A Complex Issue of Investments: Which Sectors Manage to Raise Investments

By Andriy Volkov, Investohills Group’s founder and managing partner for Glavnoe in UA.

At the World Economic Forum in Davos that came to a close on January 20, Yuliia Svyrydenko, Ukraine’s First Vice Prime Minister and Minister of Economy, stated that our country attracted investors willing to launch new projects even during the war. If we are to believe the Ministry of Economy’s data, Advantage Ukraine, the investment-raising platform announced in the fall of 2022, received over 500 applications from potential investors from the USA, the UK, Germany, Denmark, and Belgium.

Of course, I really would like to share her optimism. However, the reality looks different and is more gloomy than bloomy. According to the Ministry of Finance, Ukraine received foreign direct investments to the tune of $190 million over the three quarters of 2022. During the same period, capital to the tune of $159 million left the country.

By the way, the amount that came in is hardly an investment in the traditional sense of this word. Most probably, these are funds of the Ukrainian business people channeled into the country to help their businesses to endure during the war.

The amount leaving the country could have been several times higher. However, it is relatively small due to foreign exchange restrictions imposed by the National Bank in February 2022. However, one can hardly estimate the actual scale of the capital outflow because some of these processes are hidden from view. For example, they can be hidden under the guise of trades not included in official statistics.

As a result, the net investment surplus came close to $31 million. The figure is even positive. However, it is too low to suit the sheer scale of Ukraine’s economy. Thus, one can admit that no genuine investments came to Ukraine in 2022.

The war is the major reason for the freeze on the investment market. Domestic investors refrain from putting their money into new projects, even though they know the specifics of the domestic market and realize all the risks. Even business owners loudly declaring their plans to expand hardly inject any real funding.

There is only a small group of investors that are still active. These are entrepreneurs with projects approaching completion before February 24, 2022. After the shocks of the first months of the war, these investors came to the logical conclusion that these projects needed to be completed. There are a few examples like this, mainly in construction and medicine (such as the opening of a new hospital of the Dobrobut chain in Kyiv).

Otherwise, if business owners are willing to spend anything, they give preference to relocation, energy efficiency, logistics, and production efficiency improvement. They only invest the funds they own. There is no capital from the outside. Neither non-resident institutions nor banks provide any loans.

Thus, only export-oriented agricultural producers, companies in the oil and gas sector and maybe retail chains can afford such investments.

Foreign investors lack incentives to bring capital into a country at war. The risk of losing money is too high, with the paltry likelihood of the successful implementation of any project.

Over 2022, I met only a few foreign investors who showed interest in Ukrainian assets. Anyway, these were sheer speculators. They only were interested in buying something cheap in Ukraine to hold it until the war’s end and sell it at a good profit. They were interested mostly in properties in Kyiv or Ukraine’s West and logistical facilities. Their potential investments totaled $10 million at the most.

Unfortunately, I do not think Ukraine’s investment climate will improve much in 2023 unless the situation on the frontline changes and the economy starts rebounding. One can hardly expect any investments during a prolonged war, with civil and industrial infrastructure bombarded regularly. The most we can talk about are some projects in logistics, exports of Ukrainian products or imports of goods into Ukraine near the border with European countries.

Still, our country has one sector that is more alive than dead. It is the IT. Despite the war, Horizon Capital, an investment company, International Finance Corporation (IFC), and several other financial institutions set up a new investment fund of $200 million in 2022 to fund Ukrainian startups.

However, most Ukrainian IT companies have foreign clients, and any specialist in this field can work without being confined to a particular geography. Thus, many employers helped their employees to leave Ukraine. Some IT companies with domestic roots moved their offices to other countries.

Nevertheless, the IT sector will likely be the only recipient of investments in 2023. However, the capital will flow into the country only as long as this sector is hardly affected by the war and the Ukrainian realities.

Potentially, investors are still interested in Ukraine. Many of them are willing to develop new projects here. But the war must come to an end with guaranteed peace. Only after that will the serious investment money be back in our country.