Ukraine begins 2017 with a number of positive indicators suggesting the country’s economy is entering into a period of renewed growth. Nevertheless, foreign direct investment (FDI) remains in alarmingly short supply. Most analysts agree that without greater international investment, the current post-Maidan recovery is likely to remain anemic.
The loss of access to traditional Russian markets and the ongoing geopolitical confrontation with the Kremlin have added a sense of strategic urgency to Ukraine’s current search for new international partners. Since 2014, this has produced a sharp upswing in efforts to promote Ukrainian investment on the global stage. The Ukrainian government has staged an unprecedented series of bilateral business forums, while the private sector has also sought to meet growing international interest in what many continue to view as Europe’s last great emerging market.
This trend looks set to continue into 2017. One of the key investment attraction initiatives of the first quarter will be a series of forums in North America organized by A7 Conferences with the support of Dentons. This tour will run throughout early March, with investment events scheduled to take place in Toronto, New York City, Houston and San Francisco. Business Ukraine magazine spoke to Dentons Kyiv and New York Partner and Head of its Energy Practice Myron B. Rabij about the challenges of selling Brand Ukraine to outside audiences.
What are the key concerns among potential investors considering Ukraine market entry?
Stability of the government (which I think is a misplaced concern - governments will inevitably change during the reform process), the bureaucracy, the tax system and tax load, low margins (i.e. profitability), and, of course, corruption. The time drag of the bureaucracy cuts away at already low margins and creates risk.
As to corruption, to be frank, experienced investors in emerging markets appreciate that corruption cannot be completely eliminated. It exists in all markets in varying degrees. Investors seek to understand whether there are ways to overcome the hurdles created by corruption that threaten to impede business. This could mean the court system, law enforcement, or an ombudsman or other relief - including the reliability of international arbitration award enforcement. Does my business stand a chance when confronted by corruption? That is what an investor needs to know.
How important are geopolitical factors for investors when looking at Ukraine?
Very. Investors used to regard Ukraine as a bridge into Russia due to its trade treaty advantages and its proximity to Europe. That advantage is no longer there. An investor currently buying into Ukraine or considering building something in Ukraine is not only thinking of the domestic market (where buying power is quite low), but is also looking to use Ukraine as a springboard into other markets. There has to be incentive to invest and investors need to understand where the Ukraine springboard may take them.
Who are Ukraine’s new strategic trading partners other than the EU and the US? The EU and the US are already trading amongst themselves. There has to be additional added incentive other than Ukraine marketing itself as a low-cost labor market or outsourced manufacturing market for resale back into the EU.
Which areas of the reform process offer the greatest potential for short-term improvements in the Ukrainian investment climate?
You are absolutely right in identifying the short term as the biggest problem for the investment climate. The long-term picture looks positive, but getting from here to there is a hard road. Ukraine needs to keep working on lowering the tax load, and reducing and simplifying the bureaucracy. There have been considerable achievements but the process must go further.
It is possible to name numerous specific priorities: Further lowering tariffs on upstream drilling and changing how they are calculated; finally approving long-term power purchase agreements and the electricity law for the electricity sector and perhaps reducing connection fees; allowing the feed-in tariff to kick in during the investment stage and not simply at its completion. Creating incentives for IT innovation, privatizing land and jump starting the privatization process generally, allowing foreign law governed foreign arbitration of cross-border shareholder disputes while still debating internal court reform, and further relaxation of currency regulations (already in the works but still a multi-step process).
Many analysts identify communications as a major Ukrainian weakness, with potential investors unaware of the opportunities Ukraine represents. How should Brand Ukraine be packaged for outside audiences?
That’s a very good point. At present, Brand Ukraine does not produce a warm and fuzzy feeling. Packaging certainly helps but on a fundamental level, both the Brand and the Product need to be strong and must contain a positive message. This message is currently missing. The focus on the hybrid war with Russia is diverting attention completely away from investment. Anyone in marketing will tell you that you cannot sell your brand by constantly comparing it to or complaining about the competition (i.e. Russia). As everyone can plainly see, the result is a lot of press and attention on Russia but not Ukraine. Brand Russia effectively gets a boost from the marketing campaign of Brand Ukraine. Advertising is about you (the consumer) and me (the vendor). It is not about the other guy. I think Ukraine misses this.
The Ministry of Economy has produced some very well packaged marketing materials. That has to continue. Bearing in mind how many business people are now in government and parliament, I remain surprised how little they focus on Ukraine’s marketing campaign. I think Ukraine really needs to focus on producing quick, positive, and high profile news on investor-friendly “wins” rather than a constant re-hashing of existing problems. The government also needs to advertise and promote its reform and development strategy. We hear a lot about the various pieces. We need to hear a consistent message about how it all fits together.
About the interviewee: Myron B. Rabij is a Partner at Dentons Kyiv/New York