Ukraine: does it make any sense to invest in a declining economy

Author : Oleksiy Aleksandrov

16:10, 5 February 2016

Ukraine: does it make any sense to invest in a declining economy

Author : Oleksiy Aleksandrov

In its current position, Ukraine is attractive for foreign investors - expert

16:10, 5 February 2016

Read the original text on Forbes

What could be more meaningless that serious talks about investing in a country, which is in conditions of “perfect storm”? Instability in the economy, instability in politics, strained relations with next-door neighbor, smoldering armed conflict in the east of the country, a total distrust of the political and financial institutions.

According to various studies, more than 50% of the population does not trust the banking institutions and banking professionals. Obviously, this attitude also affects the use of financial instruments: the customer is committed to working only with the most simple and straightforward solutions. Another characteristic feature is a period of placement: from 18-24 months before the crisis, it was reduced to 3-6 months. In fact, these characteristics are already sentence for any proposed investment strategy: working with a portfolio of stocks or bonds in general requires the placement for a period of 7-10 years for the stock, and 3-5 years for bonds.

Work within the framework of the stock market in terms of the chosen strategy is not justified in the current environment, and by process of elimination we are back to simple financial solutions. For example, to deposits.

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Formation of the investment proposal requires several criteria: compliance with the law by all players, legal protection, and the investor market. At this stage, we are experiencing a problem with all the above criteria. An important point that we should not forget: all operations are conducted in the national currency, which requires a lot of courage given the trend of hryvnia against the U.S. dollar or to the euro over the past year.

To keep money on deposits?

The work of the stock market in terms of the chosen strategy is not justified in the current environment, and by process of elimination, we are back to simple financial solutions, like deposits.

We must recognize that in terms of the rate, it is a very interesting solution. Such proposals have been excluded from the European Union, the United States or other developed economies. But, on the other hand, we should remember that the proposed rate is a fee for the risk. A reasonable investor should prevail fear over greed at rates of about 10% in the U.S. dollars.

Withdrawal from the market nearly 60 players and tens of thousands of affected depositors is a necessary lesson. Do not forget that by placing a deposit in a foreign currency, you actually lose access to your own funds. For over a year there are restrictions on the withdrawal of foreign currency from the account (strictly limited amount).

In terms of converting national currency into foreign currency, the volume of purchases are also regulated. Moreover, this rule is extended to gold and other precious metals: thus, you cannot buy bullion coins or bars.

Related: Stratfor: Ukraine's slow recovery and Russia's economic decline

Investing abroad? Hypothetically, it is possible, but National Bank of Ukraine should issue some special license to you. Is it realistic in a country that seeks to protect itself by unpopular measures and thereby to restrict the movement of capital? Over the past year requirements for obtaining individual licenses and transfer of funds has tightened several times. Even if you manage to make a transfer of funds abroad - see the latest news from the markets and direct recommendation to "sell all" a whole group of renowned banks. Turbulence in the world is not less than in Ukraine. Willy-nilly, you will be returned to the deposit, but for entirely European rates at the level of 1-1.5% per annum, or even 0%.

Keeping funds in foreign currency in cash? Yes, this is a possible solution. But you must understand that the money work "in the red": they lose their purchasing power. Consolation may be just the fact that you avoid the impact of the devaluation of the national currency.

Investments in own capitalization

The traditional solution to people brought up in the former Soviet Union, investment in transport and household appliances, fortunately, finds fewer and fewer supporters. Another traditional niche: real estate. Unfortunately, we cannot predict the clear cost characteristics and the trend for the future. If it is a question of investment (i.e. profit in the future), it is not the most highly liquid and profitable option at this stage.

What investment options can be considered in the context of the economic crisis? Ironically, the crisis is often defined as the time to invest in their own capitalization: education, getting a new profession or professional skills. All crises come to an end sooner or later, and the knowledge and skills will always be with you.

Many professional investors define crisis as a time of opportunity for investors-collectors. But again, here is the risk of lack of legislative framework, formal evaluation and the listing, the official assessment of provenance (history of the origin and authentication).

Summarizing, we can describe the state of the market as highly risky for the domestic investor.

Risky investments

Let us look at all the pros and cons of the situation: excellent geographical location of the country; European mentality and values; well-developed infrastructure.

There are two important factors: the population is very, very impoverished, but this does not affect the intelligence of the population. Alas, we have quite a poor country, but a superbly trained and qualified people. The market of about 43 mln people. Potential investors should be interested in it. Of course, in compliance with the requirements described already above:

- risk control;

- legal compliance, protection of investor rights;

- existence of a market for investment.

We may count on the fact that the investors might be interested in office space; infrastructure for enterprises (land and facilities that may be converted). From the perspective of strategic investors, high-tech enterprises and companies specializing in the development of IT solutions be interesting, and of course, the active force, the basis for a modern economy: MIND.

Related: Damage of EU-Ukraine association to Russia is USD 3.5 bn, - Economy Ministry

Enormous potential lies in the opportunities for the development of infrastructure and agriculture, air and space industry. Speaking about agriculture, January 1, 2016 came into force the 4th section "Association Agreement" between the EU and Ukraine, and this opens up new opportunities and markets for domestic companies, respectively, there is a sense of investment.

If the state is able to provide the access of citizens to participate in the work of such funds, transparent and secure, the inflow of funds from both investors of legal entities, as well as from individual investors, are possible.

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