As of December 31, 2011, Ukraine had attracted FDI totalling $49.4bn, according to Ukraine’s State Statistics Service. But to understand Ukraine’s inward foreign direct investment figures, capital flows in both directions require careful examination. The first point that becomes clear from such an examination is the role of offshore financing in the Ukrainian economy. The second is the effect of showcase investments on flows.

Two-way traffic

Advertisement

In the first quarter of 2012, Cyprus made $399.7m-worth of investment into the Ukrainian economy. Cyprus has become an increasingly important source of FDI for Ukraine, with the country’s share of inward FDI almost doubling in five years. As of January 1, 2007, investments routed through Cyprus accounted for $3bn of Ukraine's FDI since it gained independence from the USSR in 1991, making up 14% of Ukraine's inflows. At the start of 2012, it had invested a total of $14.5bn sicne independence, or 28% of total inflows.

Over the same period, the total FDI from Ukraine into Cyprus increased from $4.4m as of January 1, 2007 (since independence) to $6.3bn as of December 31, 2011. While available statistics cannot show what percentage of Cypriot inflows this represents, it is commonly accepted by analysts in Ukraine that the country accounts for a majority of inflows to Cyprus.

These more proportionate flows of FDI between Ukraine and Cyprus are in stark contrast to the flows between Ukraine and the British Virgin Islands. As of December 31, 2011, the British Virgin Islands had made $1.6bn-worth of investment in Ukraine since the country gained independence, while Ukraine had reciprocated with just $25.8m of investment in the British Virgin Islands.

Financial sector appeal

Ukraine’s FDI inflows from Germany stood at $7.4bn as of December 31, 2011 since independence, up from $5.6bn as of January 1, 2007, making Germany the second largest investor in Ukraine behind Cyprus. One of the largest German investments into the country came in late 2005, when German steel giant Mittal Steel Germany purchased majority shares in state-owned steel Ukrainian steel company Kryvorizhstal in a deal worth $4.8bn. Inflows from Germany increased substantially following this headline-making deal.

Other EU countries, including Austria and Sweden, have also invested significant amounts of capital in Ukraine, especially in its financial sector. In contrast, FDI from the US, which totalled $1.5bn as of October 1, 2008, has included very little financial sector FDI. Real estate, leasing and engineering, hotels and restaurants, trade and repair of automobiles, household goods and personal items, industry and processing industry investments all registered higher FDI flows from the US than the financial sector. 

Financial sector investments make up $16.3bn, or 33% of all FDI inflows in Ukraine, making it the most popular sector. The industrial sector has received the second highest level of investment, with capital inflows totalling $15.2bn and accounting for 31% of all Ukrainian FDI. Other notable sectors are real estate, including leasing and engineering (architecture), which has received $5.8bn, or 12% of all FDI, and trade and repair of motor vehicles, appliances and personal items, which has received $5.2bn, or 11% of the country's total FDI.

While Russia remains Ukraine’s largest trading partner, the country's FDI into Ukraine is less significant. As of December 31, 2011, Russian investments into Ukraine stood at $3.6bn since the split in 1991. Investments into the financial sector accounted for more than two-thirds of this, with investments in the sector increasing significantly after 2008.