Brave investors wanted as Ukraine pulls out of recession

Reform is essential to attract foreign companies

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Luring investment into a war-torn and recession-battered country can be hard work. Yet, in Lviv, more than 1,300km away from a smouldering war with Russian-backed separatists over the industrial far-eastern regions, Japan’s Fujikura has opened a car parts factory.

A 22-year-old blue-collar worker earning about $200 per month in the Fujikura factory explains why Ukraine has not attracted more investors.

Snipping wiring to precision length on the company’s machinery, the man, who would only identify himself as Yuri, says problems plagued the country before the war began in 2014.

He says that more investment is needed, but before this can happen the business climate needs to improve.

Having suspended plans to launch production in Ukraine after Russia annexed Crimea in early 2014, Fujikura eventually went ahead with the project as the conflict showed signs of easing and not spreading. The management says it has not faced major hurdles and is grateful for government support.

Yuri thinks his employer is a brave investor which, in seeking low-cost labour in return for the millions it has invested, has provided thousands of jobs. But he knows of companies whose experiences have not been as good.

“When established investors arrive but see the rotting system we have here, they turn back and go to countries where they don’t face these problems.”

The country of 45m has an educated, low-cost workforce, a disproportionate share of the world’s richest agricultural land, sizeable mineral resources and is close to large markets.

At the end of 2015 the value of Ukraine’s foreign investments was $62bn, according to the CIA World Factbook, tiny next to Poland’s $287bn. Relative to its size, however, analysts say it is lagging behind its neighbours.

Kiev’s pro-western leadership has achieved macroeconomic stability and is starting to pull the economy out of deep recession with the help of a $40bn assistance programme led by the International Monetary Fund. After a 13-month delay, Kiev’s government last month received a third IMF funding tranche of $1bn.

Yet concern runs deep about the pace of reforms to improve governance, support investment and raise standards. Cutting red tape and other reforms raised Ukraine to 83rd position in the World Bank’s 2016 Doing Business ranking, from 152nd position in 2012. But it fell six spots to 85th place in the World Economic Forum’s Global Competitiveness Index.

According to an investors’ survey obstacles include: corruption; lack of trust in the judiciary; the conflict with Russia; an unstable financial system; restrictive capital and foreign exchange controls; complicated tax administration; and cumbersome legislation.

Survey organisers, including the Kiev-based European Business Association and investment bank Dragon Capital, say that reforms should include: hiring new judges; prosecuting perpetrators of high-level corruption; ensuring the IMF programme stays on track; liberalising foreign exchange controls; completing at least three transparent privatisations; and streamlining tax administration.

Authorities have failed in recent years to privatise any large state enterprises. As rent-seeking by vested interests continues, investors complain of graft among underpaid public servants, as well as difficulties in buying land and protecting property rights.

In September, the European Bank for Reconstruction and Development, Ukraine’s largest international financial investor, threatened to freeze hundreds of millions of dollars in loans to state gas company Naftogaz until a government minister cancelled a controversial transfer of the gas transportation pipeline to direct ministry control.

One high-profile case for investors is farming company Mriya. Some members of the founding Guta family are suspected of mismanagement involving millions of dollars in assets and cash.

As recently appointed executives try to complete restructuring on $1.1bn in debt with creditors, including foreign banks and institutional funds, authorities are looking into the previous management. But questionable decisions by courts and lacklustre support from regional law agencies have prevented the new management regaining control of some assets. Simon Cherniavsky, Mriya’s new chief executive, says there need to be better precedents set by the courts to show that the legal system can work effectively.

Western regions of Ukraine, far from the war zone and close to EU markets, offer strong prospects.

Lviv, the region’s largest city, has hopes of creating an industrial park, bringing in CTP, a leading Dutch-registered, Czech Republic-based provider of turnkey business centres for manufacturing, logistics and distribution businesses. But “revolutionary reforms” are needed for an investment boom, says Olha Syvak, the city’s chief investment officer.

At the Fujikura factory, Yuri says he could earn more as an illegal migrant in other EU countries but he prefers his own. However, he wants reforms.

“Our tax system needs to be streamlined,” he says. “It would help to have open and competitive privatisation tenders [of state enterprises] without kickbacks. We need rule of law, starting with an honest court system, to protect investors’ rights.”

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This article was updated on October 17 to show CTP is based in the Czech Republic

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