Last year, Ukraine ramped up efforts to market itself as a viable destination for foreign investment, aiming to tackle its hefty $524 billion recovery needs. However, the focus seems largely on wealthy investors, leaving smaller ones a bit out in the cold.
Much of the promotional push—think industrial parks or energy projects—targets deep-pocketed corporations and International Financial Institutions (IFIs) willing to embrace higher risks. Unfortunately, small foreign investors often find themselves on the sidelines.
Consequently, these smaller players are struggling to secure funding and are hoping for increased government support to set up operations in Ukraine.
According to economist Danil Monin, the government’s preference leans toward loans from IFIs and state-led initiatives, which inadvertently sidelines small businesses. He pointed out that while access to state bids remains murky, donor funds are mostly channeled to the major players.
Before the escalation of the Russian invasion, small foreign firms could typically rely on banks for loans and financing to invest in Ukraine. However, persistent Russian aggression has made European and American banks wary, pushing them to close their doors to businesses and private investors.
Ukrainian banks could be an option, but the high interest rates—hovering around 18-19%—are discouraging. Many foreign investors have been shut out of Kyiv’s domestic subsidy programs, even if they’re collaborating with Ukrainian companies.
RSJ Investments, a Czech firm focused on small-scale energy projects, shared with Kyiv Independent that they had trouble accessing the state support fund due to the nature of renewable energy projects in Ukraine, even after investing about $3 million during the war and collaborating with local businesses.
Jakub Kucera, the company’s asset manager, mentioned that the government has advised Ukrainian firms against seeking foreign investors during wartime, which he finds quite “discriminatory.”
The Decarbonization Fund, designed to aid businesses and state entities, offers interest rates between 7-9% and a significant funding range for energy efficiency projects. With the largest grants reaching Hryvnia ($2.2 million), RSJ could potentially create up to five new facilities, doubling heat production in Kyiv and surrounding areas.
However, without international funds pumped into these grants, cash-strapped Ukraine is unlikely to open its doors to foreign investors. Local companies seem to take precedence as they lack external funding options.
“This opportunity should extend to foreign investors if additional funds become available,” she noted.
Foreign Investment Ambitions
Kyiv and its partners have crafted initiatives like the “Investment Map” to guide foreign investors. In 2023, users can explore 195 proposals across over 14 industries in various regions. The much-discussed US Ukraine Reconstruction Investment Fund could eventually serve as a framework for foreign investment, pending further discussions in Kyiv next month.
The government has also promised tax incentives for foreign investors; those putting in over 20 million euros could be exempt from income tax for up to five years. If capital is directed to priority development zones, this exemption could extend to ten years.
Recently, Ukraine has witnessed some successful investments, such as a $650 million contract signed by French billionaire Xavier Niel with Ukraine’s third largest mobile operator, Lifecell, to merge with Datagroup-Volia.
Still, there’s a noticeable absence of small to medium-sized players, as clear frameworks aren’t established unless investors have both deep pockets and a strong risk appetite. Many are simply waiting for the conflict to come to a halt.
Strangely enough, small Ukrainian towns are attracting the interest of US entrepreneurs. Take Chris Exorin from Chicago, for example. He aimed to expand his furniture rental business into the quaint small town of Ternopil Oblast, a place with around 20,000 residents. His plan? To rent furniture to expatriates and organizations aiding in Ukraine’s reconstruction.
In the first half of the year, Ukraine’s national bank reported that foreign investment dipped to $1.1 billion, a steep decline from $3.3 billion during the same period last year.
RSJ Investments represents a rare case where a small to medium business is growing amid the war. Despite frustrations with the decarbonization funds, the company feels that initiatives like the US investment fund merely cater to the “big players,” rather than smaller enterprises.
Serhii Tsivkach, a senior advisor at Dga-Albright Stonebridge Group, concurs that both Kyiv and foreign governments need to take greater action to support small businesses and overseas investors.
He emphasized that these investors can introduce innovative technologies and open new markets for Ukrainian small and medium-sized businesses.
Unlocking Capital
Other funding options are limited, and RSJ Investments is currently negotiating commercial loans with Ukrainian banks. With interest rates driven by inflation hitting 18-19%, the company may only be able to set up two new plants instead of five. If the loan doesn’t go through, they won’t be able to build anything, Kucera noted.
On the upside, Ukrainian banks now have guarantees from the European Investment Bank and backing from the European Bank focused on reconstruction and development. This means RSJ Investments doesn’t have to provide additional asset collateral outside of the project itself—an initial requirement for loans in Ukraine.
Looking ahead, it’s crucial for foreign banks to rebuild their trust to lend to businesses and investors. Jock Mendoza Wilson, co-chair of the Ukraine Chamber of Commerce, remarked that banks tend to regard war risk as a deterrent, which affects capital access.
An effective solution for smaller entities could come in the form of insurance contracts protecting investors from war risk, either managed by the government or in tandem with private insurers. This would make it simpler for small businesses to secure loans.
Furthermore, many foreign banks remain unaware that risk levels vary across Ukraine; some central and western regions pose lower threats than others. The government could provide clearer guidelines to help identify safer investment areas and counter the broad perception that Ukraine is an outright no-go zone for investment.
“The government should encourage proactive lending strategies and help dispel negative stereotypes,” he suggested.
“If you manage your processes well and have a solid business model, your returns in Ukraine could far exceed those in places like the UK.”
