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Investment Project: Ukraine

Ukraine enters into 21 century as a state, dynamically developing and actively aiming at the engagement in social and economic processes of the modern world, the integration in the European Community.

Over the last 4 years the Ukrainian economy has experienced a GDP growth rate, which is much higher than the European average ones. In 2003 the GDP of Ukraine increased, comparing with 2002, by 9.4% ( in 2000 it raised by 5.9%, in 2001:9.2%, in 2002%:5.2% ) that is 10 times more than the average GDP increase rate of the European Union states.

The continuation of this positive trend is forecasted from 2005 till 2015 with the average forecasted increase at the level of 6.0 %-7.0% that is 1.5-2 times higher than in the EU states.

The positive trend, providing high indices of economic growth, is a result of significant growth in direct foreign investments (double the GDP increase rate), which began in 2000 and lasts through 2005 (in 2000 they constituted 18.1%, in 2001:17.6 %, in 2002:20.1%, in 2003:23.0%) and investments in fixed capital (over the last 4 years their rise has been taking place at the level of 8.9-31.3%). Despite the growth of foreign direct investments in the economy of Ukraine in 2001, FDI constituted only 2.1% of the GDP, while in those countries, which joined the EU in 2004, it made up 9.8% in Estonia, 8.7% in the Czech Republic and 7.2% in Slovakia .

Thus, according to the latest data, since independence Ukraine has got more than $4,2 billion (milliard UK) of foreign direct investments that makes up 57.5%. More than three quarters of this sum was invested by the following countries: Cyprus (25.6% of the EU investments in Ukraine), the United Kingdom (17.6%), Germany (12.7%), Netherlands (12.1%) and Austria (7.2%). Despite high macro-economic indices, the impressive growth, some progress in the market and structural reforms and also expected fundamental changes of political, economic and social climate in the country under the influence of the “orange” revolution, which opened unknown, democratically conscious Ukraine to the world, it is of utmost importance for our country to work towards working out and realization of the doctrine of a steady increase of attractiveness and competitiveness in the context of powerful economic forces and global trends in the world economy.

Judging from the first steps of the new political leaders of the country, special attention is paid to improvement of the investment climate. The government undertook to provide equal and favorable environment both for national and foreign investors and also the protection of rights in their activity programs. Law guaranties of the supremacy of enterprises corporate governance principles are planned to be created, first, in the interests of national and foreign minority share-holders and also cancellation of differences in the system of domestic and foreign investments registration and regulation, simplification of the very registration and regulative procedures, lightening capital movement and profit receipt and, finally, the creation of an Investors Council in co-operation with foreign investors under the president of Ukraine.

New tax rules must be incentive for investors. On the opinion of political leaders, the taxation legislation, combined with the repeal of benefits, must become transparent and must have a single meaning that will make not beneficial both the evasion from tax paying and bribery of officials for a decrease of tax burden. Some measures are being taken for the liquidation of bureaucratic and corruption obstacles to investment. First of all, this means a wide-scale administrative reform that should provide improved organizational governance in the country, a decrease, and ideally complete exclusion, of heads and controlling bodies with unclear mandates and often duplicate authorities.

Declared and fulfilled measures for the creation of climate with open and fair competition in the development of entrepreneurship in Ukraine did not fail to make positive impact also on the international scene. The action plan “Ukraine and the EU” is approved, the draft, concerning the revocation of the Jackson-Venik’s amendment has been introduced to the USA Congress in that part, related to Ukraine. There is a real prospect to join the World Trade Organization, the next step is the recognition of the status of the Ukrainian state with market economy. At present enough attractive prospects exist for foreign investments in the most important industries for its economic development, which includes power engineering, metallurgy, machinery construction, building and transport, tourism and service sphere, agriculture and food industry.

The energy sector is still most problematic. On the one hand, there is the highest level of the power consumption as part of the GNP in Ukraine, comparing with Europe that motivates the government to stimulate and secure investments in the energy saving project. It is clear, it cannot be done without modernization and technological renovation of existing production capacities, as well as without converting it to market competition that also opens significant opportunities for investors. Capital and the experience of European investors would allow in the shortest timeframe to transform this industry to the most modern level with simultaneous quick and high profit receipt. Specialists forecast a bright future for reconstruction of existing and building of new small-scale and medium hydroelectric power stations, wind, sun and biological plants, cogeneration and other modern technologies of natural gas usage and an increase of the Ukraine’s transit potential for energy supply transportation.

Ukrainian metallurgy enterprises are highly attractive to investments, most of them are unique. Taking into account the Ukraine’s interest in the integration with the EU, the new government is determined to revive this sector. It is not excluded that some of enterprises should be restructured to avoid intense competition with German and Italian metallurgists during the reconstruction and to occupy the most profitable position in the structure of the EU metallurgy economy. No doubt, now foreign investors will get exceptional opportunities to compete equally for participation in the restoration of many giants of the Ukrainian metallurgy. Economists estimate that not less than $7 billion is required for the Ukrainian metallurgy industry, and such a highly technological industry as machinery building, that is tightly connected and dependent on the first one, including one of the most advanced in the world rocket building, can require additional $5.1 million.

Reliable and long-term customers for the Ukrainian metallurgy and machinery building enterprises could become the Nikolayev, the Kherch and other ship-building plants, possessing a powerful production base, modern technologies and experienced specialists. Serious investments in ship-building, in addition to the creation of jobs for thousands of habitants of coastal regions, will generate significant returns for investors.

Ukraine stays mainly a land state in the very centre of Europe with a rather branched main roads infrastructure with a length of approximately 170 000 km, which scales and importance are directly opposite to its quality. A large-scale railway network is not less important, 22 500 km of which is not electrified, while the country imports oil products but exports electric power. The last years showed that Ukrainian transport workers can cope with railways problems whereas the gap between the world and the Ukraine’s standards of the main roads construction technologies demands significant investments especially, if considering the volume of works and time constraints.

Unfortunately, the majority of 700 Ukrainian airports are empty, though the country disposes of the modern aircraft construction and in the case of funds availability could create a fleet of not big economical machines and renew enough profitable air transportations.

Perhaps, the most large scale tasks are set before the Ukrainian building industry, especially in the building of accommodations and objects of cultural, household and administrative purposes. In the near term qualified work force will stay essentially cheaper than world standards in this Ukrainian industry that makes investments in the building projects extremely profitable in the country.

Indisputably, the creation of proper architectural forms in the Ukraine’s towns and countries will need huge capital investments in the building, reconstruction and technological modernization of building materials enterprises. In its turn the government promises to regulate the civilized crediting system of private persons and enterprises that will ensure a demand increase for building services in the market, which will include not only installation and finishing works directly at building yards, but the whole services complex of projecting, judicial and financial support, including provision with contract signing until fully operational.

Service level and that quality, that are customary in the developed countries, are in the formation stage in Ukraine. A significant part of this sector is connected with small-scale entrepreneurship or private activity that constitutes the lowest part of the shady economy pyramid. The new government stated serious expectancies to lighten entrepreneurship activity to the maximum and to protect small-scale and medium business. This, undoubtedly, will help to legalize a significant part of a shady service sphere, to increase competition in the market and hence to widen the assortment and improve quality of service. Inevitably the demand for capital investments will increase that will allow investors, including foreign ones, to find profitable projects for their capital expenditures.

Tourism was the main sector at all times. Unique historic monuments and objects of nature, in which all the regions of Ukraine are so rich, always attracted hundreds of thousands curious travelers from all sides of the former USSR and other states. The most popular regions for the development of this sector were the capital, the Black Sea and the Azov Coasts, the Carpathians. To be true, Ukraine inherited enough developed and up-to-date infrastructure of hotel, sanitary and entertaining objects relatively to one sixth of the Earth’s part.

But political and even greater economic issues made the majority of potential clients to save family budgets and to refuse from traveling to the sea and mountains, leading to a tourism crisis in a first half of the 90s. At the same time decline in the sector caused a price decrease in hotels prices, pensions and other objects of tourist business in Ukraine that attracted the first wave of investors. Today more than 2,500 km of the Ukrainian Coast line offers investors a variety of opportunities, beginning from building expensive fashionable hotels and tourist complexes with pools, golf fields and other first-rate attractions, ending with medium level hotels and basic seasonal camping-sights for mass clients. Focusing on wealthy tourists, it is necessary to be ready to compete with tourists industry of other countries of the Black Sea and Mediterranean basins and to offer new high-quality services with significantly lower prices. Projects for mass clients with a middle income can be more profitable for investors in the Ukrainian zone and not only from Ukraine but tourists from other countries through rendering high-quality base services with lower prices. Investments in the construction of not only large but also small centers of winter rest with skiing routs on numerous mountainsides and not big restaurant-hotel complexes can become profitable capital investments in the resort zone of the Carpathians . In a summer season investments in the working of foot, bicycle and horse routs and also extreme kinds of rest and sport such as rock-climbing, rafting etc. can bring enough high profit.

Lately medical and sanitary tourism has become popular in Ukraine. Not expensive but high-quality medical services, mineral waters and curative muds (mostly unique), salt caves and phytotherapy treatments attract more and more patients not only from Ukraine and the states of the CIS but from highly developed countries with expensive medical service. At last, one cannot forget about cultural and historical ties and interests of different countries in Ukraine. Thus, for instance, it is to be expected that tourist objects of the Crimea will stimulate the highest interest of British, Russian and Turkish investors. Undoubtedly, Greek businessmen will show higher interest to the Odessa region, Canada and the United States to Western Ukraine.

Despite not completely favorable investment climate in the previous years in Ukraine, nevertheless, many foreign investors (not only Cyprian) took the risk of starting business in Ukraine. Investment expediency in the Ukrainian economy is confirmed by examples of American companies. About 1200 of the USA firms placed their own direct investments in Ukraine during more than ten years of the state independence, about 700 of them were joint enterprises. Such famous companies as Boeing, Coca-Cola, AIG, Procter &Gamble, John Deere, Kraft Foods and others are among them.

The success of AIG is impressive, which has founded the first in Ukraine ALICO Insurance Company, completely owned by foreign investors. This example is also interesting for the reason that insurance business is still not progressing sector of economy and the rate of its risk is much higher than, say, in the wholesale trade. Another example is more typical to creation and development of foreign business in Ukraine. Procter&Gamble Company began its activity in the lowest risky sphere: the realization of its own produce in the almost empty market in 1993, and in several years governing body of the company considered that it would be expedient to close one of its plants in England and to start producing in Borispol.

Indisputably, it will be much easier to achieve positive results for foreign and Ukrainian investors in a new economic and political environment, and a financial partner of Ukraine the International Monetary Fund has already estimated the Ukrainian economy as being attractive to investments. The European Bank for Reconstruction and Development shows the tendency to the continuation of investment processes. It is preparing a new packet of investments in Ukraine up to $300 million, including $20 million that is to be invested in the development of the Ilyichevsk port and $20 million in investment of energy saving

projects. By July of the current year the World Bank is ready to allot two tranches: $175 and $500 million, including the building of high-voltage lines, reconstruction and modernization of hydroelectric power stations and also to correct its approaches to the financing of investment projects. Deusche Bank opened a line of credit in the sum of EURO 2 billion for “Neftegaz Ukraina” National Stock Company for the realization of international projects of the company. Gas de France Company is interested in the possible participation in the international consortium on the governance and development of the gas and transport system of Ukraine. Accor European hotel chain, NH Spain hotel chain and also the Baltic hotel chain intend to enter into Ukrainian market.

According to different expert estimations very often contradictory and mutually excluding, formed international and domestic situation in 2005 can allow to attract not less than $ 3-4 billion in Ukraine, and in 3-4 years to reach the level of $ 10 billion annually. A number of the Ukrainian enterprises can become significantly developed, as the result of recreation of production cooperation, taking into account the transition of the political Ukrainian and Russian relations to economic level, and will open new opportunities for investment in the Ukrainian economy that will bring mutual benefits not only to Ukraine and Russia but to Kazakhstan, Belorussia and other CIS countries. Obviously, in the terms of revolutionary changes much in the investment climate of Ukraine will depend on a position of political and economic circles of the West and, first of all, European Union. Could they go further the encouragements and the gestures so roughly shown on the eve and especially during presidential elections in Ukraine?

Undoubtedly, questions of timely improvement of the legislation, the realization by the state of its function of the control observance of national interests and economic safety, transition to the economic regulation of the economy, the development of the Ukrainian financial system will remain the main factors of the development of investment processes in Ukraine and the development of the economy.