really spend the time and effort required to create a strong team or to choose the right company to partner with. So once you are there, and you have found a decent partner or team, created trust, established good relationships, won the heart of your team and they have learned good practices from you — your business can become a great business. You will start benefiting from Ukrainian sincerity, generosity, teamwork, independent thinking, creativity and self-organisation, as well as all the abundance of natural and intellectual resources. Indeed we can do amazing things here. If you want to see the new Ukraine and benefit from the best, but at the same time avoid the worst, you should definitely begin your acquaintance with the country by partnering or investing in IT.
ICT Written by
DIANA GLADKOVA Published on March 22, 2017
Military operations in Ukraine have had some surprisingly positive side effects for modern businesses I had to take extreme measures such as going to the window whilst using my camera to prove to our clients that everything was alright at our new location.
The Russian military operation began, in Crimea, on the 20th of February, 2014. A month later, after the questionable referendum on self-determination, Vladimir Putin announced the annexation of Crimea. Demonstrations by pro-Russian and anti-government groups took place in the Donetsk (in the photo) and Luhansk oblasts (collectively the Donbas) began at the beginning of March. Shelling of the airport and the toughest military operations began on 26 May. It is estimated that about 1.5 million people have fled the Donbas area, since the beginning of the military conflict. In Donetsk and Luhansk alone, the manufacturing sector has contracted by 32 and 42 per cent respectively. It is not clear how many other businesses have been closed down or forced to move elsewhere. Immediate effect Artem Gerashchenkov, CEO at Gekos, says his company started building their business in Donetsk. We used to have quite a lot of employees — up to 200 staff members. However, after the beginning of the war we left Donetsk immediately. Some of our people were evacuated to Belarus, and some to Bulgaria. Today, we have offices in Kyiv, Rovno in western Ukraine, Vilnius, Lisbon, Saratov, Moscow and Los Angeles. We are a start-up studio, an outsourcing company and one that offers business strategy and marketing investment.” “In the summer of 2014, after the outbreak of hostilities in eastern Ukraine and, in particular, in Donetsk, Lime Systems was relocated to Kyiv within a short period of time and continued to operate whilst managing to retain almost all of its employees. This move was not easy in financial terms, as people had to leave their homes, and psychologically it was hard as well,” says Sergey Gladkov, General Director at Lime Systems. His company was founded in Donetsk, in 1993 as the IT department of a local bank and they continue to work within the banking sector with their main product being used by 25 per cent of Ukrainian banks. “I am in Spain, at the moment, at one of our branches and we have also opened offices in Dnipro, Minsk and Grodno, but our company was initially based in Donetsk before these events occurred. The first group of people sent to Dnipro consisted of 20
people. By the end of May, the shelling had started in Donetsk and a developer said to me “I will not go anywhere, I’ll keep working here.” When he got home he saw that his house had been hit by a shell. The next day the problem with our proposal to move to Dnipro had disappeared. We gained more freedom after leaving Donetsk, and we were able to open offices all over the world,” says Vyacheslav Dodatko, CEO at Anadea, which was set up in 1999. Since its beginnings, the company has worked mainly for European and American clients. Mr Gerashchenkov says they lost their Ukrainian and Russian clients immediately. “We have also lost many staff members. Some of them left because of family reasons. Some people went abroad, starting with Slovakia and ending up in Uzbekistan. Some stayed in Donetsk and refused to work anymore. Despite the fact that we have closed our offices in Donetsk, we still continue working with a few employees remotely,” he adds. Finding a way out Mr Dodatko’s priority was to save the business no matter what and a sharp fall in confidence and trust in Ukrainian companies was something she could not allow to happen. “Customers thought that the service provisioning from these companies could come to an end at any time. So being involved in their businesses seems dangerous and risky. I had to take extreme measures such as going to the window whilst using my camera to prove to our clients that everything was alright at our new location,” he says. “At the moment, it is impossible to conduct any legal business in the territory of eastern Ukraine, as the area is beyond the control of Ukraine and the military actions are still not banned. However, in other areas (Dnipro, Kharkov, and so on), that are close to the Donetsk and Lugansk regions, business is still actively developing, despite the fact that it might be rather complicated and dangerous being so close to border areas,” says Mr Gladkov. When asked about whether his company needed help, Mr Dodatko gets upset. “I do not understand this kind of humanitarian view of the people being affected and looking for help. Because this is definitely not about a company. If it is alive, it will survive under any circumstances. One of the main features
March 2017 of any company is its ability to ensure its own security or safety and we are that kind of company,” he says. “I do not think we need any help either,” Mr Gerashchenkov adds. “As a matter of principle we are a stable company with a strong background and profound experience. We have the ability to make sales and other business processes. We know how to take external factors into account. We have a built a set of regulations taking any actions into account,” says Mr Gerashchenkov. Sound growth ahead Mr Gladkov says that during this intense period, the company has even strengthened its position in the market. “Strangely enough, we were able to find some positive aspects in the current situation. The outbreak of military aggression and the need for an immediate relocation to Kyiv have united the company team. These days we are trying our best to be more attentive and patient towards one another. On top of that, we have become more resistant to any new difficulties and challenges, because there is nothing that can be compared to the problems that we have already been through,” he adds.
“Ukraine is a country with insanely talented and incredibly hard-working people,” Mr Gerashchenkov says. “The population can be their most hardworking when they get paid properly for the work that they do and when they see the future as a bright perspective. Our people can boast of entrepreneurial and professional talent and that unlimited,” he adds. “We often have to face challenges such as working in a team of diverse developers from different countries, for example, from the US. The American development team did not manage to meet the challenge, so the Ukrainian team joined the project and we managed to do it. It is notable that the qualifications and experience of our people make it possible to compete with very advanced developers,” says Mr Dodatko. “After Maidan a wave of highly educated young people rose up; people who do not want to live in a corrupt state, and who are a new generation with new views on life in all its spheres,” Mr Gladkov says. “It is a country with people who want a bright future and democracy. We have extremely intelligent and positive people with an active lifestyle; people who are not afraid of difficulties anymore. They are people who are encouraging increasingly Western principles, values and a way of life,” he adds.
OLGA AFANASYEVA Executive Director Ukrainian Venture Capital and Private Equity Association
Ukrainian start-up projects recognised in the international market but still more investors needed
Published on March 22, 2017
In 2015 alone, the total amount of private equity investment reached $132 million, which is 237 per cent more than in 2014.
Ukraine is already one of the top IT outsourcing destinations in Europe, and a prolific source of start-ups which are attracting more and more attention from global investors. However, the market remains undercapitalised compared to other European countries. The blossoming Ukrainian technology sector has triggered the advent of new companies that are developing their products based on great ideas and high performance in their technological implementation. What is needed now is a bridge between Ukrainian and global investment as well as start-up ecosystems that will match investors and Ukrainian entrepreneurs. Fortunately, this is already happening to some extent. For example, in January 2017, the UA Tech Expo Zone, formed by the best Ukrainian start-ups, was presented at the 50th International Consumer Electronic Show (CES-2017) in Las Vegas, for the first time ever. UATECH was established to introduce the capabilities of Ukrainian Tech products to the global market. Unfortunately such projects are totally private initiatives and they lack state support. The Ukrainian IT industry is a sector that was formed by itself and it was only in 2016 that some collaboration with the government was initiated with that collaboration putting a high importance on developing effective mechanisms is aiming to improve the investment climate. This will enhance the current conditions and result in better achievements than those already reached. According to the Ukrainian Venture Capital and Private Equity Overview made by UVCA, in 2015 alone, the total amount of investment reached $132 million, which is 237 per cent more than in 2014. Private equity investment in Ukrainian companies increased from 0.10 per cent in 2010 to 0.16 per cent, relative to the GDP, which is close to the upper level for Central and Eastern European countries (with only Poland having a higher ratio of 0.19 per cent). The majority of the completed deals (62), belonged belong to the venture capital sector (early stage investments). Growth stage deals have also appeared in 2015. Despite the fact there were only four such transactions, their total amount was in excess of $100 million. The emergence of such deals has led to the revitalisation
of the investment market; they are examples of successful exits that are inspiring investment in Ukrainian start-ups. The average deal size at the seed stage amounted to $400,000, and as seed deals continue to account for virtually all of the venture volume, the size of an average deal has doubled compared to 2014. In 2015, there were 60 active private equity investors present in the country, in various forms â€” from deal participation to the location of team and resources. Apart from these active investors, and angel funds which completed at least one transaction in 2015, there are about 20 other firms which were active in 2014. Interestingly enough, 52 per cent of capital was provided by local investors, which are defined as either a HQ location or the source of funds. Due to TechStarsâ€™ investment map there are more investors in Kyiv than in Warsaw, Vienna, Oslo and Copenhagen. Ukrainian IT companies have attracted more foreign investors without losing the interest of the local market. About half of the deals (48 per cent) were converted with the participation of international funds, which proves the interest in international funds and shows that Ukrainian projects are being recognised in the worldâ€™s market.
DENIS DOVGOPOLIY Managing Partner GrowthUP Group & a co-founder and president GrowthUP Accelerator Published on March 18, 2017
Ukrainian venture investment market is immature and needs growth The market cannot give investors a sufficient deal flow to actively shape their portfolios. The Ukrainian market for venture investment and business innovation has been actively and systematically developing since 2005. That is earlier than in most European countries. Despite the fact that it has seen significant growth, however, it still has not formed a self-sufficient ecosystem. Why? Of course, the main reason is the economy. In the last two or three years the prevailing conditions of permanent economic, political and military crisis have killed any surge in the internal consumption of innovations. Besides that, the e-commerce market and internal innovative products in Ukraine are almost not developing at all. The GDP per capita is very small
and the size and resource orientation of the economy makes it impossible to stimulate an internal demand for innovations (both B2B and B2C). The war and political instability have greatly increased the risks in the country, creating a backdrop against which business models for investments in technology projects have become unbalanced. If we look at the internal economy venture capital fund, we see that in different periods, only 20 to 40 per cent of venture capital funds returned positive returns. The percentage of successful funds (which went up from 1:2 to 1:4 for cost of capital in 10 years) increased from five to ten per cent.
ICT Ukrainian entrepreneurs and investors are not satisfied by the current risk-return ratio. The high potential of the country (stemming from the backward economy and an underdevelopment of the majority of sectors in the economy) can expect profitability that is commensurate with, or even superior to, a possible venture fund. The risk could be disproportionately lower for innovation risks that can be hedged by various financial instruments in the traditional economy. So, we see great difficulties with the formation of a system and a wide pool of investment, both inside and outside the country. Actually, the complete absence of national institutional investors in venture capital, in the presence of the initiatives that have occurred in this area since 2005, supports this hypothesis. The majority of active investors in our market are the venture arms of IT companies or angel investors. A major local entrepreneur told me, “My investment in my business brings me a profitability of 100 per cent per annum. I see no need to place money in alternative financial instruments, and especially not in such risky ones”. In most developing countries, this gap is filled with international financial institutions, but in its current condition — war, economic and political instability — and even in the face of competition for this funding from the younger European Union countries, as well as the fast-growing markets in Asia, Africa and Latin America, our economy actually can’t get access these tools. Well, we are done with the economy! Let’s take a look what is going on in the local ecosystem. In fact, we have 17 funds and super angels, that can invest around (either alone or syndicated) anything from $200,000 to $1 million. Our experience of Europe and Silicon Valley suggests that in order to make one investment in the United States you must look at 100-200 projects, meet with 20-30 companies make due diligence on five-six companies. These numbers are lower in Europe.
In Ukraine, 1,000 start-ups are created per year, if we accept Steve Blank’s description, of which around 20-40 of them can claim to make $200,000-1 million per year. These numbers are too small for 17 funds and the super angels. If we look at the start-up market, in order to attract 200k — 1 million, start-ups would need to build a funnel of 50-60 investors, which in the end would provide a term-sheet of two-four. If we look at our market through the prism of these numbers, we can see that the market is not self-sufficient. The market cannot give investors a sufficient deal flow to actively shape their portfolios. Plus, in order to observe 200 fundable projects a year, it is necessary to collect them, first, in foreign markets. The situation is the same on the start-ups’ side. It is necessary to go beyond the limits of our geography in order to obtain the necessary funnel(s). Experience shows that many more interesting start-ups can be found outside of Ukraine, than internally, and the investors that operate in larger markets are much more experienced and professional than they are in this country. In fact, their work processes have years of experience of working with start-ups on large stream projects; many times more than Ukrainian investors. At the moment, we see the future of Ukrainian industry venture capital investment and technological enterprise exclusively in terms of its integration into the global infrastructure. Most likely, it will have to face competition for capital, but I’m sure it’s the only thing that will push the industry. These same problems are faced by any developing market. It is obvious that our eastern neighbours (Poland, the Baltic States, the Balkans, the Czech Republic, Romania) are addressing these issues more easily than we are, but they have highest number of start-ups in their portfolios (20-30 per cent are actively looking for money in Germany and London, and more than half of early stage investors have foreign start-ups on their books).
Ukraine’s UNIT.city - a world class innovation site for the next technical wave UNIT.city is an innovation park, located on 25 hectares, in central Kyiv, the capital of Ukraine. It is being created with the goal of mobilising Ukraine’s knowledge and talent resources in order to create an environment that is conducive to development and growth in priority technological fields. Located on the site of a former industrial factory, UNIT.city is not only the first innovation park in Ukraine, but also the first park of its kind. Beyond housing world-class office space, technical laboratories and accelerators for the country’s most promising start ups, R&D centres for global brands, educational institutions, cafes and restaurants, recreational facilities and housing and social infrastructure, the park will also provide a suite of services and solutions that are designed to add value to all of its residents, regardless
of their stage in the business lifecycle. These include support for fundraising, a worldwide network of mentors and industry experts, built-to-suit R&D and outsourcing solutions, business scouting and facilitation and educational programming. The result is unmatched infrastructure and human capital as well as an environment that fosters innovation and business growth. Although it is still relatively young, the Ukrainian IT sector has already established itself as a hotbed of innovation and continues to experience strong growth. Nearly 1,000 companies, and 100,000 programmers, operate within the country, while global companies operate more than 100 R&D centres across Ukraine. Ukraine’s software and IT
services’ export volume reached over $2.5 billion last year, demonstrating year-overyear, double-digit growth. Given the size and quality of the country’s IT workforce, and it continually stronger integration into the global economy, the Ukrainian technology sector is poised to grow even further. UNIT. city is perfectly positioned and has, in fact, assembled a suite of services and solutions to profit from these current conditions and to enable its residents to unlock growth and achieve innovation opportunities. At the moment, 25 hi-tech companies are located in UNIT.city, including Concepter, Forland, Hi Tech Office Ukraine, SmartFarming and two labs: a VR lab and FabLab, a 3-D prototyping lab. It also hosts UNIT Factory, a school that was established in partnership with the French School 42, which trains IT specialists through innovative learning methods that conform to the disruptive realities of the digital economy. UNIT Factory currently has 300 students, and will have 800 by the end of 2017. The school’s mission is to pick out the most promising Ukrainian talent and to offer its three-year education for free. This ensures that the park will host some of the country’s brightest young minds Despite still being in its early developmental stages, UNIT.city shows tremendous promise, with its first 10,000 square meters of offices already built and fully rented out. The park will add 20,000 more square metres of office space by this year’s end, and will ultimately contain 500,000 square metres of offices. Its residents will include world-leading technology brands, inspiring entrepreneurs and start-ups, innovative R&D centres, digital media firms, incubators and accelerators and creative and cultural projects, etc. Judging by its current implementation and realisable plans, UNIT.city is poised to become the IT centre of Eastern Europe, where multinational and Ukrainian companies will choose to open offices in order to realise growth, to innovate their product and service offerings to unlock compelling opportunities for expansion.
TO L AU N C H
W O R T H S TA R T U P A YEAR
F R O M S C R AT C H EXTEND AND SUPPORT
ANDREW WROBEL Published on March 26, 2017
The winner of the 2016 Eurovision Song Contest — Credits: Anna Velikova (EBU)
The Eurovision Song Contest is a perfect showcase for Ukraine’s talent and warmth The Eurovision – for Ukraine and Ukrainian singers – is an opportunity to show their music to the whole world and to promote themselves. O. Torvald is the fourteenth Ukrainian act to appear in the Eurovision song contest. The country joined the family in 2003 and won the competition a year later with Ruslana’s Wild Dances. In 2007, Verka Serduchka came second with Dancing Lasha Tumbai. In 2008, the performer’s success was repeated by Ani Lorak, who sang Shady lady. In 2013, Zlata Ognevich took third place. Finally, in 2016, Jamala’s 1944 brought the Eurovision song contest to Kyiv again. “Jamala is so unique, different, unparalleled and extra-talented that it went without saying that she would make it into the top five, or even three,” Volodymyr Ostapchuk, one of the three hosts of the Eurovision song contest for 2017 told Emerging Europe. “However, we shouldn’t forget Jamala’s great aim to reveal the tragedy of her family, and the deportation of Tatar people. There
The three 2017 Eurovision hosts (photo credit Volodymyr Shevchuck)
was a lot of pain, sadness, soul, peace and love.” “It was very emotional,” Oleksandr Skichko, another 2017 host, added. “As she said once in an interview, she always dreamed about telling the story of her grandmother to the whole world. So she expressed it perfectly in a song that moved everybody.” A nation of talents Two wins and another three very successful performances, out of 13 acts so far, puts Ukraine high up in the winner’s ranking. In the history of the contest history, the country takes sixth place together with Italy, Spain, Switzerland, Germany and Austria. “The Eurovision — for Ukraine and Ukrainian singers — is an opportunity to show their music to the whole world and to
promote themselves. They take it very seriously. I think this is the reason why our country is so successful in the contest,” says Timur Miroshnychenko, the third host. Oleksandr believes Ukrainians are successful because they are different. “We create something new in our performances. Ukraine is a greatly diversified country and we have a very rich culture. We like to experiment with new sounds, new styles of music and also new dance shows. We have a lot of talented musicians. In the last years we made huge steps forward and I am sure that this year we are going to impress Europe again,” he says. “Ukraine is a relatively new member of the longest-running European contest, so it is quite obvious that, being such a big country, we can surprise Europe every single year. Moreover this year’s slogan ‘Celebrate diversity’ resonates with our main theme and purpose — to discover new, different and unique culture and music. Just believe me — you will definitely be amazed,” says Volodymyr. Welcome with open arms The military conflict with Russia has been ongoing since 2014. The number of tourists visiting the country has dropped. Jamala believes that it is extremely important and highly necessary for Ukraine to welcome the guests that will come to watch the contest. “Do you remember how exciting it was for us to share Euro2012 with Poland? We were all encouraged, started learning English, cleaned the streets and built the Olimpyiskyi stadium. It was an incentive. The Eurovision in Ukraine is a great bonus too. No matter what you think about this competition, what matters is that a great number of tourists will visit our country: there are many fans; many more of them than you can imagine. They will get an impression of us. When guests come to see you, it is only natural to show the best you have,” Jamala tells Emerging Europe. Oleksandr says that for Ukraine, the 2016 victory was a real breakthrough. “Now we have an opportunity, once again, to show the world how welcoming and beautiful our country is and music is the best manner of international communication as it connects our hearts. Ukraine is an amazing country, and Ukrainians are a great nation. We believe in an independent Ukraine. That is why, for us, it is very important to hold the Eurovision Song Contest at the highest level and to show that Ukraine is a country with a great soul, where there is a place for every guest who wants to meet her,” Oleksandr adds. “Ukraine is hosting the Eurovision song contest 2017 whilst in a complicated political and economic situation, so the most important thing is to maintain our significance and hospitality, while gently drawing attention to the existing issues in Ukraine also,” says Eugene Galych, O.Torvald’s frontman. “It’s too important to not respond to aggression. Moreover, we
cannot allow the media to find any reason for a new information war. We can’t ignore what is happening inside the country but it’s very important to give our guests a warm welcome and to do everything so they can feel safe and protected,” Eugene adds. This year’s Eurovision motto is ‘celebrate diversity.’ “Or to be more correct “peace, peace, love, love” Isn’t that a best bet to win the Eurovision?” asks Volodymyr. “For Ukraine, the Eurovision is like hurricane Katrina. Welcome to Ukraine, darlings! We will show you everything!” exclaims Verka Serduchka. “We also love watching the Eurovision song contest on TV with my mom and champagne. My mama prays there will be fewer slow songs this year, as she is afraid she may fall asleep before results’ announcement.” Discovering the country “Though the geographical centre of Europe is in Ukraine our country is a terra incognita to some extent. I’m not just talking about the sights, cuisine or destinations,” says Volodymyr. “It is also a great responsibility,” says Timur. “But we have to concentrate on the social and entertaining components of the contest. The Eurovision is all about fun, love and unity. Yet again it’s a great opportunity to show Ukrainian hospitality, openness and creativity to the whole world,” he adds. Vitali Klitschko, mayor of Kyiv, tells Emerging Europe that the Eurovision Song Contest is only the beginning of a list if musical, cultural and sports events that will take place in Ukraine’s capital. “It is my mission to bring more of these events to Kyiv, to promote our city and to show everyone, not just in Kyiv, not just in Ukraine, but around the world, how beautiful our city is. Everyone who comes to Kyiv feels good and positive emotions and gains unforgettable memories of one of the oldest cities in Eastern Europe,” he adds. Judging by the musical talents of the people of Ukraine, the Eurovision Song Contest will come back to Kyiv again soon. Verka Serduchka (courtesy of Verka Serduchka)
O.Torvald (courtesy of O.Torvald)
‘Viking’ is yet another way to annoy Ukraine ALINA NYCHYK A journalist, political scientist and economist Published on October 25, 2016
The tsars of Moscow and, later, Russia understood that without an imposing past it was impossible to create a great nation and empire.
At the end of December 2016, the film ‘Viking’ was released in cinemas across Russia. It set an absolute record among the country’s filmgoers, gathering $1 billion in the box office within its first nine days. It is also said to be the most expensive Russian film ever made. The film was expected to depict historical truth, at least this is what the producers claimed, but it seems it failed to do so. Despite its huge popularity among Russian cinema-goers and praise from the president — Vladimir Putin met with the crew at the Kremlin – it received a weighted average of 5.4 out of ten (amongst some 800 voters), which is quite mediocre for a movie that was acclaimed as the Russian “Game of Thrones” before it was released. The actual “Game of Thrones” has 9.5 points out of ten,
among 1.2 million voters. However, apart from its artistic evaluation, the film has caused some tension in the already bad Russian-Ukrainian relations. First of all, ‘Viking’ was filmed mainly in Crimea, which legally belongs to Ukraine. It was annexed in 2014, which was a violation of the 1994 Budapest Memorandum on sovereignty and territorial integrity of Ukraine, signed by Russia. Additionally, the international community hasn’t recognised the annexation therefore, it is clear that producing a film in such a disputed territory would not promote good Russian-Ukrainian communication. Secondly, the film claims a Russian legacy to Kyivan Rus. For President Putin, who thinks the legacy of the Rus belongs
(courtesy of IMDb.com)
(courtesy of IMDb.com)
to Russia, it is an ideal tool to rewrite Russian history, anew. He recently opened a monument of Kyivan Prince Volodymyr in Moscow and called him the founder of the Russian state. At the same time, Ukrainians strongly believe that Kyivan Rus was the first Ukrainian state. They believe that Russians originated from the Asian tribes that formed a state on Russian lands far later than Kyivan Rus existed on Ukrainian territory. In the essay, “How Moscow hijacked the history of Kyivan Rus” Dr Yaroslav Dashkevych quotes V. Bilinsky’s research “The Land of Moksel or Moskovia” which presents historical sources (mostly Russian) that prove the misrepresentation of the past of the Russian Empire. That misinterpretation was geared to create a historical mythology about Moscow state and Kyivan Rus sharing common historical roots, and to give Russia “succession rights” to Kyivan Rus. “The tsars of Moscow and, later, Russia understood that without an imposing past it was impossible to create a great nation and empire. Therefore it was necessary to glorify their historical roots and even to hijack the history of other nations. So, starting with Ivan the Terrible (1533-1584) the tsars of Moscow have applied all their efforts to appropriating the history of Kyivan Rus, its glorious past, and to creating an official mythology for the Russian Empire,” writes Dr Dashkevych.
Thirdly, the film supports the theory of a Viking dynasty in Kyivan Rus, which is neither Moscow’s nor Kyiv’s point of view. According to Norman theory Kyivan Rus was formed and ruled by the Normans, as the Slavs had invited the Vikings to rule their state because they could not organise themselves because of constant internecine conflicts. That theory also states that Kyiv was founded by the Vikings, as they were travelling South for trade purposes. Interestingly, while the film met huge Orthodox and nationalist criticism, from the other side, the film shows the desire of Russians to see their past and place in Europe. In the end, Russians might prefer associating themselves with European Vikings rather than with Asian tribes and the Mongolian Khanate. Regardless, Ukraine has decided not to show “Viking” in its cinemas. Whether it is a wise decision is not clear. What is clear is that for centuries Ukraine’s history has been written by its conquerors. The Russian “Viking” and the Polish “Volyn” are trying to tell Ukraine’s history anew. What Ukraine should do is to make some correct historical research on its origins and popularise it internationally. Films can be a good way of involving the international community in a discussion about Ukraine.
Past troubles belie the opportunities for investment MARGEIR PETURSSON A member of the Supervisory Board Bank Lviv
Sometimes I ask what this nation has done to deserve a life and a fate that constantly goes from bad to worse.
Entirely by chance, in 2006, I ended up controlling a small bank in Lviv, Ukraine, and I have been doing it ever since. I must admit, a lot has happened in the last decade. First, it was a story of optimism, following the 2004 Orange Revolution but after the financial crisis in 2008-2009, it has mostly been a tale of damage control and survival. The Euromaidan revolution at the end of 2013 and in early 2014, brought a short glimmer of hope but this was extinguished by an even more brutal economic crisis, as well as the sad loss of life and well-being of way too many Ukrainians in the military conflict. Sometimes I ask what this nation has done to deserve a life and a fate that constantly goes from bad to worse. The 20th century was terrible overall for Ukrainians and now their income has fallen to the lowest in Europe. They live in a state of high uncertainty about their personal and national future and subsequently they have terrible demographic statistics, fuelled by understandably high emigration and a much higher number of deaths than births. One phenomenon explains the situation: corruption. Coming from Iceland, a small western country which has also seen its ups and downs, I could never have imagined just how much corruption paralyses society. At the beginning of the 20th century, Iceland was one of the poorest countries in Europe, while the Austro-Hungarian region of Galicia
Published on February 14, 2017
was certainly in the more prosperous half, as may be witnessed by the marvellous constructions from that era. Since then, things have consistently improved in Iceland while living conditions here in Ukraine are probably worse than they were a century ago. The current level of corruption is very well-known to western investors who no longer take it for granted that Ukraine is on the right track; not as we thought a decade ago when looking at reforms in the neighbouring countries: Poland, Hungary, Slovakia, Romania and the Baltics. I want to give a short financial example of how strange things are in Ukraine compared to the Europe Union. It concerns the relationship between labour and capital. In the European Union, if a person wants to secure a working person’s salary for themselves, from their savings, they need to earn an income of €3,000 a month after tax, which is €36,000 a year. An investor with good diversification could expect to earn two per cent on their savings, so in order to earn the equivalent of €3,000 a month, they need to have an equivalent of €1,8 million in savings. On the contrary, in Ukraine, the banking deposit rates are 16 per cent in the local currency. In order to earn a working person’s salary of €200 here, they need around €15.000 in savings. So it is roughly 100 times better to be a capitalist in Ukraine than in the EU which, by the way, is only 70 kilometres away from Lviv. One would
expect profit seeking capitalists to be running the short distance to Ukraine to exploit the difference. But few are doing it and this is mostly because they fear the red tape, the ambiguous rules and laws which are constantly changing. There are nonetheless several success stories being played out here in Western Ukraine. Several tenacious investors with a cautious approach have built up their labour intensive businesses with clear access to raw materials and a predefined export route or local distribution channels. Western IT companies that are outsourcing to Ukraine are expanding ever more aggressively. They have minimal capital costs and in Ukraine they have access to well-educated and technically skilled young programmers, eager to earn salaries that resemble EU standards. This is spreading out to other sectors seeking skilled workers. Ukrainians are no different from other Europeans and they are ready to work hard to improve their living conditions. What worries me is that it is very hard for a young, talented person to start up their own business. If a government job comes up with the possibility to get their rent, it is understandable that they cross the fence. It is easier for young talent to vote with their feet and move west rather than risk a third revolution against corruption. My dream is to take part in a better future for Ukraine; one that this remarkable nation deserves.
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