Investment Climate: A Slow Recovery
Despite the ongoing conflict, Ukraine's investment climate is showing signs of recovery. After a significant decline in foreign investments during the initial stages of the full-scale invasion, there has been a gradual return of investor confidence.
- FDI Trends: FDI dropped dramatically from $8 billion in 2021 to just $221 million in 2022 due to the war. However, it rebounded to $4.8 billion in 2023, with most investments being reinvested profits from businesses already operating in the country.
- PrII Recovery: Private foreign investment fell to zero in 2022 but has since recovered, reaching $1 billion in 2023. In the first half of 2024 alone, private investors injected $0.9 billion into Ukraine, tripling the amount from the same period in 2023.
Investor Caution Amid War
The main deterrent for investors is the war and the associated security risks. Additionally, capital movement restrictions in Ukraine, which temporarily prevent the repatriation of invested funds and profits abroad, have made the environment more complex.
- Long-term Investments: Large companies are less deterred by these restrictions, as they typically invest with a long-term view, spanning decades.
- Private Investors: More risk-averse, private investors have been hesitant to engage during the conflict, with 2022 seeing a complete halt in private foreign investments.
Current Investment Focus
Investments are mainly directed towards industry and retail trade. However, due to the destruction and occupation of part of Ukraine, the share of industrial investments decreased from 65% in 2021 to 37% in 2023. Conversely, retail trade investments increased to 28%, though the absolute value remained stable at around $0.3 billion.
Sources of Investment
The Netherlands and Cyprus were the largest sources of FDI in 2021, with the trend continuing into 2023. Cyprus is traditionally viewed as a conduit for investments from domestic businessmen due to its offshore status.
Outlook and Future Growth
The National Bank of Ukraine (NBU) anticipates a gradual increase in FDI:
- Projections: The NBU estimates that FDI could reach $5 billion in 2024, $5.6 billion in 2025, and $7.9 billion in 2026.
- Drivers of Growth: The projected growth is expected to be driven by the normalization of the economy, improvement of the investment climate, reconstruction efforts, and further European integration reforms.
While challenges remain, particularly due to the ongoing conflict and security concerns, Ukraine's investment environment is slowly improving, with cautious optimism for the future.
