Steps to Stability Marred by a Failure to Attract FDI

emerging europe ukraine

Read the Outlook on Ukraine special report


Alexander Frost

About Alexander Frost

Alexander Frost is Head of Global Risk Intelligence and Data at Axco Insurance Information Services. Alexander is a multilingual analyst, with five years’ experience in academic and private sector research and publication, an extensive knowledge of African, Chinese, European, Russian and Central Asian domestic and foreign policy and a strong background in Russian and European 20th and 21st century history as well as post-Soviet security, with emphasis on non-traditional security threats and Russian-Chinese competition in Central Asia.

Recent statements by the European Union (EU) and the International Monetary Fund (IMF) give the impression that Ukraine is making significant steps toward stabilisation and normalisation. There has been much praise for the administration of Petro Poroshenko, especially for the nationalisation of the heavily indebted PrivatBank, and recognition that reforms such as this will be sufficient to unlock the next $1.7 billion tranche of IMF assistance from its $17.5 billion rescue-fund.

If one were to only look at macro-economic indicators, Ukraine appears to have made some progress. After a fall in real GDP of over 15 per cent, since the Maidan revolution in 2013, the economy returned to growth of 1.5 per cent in 2016 and is expected to expand further to 2.5 per cent in 2017. Likewise, the deficit has been brought down to 1.6 per cent of GDP and a tighter monetary policy at the Bank of Ukraine has seen inflation brought down to 9.8 per cent from its high of close to 50 per cent, in 2015.

Despite all of this however, foreign direct investment (FDI), the major measure of foreign capital’s confidence in Ukraine’s medium- to long-term trajectory has failed to recover; falling from $8.5 billion, in 2012, to only $484 million in 2015 (the most recent year for which complete figures exist). While there have been some notable exceptions in the fields of agriculture and information technology, in order to meet the government’s ambitious growth targets and to provide a meaningful recovery, Ukraine would require an FDI of $6 to $7 billion per year. How can this caution be explained?

The reason can found in Ukraine’s elevated and persistent political and geopolitical risks. Judged on a combination of public satisfaction, government stability, policy certainty and national security, Ukraine’s position remains extremely precarious, despite its increasingly positive qualitative indicators.   

While the much touted headline figures, used to substantiate stabilisation, may impress Ukraine’s western partners and the international financial institutions, they have had less of an impact on regular citizens. Unemployment remains over nine per cent and per capita income has declined from $3,878 in 2012 to an estimated $1,988 in 2017.

Moreover, despite billions of dollars in support for economic reform from the EU and the IMF, few of those reforms have had a positive impact for consumers. Transparency and price liberalisation in the energy sector have seen household bills rise an estimated 450 per cent, between 2014 and 2015; there has been major disruption to health and welfare services and plans for a rise in the pension age, in 2017, are sure to provoke public anger.

The government has also struggled to address the pervasive issue of corruption which, recent surveys have revealed, average citizens see as a high priority and perceptions of which have worsened since the Maidan. Few have confidence in the government of Volodymyr Groysman, which is supported in the Verkhovna Rada by a number of oligarch-aligned parties, to tackle this issue. Reform of the judicial branch, which is vital to prosecuting major violators, remains stymied by vested interests and anti-corruption legislation and institutions lack the authority and budgetary capacity to fight back.

Geopolitically also, Ukraine’s position remains extremely precarious, as evidenced by the flare up in violence between Ukrainian troops and Russian supported separatist forces in January 2017. Although low level fighting has persisted regularly beyond the Minsk II agreement, which was signed in early 2015, this was the first time in months that heavy weaponry, prohibited under the agreement, were used by both sides. This included artillery and saturation Grad rocket systems and resulted in numerous civilian deaths and widespread property damage.

Russia’s determination to ensure that Ukraine is prevented from further integration into Atlantic economic and security structures means it has little incentive to implement the Minsk agreement and the simmering conflict in the east is a useful lever with which to destabilise Kyiv. The occupation of the Donbas, a major centre of coal mining and industry, affects 16 per cent of Ukraine’s pre-conflict output, while the cost of maintaining an army of 280,000 troops and carrying out a major re-armament programme, estimated at 3.1 per cent of GDP, is a huge drain on Kyiv’s resources.

Ukraine also has little incentive to enforce Minsk, as this would involve giving considerable powers to the separatists, including a veto over NATO and EU membership. To attempt this would precipitate a major domestic crisis given that it would be unacceptable to nationalist parties, but its abandonment will make the prospect of EU integration even more remote, thus fuelling public anger.

The stage is therefore set for a turbulent medium-term outlook in Ukraine, with near constant political instability, domestic squabbles over reform, an increase in the potential for public demonstrations and greater geopolitical risk as anti-Russian sentiment potentially becomes the unifying focus of the country. In such an environment is seems likely that foreign capital will continue to avoid the country, or at best return slowly. 


The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.


Legal Reforms are Improving the Existing Problematic Situation in the Ukrainian Agro Market

ukraine agriculture

Ukraine Returns to the Fold

LVOV UKRAINE - APRIL 25: Workers masons laid paving stones in the repair of the main street on April 25 2013 in Lviv Ukraine

The Dilemmas of Ukraine’s Economic Policy

The Stalled Conflict in Ukraine Will be Formalised

The Innovation District IT Park Will Help Lviv Become CEE’s IT Hub

IT park lviv ukraine

Finalising the DCFTA is Expected to Bring Multiple Benefits to Ukraine

Europe’s Breadbasket Offers Opportunities for Investment and Diversification

Ukraine’s Pro-change Atmosphere Says “Welcome!”

lviv emerging europe

Protecting Intellectual Property to Encourage Business Confidence

Poland’s Business Experience Makes it a Good Neighbour to Ukraine

Maidan Three Years On—What Has Changed for Ukraine?

The Eurovision Song Contest Is a Perfect Showcase for Ukraine’s Talent and Warmth

There Is a Move Towards Change in Ukraine

A Very Good Prospect for Future Biogas Development

A Roadmap for Reform in Ukraine and a Promise of EU Support

Ukraine’s Banking Sector Reconstruction Brings Asset Sales and Opportunities in Equal Measure

Gavel and Ukrainian hryvnias on a wooden table

European Volatility Makes Economic Development Slower for Ukraine

Longstanding Early Investors Say Ukraine Offers Foreign Manufacturers Great Prospects

ukraine manufacturing

Changes Are Needed in Ukraine’s Economy and Business to Catch up with CEE Growth

Governmental Support is Vital to Fight Corruption

Thinking Big; Working Hard; Delivering Value to Clients and Building Relationships

quartsoft emerging europe outsourcing

Ukrainian Venture Investment Market Is Immature and Needs Growth

Ukraine’s Gas Industry Risks Stagnation Without Investment

‘Viking’ is Yet Another Way to Annoy Ukraine

Kyiv’s Mayor Is Used to Fighting to Attract Attention and Interest

KIEV UKRAINE - SEPTEMBER 8 2016: The facade of Kievrada the City Council located in Khreshchatyk Avenue on September 8 in Kiev.

Ukraine’s Tech Sector Is Booming but Needs Awareness and Confidence

ukraine tech emerging europe

Ukraine Outsourcing’s Value is Now in its Technological Expertise and Reliability

Leszek Balcerowicz: Ukraine Can Learn from Poland’s Economic History

Start Making Connections for the Opportunities Ukraine is Currently Offering

Kharkiv region Ukraine - July 29 2016: Combine harvests wheat on a field in Kharkiv region Ukraine on July 29 2016

Changes Are Making Ukrainian Banking More Aligned with International Standards

Business Moving Forward with Cautious Optimism — Can Investors Win the Confidence Game?

History as Destiny? Institutional Erosion in Ukraine and Poland

Anti-corruption Efforts Are the Starting Point for Further Reforms

Ukraine Is Energy Independent in Some Sectors and Awaiting Change in Others

Ukraine Continues to Make Waves as an IT Outsourcing Destination

Ukraine Is Offering Europe Unique Combat and Technological Experience

FocusEconomics: Predicting an Increase for the Ukrainian Economy

Ukraine’s Talented Students Are Well Served by Its Diversified Business Relevant Education

ukraine IT

Between the East and West, Geographically and Politically

SMEs Should Play an Important Role in the Economy and Export Development

Military Operations in Ukraine Have Had Some Surprisingly Positive Side Effects for Modern Businesses

Night city reflection on the river in Donetsk. Ukraine

Ukraine’s Government Declares Ambitious Privatisation Targets

Sirin Software — A Ukrainian Firm Conquering Global Markets

Ukrainian Start-up Projects Recognised in the International Market but Still More Investors Needed

Startup Diversity Teamwork Brainstorming Meeting Concept

Past Troubles Belie the Opportunities for Investment

Denmark in Ukraine: Fostering a Better Business Climate for Both Sides

Ukraine and Canada: A History of Settlement and a Future for Investment

Naftogaz: A Good Start Has Slowed But Optimism Remains High

Closeup of pressure meter on natural gas pipeline with people on the background

The Human Factor is Boosting Ukraine’s Promising IT Export Sector

Energy Tariff Reform in Ukraine: Estimated Effects and Policy Options

The Ukrainian Banking Sector Looks Set to Regenerate New Growth

From a Small Family Firm to a Top 100 Global Outsourcing Company

Ukraine’s Reputation for Cheap Labour May Not Ring True in the Long-term

Office Space Remains Available in Kyiv

Danish companies Support and Assist Ukraine’s Economic Transition

President of Ukraine Petro Poroshenko and Prime Minister of the Kingdom of Denmark Lars Lokke Rasmussen during a meeting in Kiev Ukraine

Ukraine’s NIX Solutions Expands to Israel and Beyond

Lviv Is the Pearl and the Soul of Ukraine

Ukrainian Agribusiness — a Jewel in a Crown

Wheat ukraine agriculture ebrd

The Political Economy of Independent Ukraine: Late Starts, False Starts, and Last Chance?

See the New Ukraine and Benefit From the Best by Partnering or Investing in IT

Engineer proceeding to data recovery from computer

Western Ukraine Could Be an Entry Point into the Country

Ukraine’s Economy in 2017 — When Dreams of Growth Meet Geopolitical Reality

Falling into Old Ways in 2017? Ukraine’s Struggle for Functioning Economic Institutions

Leave a Reply

Your email address will not be published. Required fields are marked *