Donetsk is literally built by foreign investment, having been founded by Welsh businessman John Hughes when in 1869 he built a steel plant and several coalmines. After Mr Hughes came entrepreneurs from the US and western Europe, turning scorched steppe into a sprawling industrial cluster.
Fast-forward 143 years and Donetsk Oblast – the region that surrounds the city of Donetsk – is the most populous in Ukraine and more than a quarter of the country’s industrial production comes from the area.
Ukrainian president and Donetsk-native Viktor Yanukovych likens the region to a train, hauling along the whole of the Ukrainian economy. The analogy is fitting in more ways than one. While trains can carry goods from one point to another, they are not necessarily associated with agility and eco-friendliness. It is a reminder that Donetsk’s economy relies on heavy industries such as coal mining, metallurgy, chemicals manufacturing and machine building.
Nevertheless, Donetsk Oblast has recently been undergoing a major overhaul. “Regional elites realised that there is a big need for foreign investment and as a consequence the sometimes hermetic world of Donetsk business is opening up,” says Maksym Ferenc, partner at Ferenc & Kuczynski, a Warsaw-based law firm that helps foreign investors launch operations in eastern Europe.
“It is very important for us to provide conditions for investors so that they find working here convenient. Transparency and predictability is important for conducting business,” says Igor Kostenok, deputy director of Donetsk Regional Centre for Investment and Development, a local branch of the national economic development agency InvestUkraine. The entity represented by Mr Kostenok, together with the newly formed Agency of Investment Development of Donetsk Region, has been put in place to aid entrepreneurs coming to the region. Feedback from investors confirms that the drive to improve the business environment is not just talk.
Richard Spinks, a UK-born serial entrepreneur and CEO of Active Energy Group, a biomass fuel provider, tells fDi: “Donetsk has become a good starting point for those wishing to invest in Ukraine. I feel comfortable here, both as an investor and as a resident. Authorities here are open for business.”
Policy of honesty
However, the concept of ‘open for business’ can be tricky in many post-Soviet republics, and has often meant paying off local luminaries. Not so in Donetsk, according to Mr Spinks. “No one has ever asked me for a bribe here,” he says.
Mr Spinks also praises the professionalism of many local companies that are keen to expand abroad and, to do so, hire managers from western Europe. “People over here have the desire to emulate Western standards of doing business. They are also eager to learn from their foreign peers. I have not seen a similar approach in western Ukraine,” he says.
Located on the Sea of Azov and next to the Russian border, Donetsk Oblast is a good fit for projects in tourism, logistics and warehousing. With about 2.2 million hectares of arable land, agribusiness is another sector in which the region has the potential to attract crossborder projects. Given that the province has 14 academic institutions, of which five specialise in engineering studies, the region can also provide opportunities for companies seeking to establish outsourcing operations.
“The key advantages of Donetsk are its favourable geographical position, developed infrastructure, qualified workforce, [access to] minerals, developed manufacturing and comparatively easy transport accessibility,” says John Campbell, partner at the assurance services division of accountancy firm PwC Ukraine. To date, nearly $3bn has been invested in crossborder projects by companies such as German construction firm Knauf Gips, engineering firm Siemens and US food producer Cargill.
However, according to research by greenfield investment monitor fDi Markets, when it comes to the number of greenfield projects attracted between 2003 and 2011, Donetsk is being overtaken not only by the capital Kiev, but also by provinces such as Lviv, Kharkiv and Dnepropetrovsk. “Part of the problem is connected with the previous administration. They tried to create an image of eastern Ukraine as a place that should not have the leading role in development of the country,” says Oleksandr Lukianchenko, Donetsk's mayor. In fact, during Viktor Yuschenko’s term in office as Ukraine's president from 2005 to 2010, residents of Donetsk Oblast would frequently complain that they were being sidelined. Now, however, observers are expecting to see a boost in Donetsk’s economic development, given the close ties that Mr Yanukovych and prime minister Mykola Azarov have with the region.
At the same time, Donetsk Oblast is making huge progress opening up to foreign ventures and investment opportunities are changing too. “The modernisation of outdated, energy-guzzling Soviet behemoths is still in its early days,” says Mr Ferenc. “Sectors connected with innovative technologies, especially those connected with power-saving solutions, have big growth potential here.”
EcoEnergy, a Swedish renewable energy developer, is among companies investing in the region’s green technology drive. In 2009, EcoEnergy announced its intention to build a waste-to-energy plant in Donetsk. Company chairman Lars Guldstrand stated that the outcome of this investment would influence the future activity of his company in Ukraine. The plant, currently under construction, is designed to handle 469,000 tonnes of solid domestic waste and turn it into heating and electricity.
Another big hitter in Donetsk is System Capital Management (SCM), a large holding owned by Rinat Akhmetov, the Donetsk-born entrepreneur, who for years has been topping the lists of Ukraine’s wealthiest people. SCM’s activities span from mining through media to banking. The number of projects in which Mr Akhmetov is involved is very impressive. Local experts stress, however, that the change in the region is not driven by only one man. “Mr Akhmetov is very active here, but there are developments all around the city and many of them are not connected with SCM,” says Mr Spinks. Alexander Kuskin, project manager at the Donetsk office of business advisory firm Kreston GCG, confirms that the region has gained a reputation as Ukraine’s business centre not “exclusively because of influential business-backers, such as Mr Akhmetov”.
Nevertheless, locals can thank Mr Akhmetov for their new $500m Donbass Arena football stadium. The stadium was used for the 2012 European Football Championships, which Ukraine co-hosted with Poland. For Donetsk, this event served as a catalyst for change. The city gained a new airport terminal, upgraded its railway station and spruced up its promenade. It also had a chance to present itself to a wider audience, an opportunity that has been used to the fullest, according to Mr Lukianchenko. “Before the championships, because we are an industrial city, many foreigners associated us with dirt and violence. But all who came here could see that the city has a lot to offer and we are friendly,” he says.
In 2013, Donetsk will host the World Youth Championships in athletics and the Ice Hockey World Championships. And local football club Shakhtar Donetsk has made impressive progress in Europe's club football tournaments in recent years.
Donetsk has come a long way in a few short years. “When I came here for the first time in the 1990s, it felt like I was in some sort of Soviet movie. It was the middle of winter, it was nearly impossible to get to the city centre from the airport. I felt I had to get out of this place,” says Mr Spinks. “Now, it is well connected to the world and there are more and more things you can do in your free time. I see many reasons to live here and invest here.”