Is investment in Ukraine really growing or is it a myth?

Author : Oleksandr Okhrymenko

Source : 112 Ukraine

Who can remember how many times our president and prime minister told us about Ukraine having become more attractive for foreign investors?
15:44, 1 June 2018

See for yourself: in the first quarter of 2018, the capital investment index in Ukraine rose by 37.4% compared to the same period last year. However, it should be reminded that capital investment fell by 23.1% in the first quarter of 2014. So what happened now that could have caused the growth in investment?

The growth of the capital investment index in Ukraine is totally off the charts for the first quarter of 2018. The country has not seen anything like it in a while. Within the first quarter of 2017 the index added 21.4%, while the figure for the same period in 2016 stood at just 0.6%. What if it’s not really growth at all?

The capital investment index does not take into account the price increase in Ukraine, although it is difficult to substract the price increase from the figure completely. Whatever the case may be, the tendency is right. Yes, there is growth. Moreover, in the manufacturing sector the index grew by 46.3%. Investment in the IT services sector has doubled. At the same time, investment in the Ukrainian agribusiness has added a modest 10%. There is no decline in capital investment recorded in any segment of the nation’s economy.

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For those who are not sure what capital investment actually means – it is construction and repair of buildings and production departments, purchases of equipment and machinery, as well as housing construction. It is everything that creates the material wealth of Ukraine. It is what our politicians discuss a lot, without even realizing that what Ukraine really needs is not useless loans from the IMF that have no impact on the economic growth, but rather precisely this capital investment.

In order to understand why such impressive growth is recorded, it is necessary to look at the sources of funding carefully. Most of the money was invested by Ukrainian corporations – 76% of the total investment in the first quarter of 2018. The public portion of the total investment usually means funds allocated for housing purchases, around 8% of the total figure. On the other hand, the state’s portion in the capital investment stands at 1%, while that of foreign investors is at 0.3%. But don’t ask what billions of hryvnias from the state budget allocated for the economic growth and invested in the real economy were actually spent on. The government will find it rather uncomfortable to answer that question, as it seems to be spending most of its time counting kickbacks. There is a lot of talk about the country spending billions investing in the Ukrainian economy. However, if one looks more carefully, it will become obvious that a lot of this money is going towards the organization of economic forums on attracting investment instead of the real economy of the nation. And there seems to be no way to disrupt this trend, as all of those opposing it tend to promise economic growth and to invest state funds in the Ukrainian economy in a transparent way. But as soon as they become the ruling party themselves, the very same opposition activists become the most active investors in offshore areas, and it ends rather sadly

Related: What can cause inflow of foreign direct investment to Ukraine?

Who can remember how many times our president and prime minister told us about Ukraine having become more attractive for foreign investors? But the reality is different. In the first quarter of 2011, when the government was “criminal” and nobody was fighting corruption, the fraction of foreign investment in the total capital investment was 10 times higher, namely 3% of the total figure. Foreign investors have always been cautious to invest their money in the real economy of Ukraine. Foreign investors seem to prefer currency speculation or bond manipulation, without having a particular interest in the real sector of the economy. At the same time, the government loves to talk about how much it has done in order to attract investors from overseas.

In reality, however, the Ukrainian economy is more pragmatic, and one should not be surprised by the fact that both the public and the corporations are the primary investors in the economy and they are the ones to thank for the Ukrainian economy not collapsing once and for all.

So what we are lacking for a real expansion is for that investment to be regular as opposed to situational. There is no real corporate lending in Ukraine. The portion of loans in the total figure of capital investment in the first quarter of 2018 reached 8.4%. In the first quarter of 2013, prior to the Maidan revolution, the figure was at 18%. Furthermore, this figure reaches as high as 50% of the total investment amount in developed economies. These are the loans necessary for local small and medium enterprises to grow, develop and expand, as the population’s funds are constrained. They are really financing a lot of things now, as there was no way to invest during the troublesome period of 2014-2015. Most people were hiding their money instead of investing it. However, the hryvnia has become stable, there is no significant risk of devaluation. This means that Ukrainian corporations, as well as the public at large have become more inclined towards investing. As a matter of fact, as soon as the hryvnia devaluates, the population and the businesses start buying up dollars, but when the exchange rate is more or less stable, they become hesitant about what to do with the dollars. Right now is the time when foreign currency savings from the previous periods are being used – it makes much sense to exchange dollars for hryvnias and to buy an apartment or to build a house. It also makes sense to use the offshore dollars to purchase new machinery for a plant, or even build an entirely new plant. Everything is changing now.


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The biggest risk is that the savings will dry, while lending will still be inactive, which would cause the skyrocket capital investment increase to disappear as dramatically as it began. All this talk about Ukraine will win its fight against corruption and it will be flooded with investments from elsewhere are unrealistic. What does corruption have to do with those who are involved in investment? Corruption is not an obstacle to investment. Revolutions, disorder and currency devaluation as the result of political turmoil are all far more frightening to any investor. And most importantly: money likes silence, not careless reforms that only harm businesses and create problems for the population. Haven’t we had enough? Let’s have fewer reforms, let’s just launch corporate lending, and then the Ukrainian economic wonder will prosper and flourish.

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