Investment and Ukraine's Economy

Potential Investment & the Ukrainian Economy

Main Contributor: Dave Herbut

Edited by: Martin Eidenberg

The current political climate in Ukraine is not yet conducive for investment in the economy. One of the major obstacles for the Ukrainian government is the endemic level of commercial corruption. Commercial corruption in the country has prevented foreigners from investing in emerging markets. Small, cohesive groups of business elite have closed off emerging markets within Ukraine through increased lobbying for new regulations. In some cases private interests seem to have taken over the management of public goods. We spoke with Dimitri Vatrych, an owner of a transport company based in Chernivtsi, a city near the Romanian border. He suggested that companies like Denyshinka, a logistics company based in West Ukraine, have bought out local governments in order to retain a measure of control over certain toll roads. Vatrych continues by saying that tolling is often uneven and arbitrary, preventing him from ensuring a steady revenue stream.    

Incidents of corruption are widespread, but it seems to run deepest in the judiciary. Judges at the local levels have to contend with extremely diminished salaries.  Opportunities for rent-seeking are high, in some cases coalitions of businesses resort to outright bribery as a means of resolving contract or trade disputes.  Many foreign investors have experienced frustration with the Ukrainian commercial court system, as few are able to obtain fair rulings. Foreign investors are often unfamiliar with the informal legal structure of Ukraine and are unable to work the court system to their advantage.  

To attempt to mitigate these risks, the new Ukrainian government is currently working to put in place a number of anti-corruption measures. In June, President Poroshenko’s administration passed 5 anti-corruption measures. Laws in this package included public access to property registration, public access to expenditures, and mandatory disclosure of beneficiaries. In addition to the measures in June is a new roadmap consisting of 11 separate bills. These bills include an anti-corruption Bureau and graft database. Critics of the current regime doubt that the new measures will have the intended effect. They cite a failure of implementation and action, not a lack of legislation.  Another issue with the new legislation is that it seems to be focused too much on the graft and expenditures of the political elite. As of yet there has been no legislation passed to reform the judiciary. Moreover, there has been no effort to improve public funding of the courts and police.

Lack of a timely resolution to the problems has added to the damage to the Ukrainian economy. Ukraine is currently experiencing significant capital flight. Of all the markets affected the Ukrainian energy sector has been hit the hardest. Powerhouse companies like Steel Mont Trading Ltd have cancelled contracts for coal shipments. They cite an inability to find reliable suppliers and difficulty in enforcing agreements and contracts to minimize supply risks.

Investment opportunities in Ukraine are unlikely to spring up in the near future. There is currently too much risk involved with the current climate. If the Verkohvna Rada, Ukraine’s Parliament, makes a commitment to battling weaknesses in the judiciary and if it reduces the entry barriers for SMEs then the Ukrainian economy may see a recovery. If potential investors see these signs, then investing early will mean lower entry prices and, therefore, greater potential for growth. Ukrainian companies rely on the informal nature of the legal system giving them an advantage over foreign investors. For foreign companies to navigate the legal environment they must expend a higher level of funds on legal fees, for instance hiring lawyers competent in facilitating rent-seeking. Foreign investors lack the established networks that local business elites possess. Until a level more level playing field has been established it is unwise to invest in Ukrainian assets.