Ukraine has taken incredible losses due to the unprovoked Russian invasion, of which death and human lives are the heaviest price the country pays. But each branch of the government works tirelessly to respond to the challenges and provide value to its citizens, allies, and partners. My team at the Ministry of Economy is tasked to attract investments in the country to secure Ukraine's soon recovery and transformation.
The main source of foreign capital in the country is financial aid from its allies and financial institutions. But Ukraine is interested in creating an environment where foreign private capital wants to come, stay and work for the country long-term, rather than depend on financial infusions.
Establishing an investor-friendly climate
Firstly, my team at the Ministry of Economy consulted with potential investors in Ukraine to hear their concerns and the obstacles that need to be eliminated. Based on their feedback and recommendations of analysts of American and British think tanks, we developed a set of legislative actions to be made in the judicial system, taxation, etc.
One of the concerns of investors, especially in the tech sector, is that male Ukrainian specialists may be conscripted. The Higher Commandment of Ukraine has been publicly admitting many times that at this moment Ukrainian army doesn’t lack people, it lacks long-range weapons and artillery. In addition, the Ministry of Economy is setting up a transparent system of reserving some specialists of the conscription age.
We are working with the Ministries of Digital Transformation and the Ministry of Defense to allow companies to reserve the specialists they need to continue operations. The companies will submit applications with justification for a number of specialists to be reserved and, upon approval from the Ministry of Defense, we issue reservations for them. It means that Ukrainian specialists can legally temporarily leave the country, and go on business trips to stimulate economic activities: pitch to investors, represent Ukraine at international events or sign deals. We advocate streamlining the process by introducing amendments to the law on mobilization and expect the procedure to be simplified by the end of the month.
Providing guarantees to foreign investors
After the invasion and the following exodus of investors, my colleagues and I started looking for solutions to change the situation. We figured that in order to attract direct investments, we need to focus on de-risking some of the components that are blocking the decisions of investors.
We designed and launched an initiative called Advantage Ukraine that is run by a team of investment experts — former investment bankers, private equity and venture capital investors, and Big Four auditors — and is supported through technical assistance from the U.S. Agency for International Development (USAID).
Currently, we are setting up instruments to provide investors with guarantees to cover their exposure in Ukraine.
One of the most promising instruments to secure investors is offered by MIGA – Multilateral Investment Guarantee Agency which is a member of the World Bank Group. MIGA provides political risk coverage for foreign direct investments. In the summer of 2022, we got in touch with them and managed to strike an agreement to allocate funds to secure the pilot projects in Ukraine. The first applications were submitted in late September. The applicants have already received preliminary conditions and the decision will be taken by the World Bank Board of Directors sometime in next month. That is when we will have the benchmark for the investment guarantees and the political risk coverage guarantees, and we will be able to disclose the conditions and criteria for the project to be selected for this program.
MIGA instrument is covering up to 90% of the potential damages that can occur due to force majeure conditions. After the final decision of the World Bank Board, we're going to replicate this case and use it as a benchmark.
We also work closely with the U.S. International Development Finance Corporation (DFC) which is a consolidated agency that brings together the capabilities and expertise of Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority. DFC is pretty active at the moment because they received a direct mandate from the US government to support Ukraine. I consider it a very smart move given the multiplier effect these funds will trigger for all stakeholders.
OPIC used to be strictly limited to supporting exclusively American investors. But DFC waived this condition for Ukraine and provides a number of products, including political risk insurance and technical assistance. Applications are reviewed and assessed on a case-by-case basis. Their instruments work like the classic credit risk coverage insurance policy, except, in this particular case, they also evaluate the risks associated with active war actions:
- How close is the enterprise to the battlefield?
- What sector does the company represent? Is the sector somehow interconnected with the defense sector?
- How far away is it located from the critical infrastructure?
We also work with export credit agencies (ECA) that typically support national exporters competing for international sales. ECAs operate under the rule of the OECD – Organization for Economic Cooperation and Development which consists of 36 nations. In addition, ECA programs can offer “comprehensive” cover — when both commercial and political risks are covered.
The British agency, UKEF, has been traditionally supporting exports from the United Kingdom and agreed to allocate up to £200 million, to provide insurance for political risks, or war risk, coverage for British investors considering Ukraine.
We are holding discussions with the French Treasury and the ECA called Bpifrance. Their products have been suspended due to weak demand since there was no war in Europe triggering their offers since the war in the Balkans. In my y opinion, the French government will either reinstitute the product of their agency or will take advantage of an existing MIGA facility transferring funds into it.
How and who can apply for the investment guarantee program
The Ministry was able to secure hard tangible assets with the above-mentioned organizations. We have ten applicants, each with a couple of millions of dollars to invest, from more traditional industries like construction, manufacturing, food processing etc.
Intangible investments, like the team of specialists or outstaffing that are more relevant for IT sector, are harder to guarantee as we need to test the mechanism first. But it should not prevent tech investors from considering Ukraine.
Despite the dramatic economic downturn, the tech sector is demonstrating confident growth. It is the only industry that grew at least 15% and, by some estimations, up to 20%. The overall gross export of the tech industry is expected to be $8 - 8.5 million.
Something like setting up the R&D center, which includes the hardware and software, is actually applicable to be secured by our programs. The coverage for the tech industry is a work in progress and the more interesting projects we have and specific applications, the higher the chances for positive responses from insurers.
So, I do encourage potential investors, including those in tech, to get in touch with us with our team so we could find a solution that gives them additional comfort and guarantees while investing in Ukraine. One can visit the Advantage Ukraine website and submit a request. The team will get back to an applicant and advise on possible options. They are set to have special training on how to pre-select applicants and choose those who fit the program. This way they can consult the applicants, process the requests from potential investors and provide recommendations on improving the programs.
Martial law is always seen by investors an obstacle, but the whole reasoning behind it is to eliminate bureaucracy and enable fast and efficient decision-making that is so needed in times of war. Now we have an opportunity to introduce progressive legislation changes and have them approved faster since civil society, the private sector, and the government are more intertwined and connected than ever before.
Investing in Ukraine may seem risky, but as Robert Arnott said about investing, “What is comfortable is rarely profitable.” I believe that investing in the winner is the safest bet ever. And if you were looking for an opportunity to invest in a valuable asset, the timing could not be better.