The Dnipropetrovsk region economy has experienced a challenging year in 2020, but there have been moments of progress to report alongside the complications created by the coronavirus pandemic. One of the most encouraging developments was the official launch in October 2020 of Ukrainian Mineral Fertilizers, a Kriviy Rih-based company that uses state-of-the-art eco-friendly industrial recycling technologies to produce nitrogen fertilizers.
The recently unveiled Dnipropetrovsk region facility is the latest investment of UMG Investments. Founded by SCM in 2006 to manage commodity assets, UMG Investments now operates as an investment company with interests in a range of economic sectors and total assets valued at above USD 500 million. The new Ukrainian Mineral Fertilizers production complex was constructed from scratch and involved an overall investment of more than USD 11 million. It features cutting-edge technologies from German-Japanese mechanical engineering giant Hosokawa Alpine, and is more advanced than most similar facilities located in the neighboring European Union.
This emphasis on ecologically sustainable business models and readiness to invest heavily in technology are both very much part of the UMG Investments philosophy. Such thinking is still relatively novel in Ukraine, but UMG Investments CEO Andriy Gorokhov believes it is simply a matter of sensible long-term business strategy. He points out that while Ukrainian ecological regulations are not currently as stringent as those in place within the EU, we are likely to see increasing convergence over the coming decades. It therefore makes sense to establish facilities now that will meet the future requirements of what is expected to be a significantly more regulated market.
Adherence to the higher standards of the European Union also means greater access to EU markets. Gorokhov says the quality and ecological purity of Ukrainian Mineral Fertilizers production is a major factor for foreign clients. “They tend to be very strict in terms of ecological issues and want to make sure the fertilizers they use do not contain any harmful additives,” he notes.
Ukrainian Mineral Fertilizers is the second new project for 2020 in the UMG Investments recycling portfolio. In April 2020, the company entered into an agreement with Effective Investments over the acquisition of a minority stake in a Lviv region enterprise producing high-protein feed additives for farm and domestic animals. This partnership aims to create the first independent processing plant of animal by-products in Ukraine.
Work has also been underway during 2020 on another Dnipropetrovsk region initiative that seeks to convert the greenhouse gases generated during the coal mining process into a source of heating and electricity. So far, UMG Investments has invested around USD 2 million in a pilot project at a coal mine located close to Pavlograd in Dnipropetrovsk region. At present, the power it generates is being supplied back to the mine itself. If this pilot project proves to be a success, there are plans to scale the operation up over the next five years, with output rising from today’s 1.5 MW capacity to 6.5 MW, along with the addition of a second facility.
“The project has great potential to make a positive ecological impact on the surrounding region, which is something we are passionate about,” says Gorokhov. “We have also started looking for partners in a new area for UMG Investments: secondary plastics. We are ready to invest above USD 2 million in enterprises and projects for the processing of polymer waste. As more and more European countries require packaging manufacturers to use up to 30% of recycled plastic, this market is expected to become the fastest-growing segment of the plastics processing market. Global trends also indicate a positive outlook for Ukraine. From 2019 to 2027, the plastics processing market is expected to grow by 6.6% annually in terms of profit, and by 8.8% in terms of volume. Our country is already moving towards the implementation of extended producer responsibility. The number of sorting stations is growing every year, and the practice of separating household waste into different categories is gradually increasing among the population. These trends create the prerequisites for an expansion of the production capacity at existing Ukrainian enterprises and entry into global markets for recycled plastic. We are looking for companies that process all types of thermoplastics for finished products or intermediate raw materials such as flexes, pellets, and fibres.’’
With industrial recycling still a relatively untapped niche in Ukraine, Gorokhov believes there is huge scope for further investment. He says that awareness of the potential offered by the reprocessing of industrial byproducts is now growing within the Ukrainian business community. This is opening up new avenues for cooperation. “In many industries we are seeing a readiness to enter into long-term agreements with partners like us in order to build the facilities necessary to recycle industrial waste and byproducts. As this culture becomes more and more widespread, it creates new chances to invest.”
While Gorokhov continues to seek out new investment opportunities across Ukraine’s industrial sectors, he has also had to come to grips with the turbulent business environment created in 2020 by the global coronavirus outbreak and accompanying lockdown restrictions. Despite the novel nature of the pandemic itself, Gorokhov notes that the crisis conditions it has created are actually nothing new for Ukraine. Indeed, this is the third major crisis that UMG Investments has been forced to navigate during its fourteen-year history. It follows the 2008 global financial meltdown and the economic crash that accompanied the height of the crisis with Russia in 2014. “We have all the relevant professional experience and a good understanding of how to deal with crises of this nature,” he says.
Like many business gurus, Gorokhov believes the current crisis conditions also create a whole new range of opportunities for ambitious and confident companies. He talks about adopting the mentality of a startup and stresses the importance of boosting organizational agility in order to pivot when necessary in response to the rapid changes taking place in the business climate. The companies that are best able to adapt to the new market conditions will reap a whole range of rewards, he argues, including greater market share, closer relationships with clients, and a significantly enhanced reputation. “If you have proven yourself able to manage your business successfully in the present economic environment, then it is reasonable to assume you will be able to handle future crises in a similar manner. This generates considerable confidence.”
The coronavirus crisis also opens up windows of opportunity for possible expansion, says Gorokhov. Many international investors have responded to the pandemic by shelving plans to enter the Ukrainian market and turning to more stable if unspectacular options. Meanwhile, the unfavorable economic conditions created by the coronavirus outbreak have reduced the number of domestic competitors on the market. “Such circumstances actually make this one of the best times to invest. Valuations are lower and competition is not high, making it possible to implement investment projects that might otherwise have been unavailable.”
Throughout 2020, Gorokhov has been an active participant in the evolving public debate over the priorities for Ukraine as the country looks to get back on track following an extended period of pandemic disruption. So what is his recipe for economic recovery? “That’s a good question! If anyone could provide a comprehensive and convincing answer, I think they would deserve to be at least nominated for a Nobel Prize,” he quips. “We have invested in eleven companies and this provides us with insights into all the major industries in Ukraine. We also sell to 40 markets worldwide so we get a clear sense of the current sentiment elsewhere around the globe.”
As Gorokhov discusses the challenges facing Ukraine on the road to recovery, he comes back time and again to the need for a clearer vision of the country’s future economic direction. “I consider it vital for Ukraine to establish a single vision and a single economic strategy for the country. If the government is able to identity the economic sectors that are Ukraine’s top priorities, they can then move forward towards identifying what these sectors lack and what they need in order to make progress. We can then look to establish the kind of cooperation between the state and the private sector that can help Ukraine travel from point A to point B in the country’s economic development. It is already clear that the road ahead is long, but we currently lack a coherent vision of the target model.”
The UMG Investments CEO also acknowledges the importance of international investment as one of the principal engines of Ukraine’s desired transformation towards developed economy status. Since achieving independence in 1991, Ukraine has steadily fallen further and further behind its neighbors in Central Europe due to the country’s comparative inability to attract Foreign Direct Investment (FDI).
This is no accident, according to Gorokhov. “Ukraine’s relations with international investors are subject to the same basic principles as the interactions in our everyday lives. When you meet somebody new, you have to decide whether you want to develop a relationship with that person. If you find that you have a lot in common, you might decide to invest in the relationship, but if there are significant differences, you are more likely to keep your distance.” He believes Ukraine still often lacks the credibility to convince international investors that the country is a reliable partner. “The kind of investment Ukraine needs requires long-term commitments of five, ten, or twenty years, and involves fixed assets. You cannot then take these assets to Japan, Britain, or France. You must stay in Ukraine. So this requires high degrees of trust and understanding towards the local business climate.”
One factor currently preventing greater levels of trust from developing is Ukraine’s rocky relationship with the International Monetary Fund. In spring 2020, the Ukrainian authorities secured a new IMF program that was seen as essential for the country’s economic stability. However, a number of subsequent government decisions and court rulings have targeted the conditions set by the IMF and threatened to derail further cooperation. Gorokhov says this has sent out alarming signals to potential investors. “Everyone, including the Ukrainian government, understands that the position of the IMF acts as an indicator for the wider investment community. It is ridiculous for a country that is looking to attract investment to step on the gas and then slam on the brakes in this manner. If we want to establish a reputation for trustworthiness, then we need to treat to the conditions established by the IMF like the Biblical ten commandments.”
Ukraine’s relatively low international profile also undermines the country’s efforts to attract investors. Gorokhov was one of a number of Ukrainian business leaders who participated in the Ukraine House initiative, a promotional platform which took place on the sidelines of the World Economic Forum in Davos in January 2020. He is well aware of Ukraine’s reputation problems and is a strong believer in the need to showcase the country more proactively on the international stage. “I believe it is critically important. If we don’t pitch ourselves and give international audiences a chance to get to know us better, then they will get their information from elsewhere. Unfortunately, much of the available international media coverage of Ukraine tends to be negative. So initiatives like Ukraine House in Davos are a very good tool to promote Ukraine as an investment opportunity.”
As someone who spends much of their professional life moving in international investment circles, Gorokhov remains cautious about future prospects but sees some indications that Ukraine’s message may be starting to get through. “Investors increasingly regard Ukraine as a European country with a European mentality. This is very good news. There is also great interest in the rapid development of the Ukrainian IT sector, which illustrates the talent that Ukraine has to offer and underlines the country’s ability to integrate into the global tech and digital economy. Most of the investors I come into contact with are not yet ready to invest in Ukraine, but they want to keep track of new opportunities and are eager to maintain warm relations with the country’s business community. If we are able to create the right business climate and establish greater levels of trust, investors will come and they will bring money, technology, and development.”