In a global race for investments, Ukraine is asleep at the wheel

Vadym Ivchenko is a member of the Verkhovna Rada, Ukraine’s parliament. He was first elected in 2014Popular
on social media

When shaping national macroeconomic policy to an ever-changing global market, prioritizing promising and, more importantly, profitable investment is of the utmost concern. Countries that manage to capitalize on such opportunities are rewarded with steady streams of capital, while those that do not suffer the consequences of a competitive geopolitical landscape. Likewise, companies, as well as private investors, are constantly monitoring the market, seeking to find alternative channels capable of providing stable inflows of funds. This may explain their pre-existing preference of placing their trust in “familiar” markets with more predictable business environments, offering a less risky and more lucrative investment option. Perhaps this is why Ukraine has attracted, on average, three times less investment than its neighboring countries through the last two decades.

This unfortunate trend has continued in recent years. In 2018, while the neighboring countries of Poland, the Czech Republic, and Hungary all raised substantial funds, raking in $11.5B, $9.4B, and $6.3B, respectively, Poland failed to gather $3B. And although the next year may have slightly alleviated the disparity, increasing Ukraine’s investment portfolio by 11%, this success would be short-lived. As for much of the world economy, 2020 was devastating for Ukrainian investment, seeing it plummet by nearly a third.

A saving grace, perhaps, is that in a recent survey, fewer than half of foreign investors believe that Ukraine’s investment attractiveness is declining. On the other hand, only 9% foresee any notable improvement, with 42% predicting no significant change in the nation’s investment environment. According to the poll, this lack of optimism boils down to a rather unfortunate reputation, as the top two listed reasons for discouragement were a general lack of faith in the country’s judiciary branch and the perception of widespread corruption.

To be clear, the deteriorating investment climate that Ukraine is currently experiencing is inextricably linked to legislative initiatives aimed at the total fiscalization of national business. For those interested, I recently raised this issue in my recent  London Globe article, in which I explore the topic of potential foreign investment in more detail.

I have regrettably witnessed many cases, in my experience, in which foreign companies operating transparently on the Ukrainian market are made “obscene offers”. Furthermore, in recent years, government officials have become more interested in creating new regulations and public authorities, prioritizing government intervention over the general liberalization of the national economy. The potential large-scale corruption stemming from regulatory overinvolvement, combined with Ukraine’s unscrupulous precedent, makes it an intimidating investment prospect.

The turn of the decade has reshaped the global investment landscape, with international competition increasing sharply in response to the pandemic. All the while, Ukraine has remained paralyzed amidst the global crisis. Most tragic of all, however, is that this cataclysmic state of affairs could have been easily avoided by prioritizing key issues and structural reforms, namely economic deregulation, much-needed judicial reform, anti-corruption initiatives, fiscal reforms, and, importantly, enticing incentive packages for both domestic and foreign investors.

By failing to enact these necessary changes, Ukraine now faces a grim state of affairs. In 2020, investment in industry declined by more than a third, by 36.4% in construction, by 34% in forestry and fisheries, by 29.5% in wholesale and retail trade, and by 36% in transport, warehousing, postal and courier activities. This precipitous plummet was also mirrored in other industries.

Neighboring countries have the relative advantage of offering investors a wide range of state support tools and services. Ukraine, on the other hand, has had a significant number of investment projects fall apart due to the risks incurred from a flawed property rights protection apparatus and volatile fiscal policy.

Some Regional Examples:

  • Hungary offers:
    • subsidies and grants for investments larger than 5 million euros
    • tax benefits (0% SSC for employees with a Ph.D.)
    • income tax exemptions
    • grants for job creation
    • low-interest loans
  • Poland offers:
    • income tax exemptions for 10-15 years
    • property tax exemptions
    • provides grants for investment costs
      • between 2-7.5% for most projects
      • up to 11.5% for large-scale projects
      • 5% for projects in economically depressed regions
  • The Czech Republic offers:
    • income tax exemptions for 10 years
  • Slovakia offers:
    • income tax exemptions
    • rent at a reduced price
    • real estate at a reduced price
  • Slovenia offers:
    • income tax benefits
    • tax incentives for economically depressed regions
  • Kazakhstan offers:
    • income tax exemptions
    • free use of state lands.

Naturally, the industries which promise to add the most value are courted most vigorously by foreign governments. However, as can be learned from the nearby Baltic countries, most notably Estonia, the best method of luring investors is by simplifying the tax code, creating a clear basis for business. Theoretically, everything built and invested in these countries could be replicated in Ukraine. All it takes is for the government to embrace the correct priorities. In conclusion, while Ukraine desperately lags in the global competition for the attention of investors, it is only a few right decisions away from regaining even footing.

(c)KYIV POST 2021

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