Screen Shot 2016-10-14 at 14.55.29A cursory glance at the headlines would deter anyone from investing in Ukraine. Those not in the know could be forgiven for believing the country is besieged by the Russian military, tangled in a complex web of red tape and bureaucracy, and plagued by corruption and bribery.

True, there are some risks that need to be evaluated when investing in Ukraine. But according to research conducted by The Lawyer and Kinstellar, these are overstated and can be overcome with careful planning and specialist advice.

Ukraine’s advantage

Ukraine is an attractive investment destination compared with other countries in the Central and Eastern Europe (CEE) region. Some 16 per cent of respondents expect Ukraine to attract more investment than any other CEE country in the next 10 years, behind only the larger economies of Poland (41 per cent) and Russia (29 per cent).

Why are investors attracted to Ukraine, given the political climate? The most frequently cited reason, selected by 41 per cent of survey respondents, is the country’s well-educated and talented workforce. Indeed, Ukraine is one of the most educated nations in the world, with a literacy rate of 99.7 per cent according to Ukraine’s Ministry of Economic Development and Trade. Some 70 per cent of the workforce also have a secondary or higher education.

The country’s workforce is not only extremely well-educated, it is also highly cost-effective for employers. The country’s 43 million population takes home an average €173 (£155) each month. This is significantly less than the average salary for neighbouring countries such as Russia (€504 per month), Hungary (€800 per month) and Poland (€985 per month).

Selected by 29 per cent of survey respondents, strong market growth potential is the second most important factor underpinning the country’s attractiveness. The prospects for 2016 are certainly positive. The International Monetary Fund forecasts GDP growth of 1.5 per cent this year after zero growth in the previous two years.

Where will investment flow?

Investors surveyed for this report expect Ukraine’s agriculture and ports and shipping sectors to attract most capital in the next 18 months. Some 37 per cent cited these areas among their top three sectors targeted for investment in the next 18 months.

Agribusiness is a core pillar of Ukraine’s economy so it is no surprise that investors find this industry attractive. Historically known as the “breadbasket of Europe”, around 25 per cent of the world’s highly fertile black-earth soil is in Ukraine. The country is also the world’s largest exporter of sunflower oil and the second largest exporter of grain behind the US.

The ports and shipping sector is attractive for two reasons. First, it is crucial to export the country’s agricultural produce. Second, Ukraine’s 13 sea ports, excluding the five ports annexed in Crimea, are in dire need of modernisation. According to the State Property Fund, 70-90 per cent of the port infrastructure is outdated. Foreign investment is needed to upgrade the ports so they can accommodate larger vessels and therefore boost exports.

A large number of investors are targeting Ukraine’s IT sector – 32 per cent mentioned that IT is one of their top three targeted sectors and 21 per cent said it was their core focus. This is hardly surprising given that IT is one of the country’s fasting growing industries. According to Ukraine’s Ministry of Economic Development and Trade, IT outsourcing sales have increased by a multiple of 20 since 2003.

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Navigating the risks

Despite the enormous opportunities, investing in Ukraine is not without its risks. For a start, there is a widely held perception that Ukraine has an unfriendly business climate – 82 per cent of survey respondents believe Ukraine is a difficult place to do business.

This perception is not completely divorced from reality. Indeed, Ukraine is 83rd in the World Bank’s ‘ease of doing business’ rankings, below neighbouring countries such as Romania (37th), Belarus (44th) and Russia (51st).

What risks must investors evaluate before committing to Ukraine? The survey data provides some answers. Almost half of surveyed investors that have not invested in the country said political risk was the most important deterrent. Corruption was the second most important (cited by 24 per cent of investors), followed by regulatory uncertainty (14 per cent).

Political risk: There are many dimensions of political risk but in the context of Ukraine the interviews conducted for this report reveal that the threat of Russian invasion and the potential this has to destabilise the balance of power in Kiev is most important.

The severity of the actions by the Russian military in the east of the country and the potential for further conflict should not be understated. That said, there is a sense in Ukraine that the situation has been exaggerated by international observers.

“There is a distorted perception of Ukraine in the minds of many including investors in financial capitals such as London or New York,” explains Andy Hunder, president of the American Chamber of Commerce. “News from Western media outlets regarding the instability in Ukraine and the Russian threat is overplayed and it is an issue that needs to be addressed. If you visit Kiev the reality is very different. The conflict affects 7 per cent of the country, and the remaining 93 per cent is very much open for business.”

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Regulatory uncertainty: Placing the conflict in the east to one side, there are regulatory hurdles that investors must also consider. Complex networks of bureaucracy can leave investors tangled up in red tape leading to, for example, long delays to application processes.

Issues surrounding the registration and ownership of property are particularly problematic. Ukraine’s fragmented land ownership system causes problems for companies looking to begin operations in the country. Agricultural companies are especially exposed to the risk.

Paying taxes is also an issue. According to research conducted by the World Bank, businesses in Ukraine spent on average 350 hours paying taxes in 2015, much higher than the 110 hours allocated by UK-based businesses.

Another challenge for foreign investors are regulations surrounding capital flows and the impact this can have on retrieving dividends from businesses located in Ukraine.

“Until June of this year it was not possible to receive dividends in a foreign currency due to legislative restrictions,” explains Mykhailo Granchak, director at Dragon Capital. “The legislation was recently updated, allowing foreign investors to repatriate their dividends accrued in 2014 and 2015, but for any future dividends the restriction persists. It makes international businesses think twice before setting up operations in the country.”

But while Ukraine’s complex regulatory environment might seem daunting to overseas investors, it is no different from many other emerging markets that offer high returns.

Corruption: Investors surveyed for this report cited a number of reasons why their investments in Ukraine were unsuccessful. Corruption, alongside currency devaluation, political instability and the behaviour of local partners (all cited by 24 per cent of respondents) contributed to unsuccessful investments.

Concerns regarding corruption are affecting investment. Surveyed investors ranked corruption as the second most important deterrent to investing in Ukraine, behind perceived political risk.

Worries about corruption are certainly not unfounded. In 2015 Ukraine was ranked alongside Cameroon, Iran, Nepal, Nicaragua and Paraguay at a lowly 130 out of 168 in Transparency International’s Corruption Perceptions Index, a yearly ranking based on the level of corruption in a country’s public sector.

Despite concerns about corruption it is important to keep the scale of the issue in perspective. Indeed, many individuals surveyed and interviewed for this report had no experience of corruption whatsoever.


Ukraine is something of a hidden gem for international investors targeting high returns in a strategically important location next to the major European markets. While the risks posed by corruption, complex legislation and the conflict in the east of the country should not be underestimated, these challenges can be overcome with careful planning and advice from local experts.

Those shunning Ukraine may want to look again.

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