Institute for War and Peace Reporting | Giving Voice, Driving Change

Uncertainty Dominates Ukraine Economic Outlook

Conflict risk adds to difficult operating environment for local businesses and potential investors – but there are reasons for optimism, too.
  • A field of sunflowers in Ukraine, the world’s leading exporter of sunflower oil. (Photo: Valerii Tkachenko/Wikimedia Commons)
    A field of sunflowers in Ukraine, the world’s leading exporter of sunflower oil. (Photo: Valerii Tkachenko/Wikimedia Commons)

Dmitriy Gilgur is director of VimesVC Ltd, a financial consultancy with offices in Kiev and London, talks to IWPR editor Daniella Peled about the challenges and opportunities for investing in Ukraine.  

What was trade like between Ukraine and the UK and the rest of Europe prior to the revolution of February 2014?


Trade between the UK and Ukraine was pretty bad, almost non-existent. Ukraine was mostly seen as a transit route for gas. The UK accounted for two per cent of Ukraine’s trade volume and levels were negligible from the UK’s point of view. Ukraine’s traditional European markets would be Poland, Cyprus to an extent, and Germany.

Ukraine’s agricultural exports are incredibly strong, even if you take into account the fact that the country is quite an inefficient producer. Still, Ukraine is the world’s number one exporter of sunflower seeds and oil, and among the top three for wheat.

But this is irrelevant as far as Europe is concerned. The EU Association Agreement [signed in March 2014] lowers trade barriers, apart from in agriculture where there are trade quotas. The theory is that this allows the EU to open its borders in a controlled manner, giving Ukraine time to conform to produce regulations.

Europe is such a closed market that Egypt and even Asia were more important for Ukrainian food exports. Now the market is opening up very, very slowly, but at least this is a movement forward.


What has been done about corruption – and is there any chance of funds siphoned off by corrupt officials in the past ever being returned?

In terms of retrieving funds stolen by the previous regime, this will probably not happen and, as I see it, is probably not the point. I would rather let this issue become history and focus on the future.

Too often, under the guise of clawing back money, this becomes an opportunity to redistribute funds to yet another corrupt bunch. The exception are the funds funnelled abroad by [former president Viktor] Yanukovich. These will be very easy to trace and should be appropriated and returned.

But when it turns into a witch-hunt against oligarchs, it becomes politicised and dangerous.

There has been very little done regarding legislation, building new institutions and fighting corruption yet. It’s rather depressing. Corruption is the bane of small business. What is most practical is to cut the host of legislation tying down small business and to reduce the powers of the agencies regulating businesses.

In Ukraine, the assumption is that everything is forbidden and you need to get a license to allow it. For instance, in the UK no one thinks too much about the Inland Revenue. In Ukraine, they [tax service] have their own armed force, so they don’t need to go to the police to pursue people. This inevitably leads to corruption.

Or take the fire department, which has enormous powers to disrupt business. For instance, they can come and measure your power sockets and decide they are a little too big or too small, and decide to shut you down – unless you come to some kind of an arrangement with them.


Has the fact that the Ukrainian army seems to be pushing back the insurgents had any effect on the markets?

There is terrible uncertainty, and the chance remains that Russia will invade. This is obviously bad for business. People have been feeling the same way for months.

A lot of people have left and a lot of businesses are contingency-planning. What would they have to do if they needed to relocate or if their factory got bombed? Small and medium businesses are very close to the ground and they feel the effect.

The entire business community is hoping for the best. My clients in Kiev are all holding their breath.

And all geopolitical turbulence directly affects the exchange rate. Ukrainian businesses which import their raw materials –that’s pretty much all of them – have seen prices jump. The fact the insurgents appear to be on the back foot is good news, but it hasn’t had a clear positive effect yet. 


What areas of investment look particularly promising in Ukraine?

One of the most obvious opportunities lies in all things IT-related. Ukraine is unofficially an outsourcing hub. Ukraine is full of offices of programmers doing grunt work and there are huge numbers of big-name IT companies using Ukraine as a back office, from dating websites to the financial sector.

That’s because there is a very strong historical background of sciences discipline here. When I was a kid, I was told that the only practical things to study were maths, physics and IT.

Many IT businesses operate semi-legally. They start offering services and don’t register, or try and register in another, Baltic country. Registering is a terribly confusing and onerous process, and PayPal is not particularly welcome in Ukraine, for instance.

Once Ukraine cleans up its legislation to allow small businesses to operate, there is an opportunity for a tremendous boom. This is an area just ripe for exploitation. 


What does the long-term future look like?

The benchmark for opportunities in Ukraine prior to February 2014 was pretty low. Unless you had very close ties to the government or were a scam artist, there were few reasons why you would go into Ukraine. The Association Agreement hasn’t changed the facts, regretfully, but there have been some changes in terms of perception. The agreement is a signal that we are trying to do the right thing.

One of the most significant changes has been signalled by the European Bank for Reconstruction & Development (EBRD) and the International Finance Corporation, a member of the World Bank group. Even though their role is to be active investors in countries with difficult circumstances, they were not previously keen to get involved with Ukraine. Now, for example, EBRD has committed 350 million euro for Ukrainian infrastructure/real estate projects, with an one billion euros earmaked for overall investment in 2014. This marks a real change.

The problem is that investors are still very cautious. But there is no such thing as bad publicity.

We have been approached by large investors in the UK who are not quite ready to jump in, but are enquiring whether now is a good time to get some bargains. It’s high-risk but high-return, and we have faith in our country.

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