Current Investment Climate
The investment environment in Ukraine today can be likened to an early spring day: the chill of uncertainty remains due to the war, but there are glimpses of optimism as foreign investors begin to re-engage with the national economy. After the initial shock of the full-scale invasion, there has been a modest revival in foreign direct investment (FDI). However, investment levels are still significantly lower than pre-war figures, and some inflows are influenced by restrictions that limit capital withdrawal from the country.
Trends in Foreign Direct Investment
Sharp Decline in 2022: The full-scale invasion by Russia led to a dramatic decrease in FDI, plummeting from $8 billion in 2021 to $221 million in 2022.
Rebound in 2023: There was a partial recovery, with FDI reaching $4.8 billion. Notably, the majority of this amount consists of reinvested earnings from businesses already operating in Ukraine rather than new investments.
War and Security Risks: The primary barrier to attracting new FDI is the ongoing conflict and the associated security risks. Many investors remain cautious until a stable peace is established.
Capital Movement Restrictions: Current restrictions prevent the repatriation of invested funds and profits abroad. While this poses challenges, it is less of an issue for large companies with long-term investment horizons.
Private Investment Dynamics
Individual Investors' Hesitance: Private foreign investment (PFI) saw a steep decline, dropping from $2.5 billion in 2021 to zero in 2022. This group of investors is particularly sensitive to wartime risks.
Gradual Recovery: In 2023, PFI improved, reaching $1 billion. Preliminary data from the National Bank of Ukraine indicates that in the first half of 2024, private foreign investors injected $0.9 billion into the economy, tripling the amount from the same period in 2023.
Reinvestment Over New Capital: Much of the reported investment is reinvested profits, partly due to currency restrictions limiting fund withdrawals.
Sectoral Focus
Industry and Retail Trade: These sectors remain the most attractive to private investors.
Industry: The share of investment decreased from 65% in 2021 to 37% in 2023 due to destruction and occupation of territories.
Retail Trade: Despite economic challenges, the retail sector's share of investment doubled to 28%, maintaining an absolute value of approximately $0.3 billion.
Key Investor Countries
- Netherlands and Cyprus: These countries continue to be the largest investors in Ukraine, with the Netherlands contributing $2.2 billion and Cyprus $0.5 billion in 2021. Investments from Cyprus are often linked to Ukrainian businesses due to its favorable tax environment.
Comparative Perspectives
- Learning from Israel: Ukraine can look to Israel's experience, a nation that attracts investment despite ongoing conflicts. A robust high-tech military and strong alliances help mitigate security risks, making it competitive for investments. However, unlike Israel, Ukraine lacks direct military support from Western allies, which affects investor confidence.
Future Outlook
National Bank's Projections: The National Bank of Ukraine forecasts a gradual increase in FDI:
- $5 billion in 2024
- $5.6 billion in 2025
- $7.9 billion in 2026
Factors Driving Growth:
- Normalization of Economic Activities: As the economy stabilizes, investment conditions are expected to improve.
- Improved Investment Climate: Reforms aimed at reducing corruption and enhancing the business environment are crucial.
- Reconstruction Efforts: Post-war rebuilding will create opportunities across various sectors.
- European Integration Reforms: Progress towards European Union membership may boost investor confidence.
Analysts' Views:
- Optimistic Scenario: Some experts believe that ongoing reforms and reconstruction efforts will stimulate investment growth.
- Cautious Perspective: Others, like Vitaliy Vavryshchuk of the ICU group, are less optimistic, suggesting that without significant improvements in security, FDI will remain modest, potentially only a few hundred million dollars annually in new investments during 2024-2025.
Conclusion
While the war poses significant challenges, there are signs of a cautious resurgence in foreign direct investment in Ukraine. The country's ability to attract and retain investment will largely depend on the resolution of the conflict, continued economic reforms, and efforts to improve the overall investment climate. The coming years are critical for Ukraine to leverage these factors and stimulate sustainable economic growth.
