November 21, 2015 marked two years since the beginning of Ukraine's Maidan movement and the Revolution of Dignity that toppled the Viktor Yanukovych presidency. However, economic reform in the conflict-torn country seems to have crawled.
“Would-be entrants to Ukraine have adopted a wait-and-see attitude, though western Ukraine and Lviv in particular have seen a flurry of FDI,” says Andy Hunder, president of the American Chamber of Commerce in Ukraine. “And the biggest question nowadays is what will happen domestically in terms of corruption and reform.”
The way things were
Ukraine has been dismantling its inward investment office, the State Agency for Investment and National Projects Management. The agency’s staff has dwindled from 80 to 10, and those remaining have shifted to caretaker roles as the office is wound down. “The State Agency was an absolutely corrupt institution built by the Yanukovych government to siphon off state funds,” says Ukraine minister for economic development and trade Aivaras Abromavicius. “There was no interest in hiring new people, and the agency’s assets have been audited and then transferred to the [Ministry for Economic Development and Trade].”
What the minister’s team dealt with at the State Agency when it began working in December 2014 reflected the general condition of the Ukraine economy. In the first half of 2015, the country experienced a currency crisis with the hryvnia falling by as much as 10% in a day in the first quarter; the consumer price index rose 14% in the month of April alone.
While corruption has been a continual drag on post-independence Ukraine, the Yanukovych-era concentration of state purchasing and projects in order to divert budget funds, as well as the maintenance of a disastrous foreign exchange peg, had brought the country's economy to its knees. “The situation was appalling,” says Mr Abromavicius. “The task at the time was not to set up an investment promotion policy; it was to stabilise the situation.”
Ukraine's macroeconomic fall ended in mid-2015, and key economic sectors such as agriculture began to stabilise in the third quarter of the year, with laggards such as construction and retail sales expected to settle throughout 2016. The country's treasury is filling at an even greater rate than expected and the Institute for Budgetary and Socio-Economic Research has reported for months that all key state budget revenue sources in Ukraine have beaten projections for the year, except for corporate profit tax, which has been dragged down by plummeting financial industry results.
At the same time, some government departments have slashed budgets and head counts. The Ministry of Economic Development and Trade, for example, held a series of staff cuts and by year-end will be half its 2014 size. So is it time to build an investment policy?
There are signs that such a policy is being shaped. “What’s new is the focus for us. We will be establishing separate trade promotion and FDI promotion agencies,” says Mr Abromavicius. “Sometimes there are synergies to be gained from having a single organisation handle this; you can see this in Scandinavia. We ran a study and we didn’t find these synergies in Ukraine.”
The key emphasis for 2016, though, will be rolling out new legislation that lays the foundation for long-term development throughout the economy. For one, deregulation and simplifying bureaucratic procedures is an ongoing and often piecemeal process. For example, travel industry permits were revamped in October. A one-stop shop for business registration is in place, and online State purchase tenders, which began in 2015, will cover 100% of tenders in 2016. However, establishing electrical connections for new business premises still takes more than 200 days.
Promoting the Ukrainian government’s position is yet another problem to be tackled, and this has a direct impact on FDI. One thing that has worked in 2015 has been face-to-face meetings with Ukraine-focused business groups abroad. “The Ukrainian-German Economic Forum meeting in Germany in October was supposed to be a gathering of friends, of companies that were already [active in] the Ukrainian market. We ended up with more than 700 participants, and that was limited only by the amount of space we had. Interest in Ukraine is very high, especially when companies can share their experience of being here,” says Mr Abromavicius. It was the largest such meeting in Germany focusing on a single country in the past 10 years.
However, getting firm data about Ukraine has been a long-standing complaint in the business community, and this may help explain the attendance at meetings. This has led to questions over the Ukrainian government's apparent inability to communicate.
Martin Nunn, a Ukraine expert and managing director of the Foley & Nunn international news agency, lays the blame squarely on a set of Soviet-era laws that he hopes will soon be replaced. Ukrainian law, being based on the Napoleonic code, requires permissions for things to be done. And while existing legislation includes, among others, 11 laws, five cabinet decrees, three international agreement signings, and a similar number of presidential orders, public communications is never defined as a function of the government. Thus, every government organ follows its own lead, there are no standards for hiring PR staff, and no vision or planning. “Government communication is essentially reactive”, says Mr Nunn.
“It gets worse,” he adds. “Legally, all government communication should still go through the Security Service of Ukraine, and none of it does, so technically every announcement from the government, every promotion, is illegal.”
A 'free' media
For the potential investor attempting to make sense of events in Ukraine and whether actual change is occurring, the problem is compounded by the politicisation of Ukraine’s media and the lack of media reform. While media is free, in the sense that it is free from government control, most general access sources are tied to political groups vying for influence but without the controls found in other countries. “Ukraine has no independent press council as the UK does, where media complaints are handled on a judicial basis and those flouting the council are found in contempt of court. As a result, the information that does get out is often skewed and there is currently no mechanism to stop it,” says Mr Nunn.
As a result, progress against corruption often gets drowned out. The state oil producer Ukrnafta, for instance, went from a Hrv3bn loss in 2013 (about $400m) to a Hrv4.49bn surplus in 2014, largely by cutting out special privileges and corrupt schemes. This growth came despite the global fall in oil prices. But politically motivated press and non-existent information promotion have largely failed to capitalise on this example of concrete reform.
The effects of communications reform will have a long-lasting impact on the perceptions of investors. An early comprehensive reform roll-out is slated for education, with public and expert input and a public outreach effort, and all options are open at the moment. One consideration is to follow an Israeli example, where 500,000 school children are currently enrolled for instruction using 3G-connected tablets. Given that '3G-connected tablets' were a concession offered to foreign investors by the former regime in Ukraine, any agency putting this forward will need to communicate on an entirely different level if it wants to be taken seriously.