Foreign Investment Opportunity in Ukraine: 10 Attractive Industries
History does not set unsolvable tasks. Ten years ago, Ukraine was in the focus of attention of all major international funds. Banks and industrial companies were considering offers for investment from the world’s largest players; money was showering into the economy. Those times are considered golden for Ukrainian business.
Today, we speak about sectors of the Ukrainian economy are undervalued, which means that they are the most attractive for external investors.
So, 10 promising sectors for investment in Ukraine
Unlike most developed European countries, agriculture in Ukraine is the most capacious industry for attracting foreign investment into the economy. This is facilitated by both market advantages and problems of other industries. The positive factors are: favorable natural conditions and favorable location of the country on the map of the world agribusiness, low cost of local resources and historical predisposition to agriculture, developed infrastructure and agricultural machinery, being close to the world’s leading consumer markets – the EU countries and the Middle East.
The largest investment projects in the agricultural and related sectors mainly relate to the agrarian infrastructure. According to the Institute of Agrarian Economics, in 2016, Ukrainian agribusiness received UAH 44.2 million of capital investments. Elevating capacities, transshipment terminals, whole logistics complexes are the fields where the global traders who have come to Ukraine are actively working now. In recent years, terminals of Bunge ($ 180 million), Cofco ($ 75 million), Risoil S. A. ($ 70 million) and Allseeds ($ 200 million) were constructed in Ukrainian ports. Louis Dreyfus Ukraine, the largest exporter of Ukrainian grain among foreign companies, and Brooklyn-Kiev are implementing a $ 99 million grain-terminal project.
In addition, the NCH agricultural holding unit operates in Ukraine ($ 36 million investment in 2015); so does seed plant of American company Dupont Pioneer ($ 51 million of investment since the launch of the plant in 2013).
Foreign investors, as well as international financial institutions, focus on the prospects of the agrarian sector. For example, the EBRD plans for 2017 was to invest 150-200 million euros in the Ukrainian agribusiness. Similar figures are used by representatives of the International Finance Corporation.
Software and hardware
In Ukraine, many people pray IT like a God. Experts and financial analysts often speak about the super-profits of companies operating in outsource software development market. “Billions of dollars in the reports should not be misleading. The main asset of these companies is employees with a sufficiently high level of qualification. The main competitive advantage is a low wage in comparison with Western Europe and North America. One should not expect a significant inflow of investments into this segment – especially fixed assets. In particular, because companies of this industry rent abroad even the computing power,” they say in IDC Ukraine.
In recent years, Ukrainian IT-start-ups have attracted big money. For example, in 2012, the Google bought the Ukrainian project Viewdle for $ 45 million and in 2015 it became known about the deal between the Odessa startup Looksery and Snapchat with a record sum of $ 150 million.
According to the Ukrainian Venture Capital Association (UVCA), in 2016 87 investment transactions with our innovative companies were concluded in the country, which is 32% more than in 2015. In 2016 total amount of investments was $ 88 million and for the last 5 years it was more than $ 400 million.
Wires, rails and asphalt
Infrastructure is one of the most promising sectors for billions of capital investments. So far, there are not so many investments in this field. Mainly, money comes to projects with already developed business models whose future may be easily predicted.
Communication sector is the most illustrative example. In early 2015, Kyivstar, MTS Ukraine (Vodafone) and lifecell paid the state 8.7 billion UAH for new licenses at the 3G auction. Since that time, the companies have invested more than 20 billion UAH in the infrastructure of the new generation. Taking into account the licenses, foreign investments (shareholders of all three companies are not Ukrainian entities) has already totaled about UAH 30 billion, or slightly more than $ 1 billion.
Of course, now new licensees will have to invest in equipment for 4G-networks. The investments will not be as large as for 3G. First, the same three mobile operators are expected to become the main players in the 4G-market. They bought base stations, which are called 4G ready. Such equipment is capable of working in fourth generation network. Companies will have to spend money on new stations in places where there are no stations today.
Burning sun and old networks
After the parliament has established clear and predictable rules of the game in the market of alternative energy in 2015, money literally flow into the industry.
The green tariff in Ukraine will be annually decreasing till 2025, and it will be canceled only in 2030 as a temporary stimulus for the development of renewable energy sources. This makes it possible to calculate the payback period of popular projects in recent years, such as solar stations. The rapid reduction of the cost of solar panels is the main impetus for the development of this market in our country.
While the alternative power generation stations are becoming a favorite object of investment, the backbone networks are gradually decaying. According to Ukrenergo estimates, by 2026 the need for capital investments in this asset shall reach about 130 billion UAH. Automation of energy network management is one of the main tasks.
Turbines, trains, automotive components
After the Revolution of Dignity, the Ukrainian machine-building industry has greatly subsided. It is due to the loss of Russian sales market and the sharp collapse of domestic markets. For example, over the past four years only Ukrainian car building factories have reduced the output of freight cars by 50 times. The industry, which in 2000s generated multi-billion dollar earnings for the country, in 2015, has seriously subsided. As a result, in 2006 the share of machine building amounted to only 11.9% in the structure of exports of goods. In 2013 this figure was 20%.
Despite all the difficulties, Ukrainian machineries are trying to enter new markets, and large Western corporations are looking for opportunities for investment in Ukrainian engineering. This is especially noticeable with the growth of the automotive components sector. According to Art Capital, in 2015 Ukraine exported wires for spark plugs to the amount of almost $ 1 billion (22% of all exports in engineering). The products were supplied mainly to Hungary, Poland and Germany.
In Ukraine such companies as Karpaty, Mukachevo plant Tochpribor, Taiko Electronics, SEWS, Sumitomo Electric, Kromberg & Schubert and other produce electric wiring for the world auto industry. Several other enterprises export other kinds of auto components – bundles, covers, acoustics. Ukrainian products are used in BMW, Mercedes, Nissan, Ferrari, Porsche, Volkswagen, Opel, Audi, Fiat.
In 2016, Japanese company Fujikura, specializing in the production of electrical equipment, launched two factories in the Lviv region for the production of auto components. The company has created 1800 jobs and plans to invest $ 75 million in the Ukrainian economy. The company will open two more plants – in Vinnitsa and Cherkassy (by 3000 work places). Also in the Lviv region there is the German auto parts plant of the concern Leoni AG with 6000 workplaces; it produces electrical cable networks for Opel cars. The company announced the construction of a new plant in the Ivano-Frankivsk region. At the first stage, the investment will be € 15 million.
German suppliers of parts for the automotive industry also have great interest in Ukraine. Currently, about 25,000 people work at production sites of German companies in the western region of Ukraine. In the next year or two, the Germans are planning to create another 10,000 new jobs. The company Kromberg & Schubert, which already has a factory for the production of electrical wiring for cars Volkswagen, Mercedes and BMW in Lutsk, is going to build new production facilities in Zhytomyr.
The main machine-building giants of Ukraine
- Motor Sich
- “Kryukov Railway Car Building Works” PJSC (KVSZ)
The pharmaceutical industry is an immense field for foreign investors in Ukraine. After all, the level of domestic medicine is significantly lower than the advanced world technologies. According to the European Business Association, in the past five years, about $ 200 million have been invested in Ukrainian pharmaceutical industry. According to Business Credit analytical agency, about a quarter of drugs on the Ukrainian market are imported. As we see, there are a lot of opportunities for opening domestic production for foreign companies.
What attracts investors to the Ukrainian pharmaceutical sector? First, foreign companies consider the availability of qualified personnel in Ukraine, and secondly – the relatively free market, as well as government programs to support business in the field of pharmaceuticals.
Pharmaceuticals and biotechnology remain the most high-tech industries in the world in terms of absolute and relative costs. It accounts for 70% of all investments in the medical sector – over $ 1 trillion. According to the Survey of Trends in the Global Pharmaceutical Market, prepared by Frost & Sullivan, the international consulting company, in the period from 2018 to 2025, the world pharmaceutical market (including biotechnology) will grow by 4.6% on average, and by 2025 its volume will amount to $ 1.7 trillion.
Investing in food
The production of food and beverages is the most competitive, yet the most necessary branch for investment. Nestle, Mondelez, Danone, Carlsberg, and Coca-Cola – that’s just a small fraction of food giants with world names who believed in Ukraine.
It’s no secret that not all of them implemented their projects from the scratch. Majority of these companies bought existing enterprises and modernized them, but this does not detract from their influence on the country’s economy. Their presence in the market suggests that foreign companies can work successfully in Ukraine.
“If we speak about the bright examples of the impact on the economy of Ukraine, it is possible to single out the activities of Coca-Cola: by early 2016, foreign direct investment (FDI) of the company to Ukraine reached $ 490 million, which is 1% of total FDI in our country,” said Dmitry Anufriev, partner and head of the corporate finance department of Deloitte Ukraine. GfK Ukraine estimates the total added value generated by the company amounts to 0.25% of annual GDP.
Weapons for export
The main problem with foreign investment in the Ukrainian defense industry is the absence of private arms market as such and the rules of the game that are understandable for all market players. Ukrainian defense companies cannot fully develop, because they are critically dependent on the state defense orders. It is not profitable for foreigners to invest in Ukrainian defense industry companies – most of them are state-owned, and all accompanying procedures involve complex bureaucratic reconciliation.
The largest and strategically important enterprises of the national defense industry are a part of the state concern Ukroboronprom. In 2014-2016, the companies of the concern exported weapons for $ 3.86 billion.
If we speak about foreign investments in the Ukrainian defense industry, it is easiest to work in the format of joint ventures or on the basis of a contract. This is what the majority of state companies do,” says Pavel B. Barbul, Director of the State Enterprise SpecTechnoExport. Joint project of Antonov State Enterprise and Saudi Arabia for the production of the An-132D aircraft may be considered a good example of international project cooperation in this field.
It goes without saying that in the coming years banking is the most attractive financial area for investment. After the nationalization of PrivatBank, the state controls over 50% of the market. As the head of the National Bank promised, “It is possible for the state to sell the bank with a good multiplier, but, perhaps, it will take 3-4 years”.
“The EBRD has already been invited to participate. I believe there will be a success story”. There are other candidates as well. The state is considering selling shares of Oschadbank, Ukrgasbank and Ukreximbank to foreign investors. In the five-year perspective state banks may attract billions of hryvnia investments.
In addition to banks, financial sector has new directions, which are difficult to compare with the giant banks in terms of potential investments. “Approximately several million dollars are invested annually in fintech,” says Yuri Chaika, founder of Fintech Cluster.
There are many financial start-ups in Ukraine. Majority relates to a more convenient transfer of funds from abroad and abroad, as well as ways of accepting/cashing out electronic payments in Ukraine. Bitcoin projects are also gaining popularity. Even the national bank plans experiments with cryptocurrencies.
Retailers: selective growth
According to a study by GT Partners Ukraine, the share of food retail is steadily growing. In the first quarter, retailers opened 2010 small format stores (up to 400 sq.m.), which is 31% more than in the same period last year. This exceeds the average for the market. For example, in the first three months of the year 4350 new food stores appeared in Ukraine, while in the same period last year it was 3650 (19% growth).
These are mainly Ukrainian investors like Fozzy Group (Fora, Silpo, Fozzy C&C), Nash Krai, Lotok who invest in the development of small-format chains. The leader of the food retail market – ATB – works in the format of a discounter. Nevertheless, the competition is intensifying. French retailer Auchan also plans opening stores near the house.
More and more Ukrainians, as well as residents of EU countries, prefer shopping close to their homes and don’t want to go for food and essential goods in super- and hypermarkets. According to a study by GT Partners Ukraine, last year sales of small retail outlets increased by 22% – and reached UAH 24.1 billion. For comparison: all food retailers sold products for UAH 219 billion last year, which is 16% more than in 2015.
The largest foreign retailers in Ukraine:
- Metro Cash&Carry
Investments of the future
If we consider the world trends of the international capital flow, then, according to experts, its volume in 2016 decreased by 13% – to $ 1.525 bn – mainly due to decrease in activity in emerging markets (Africa, Latin America and Asia). United States, Great Britain and China take the leading positions in the top ten of the recipient countries. In emerging economies, which includes Ukraine, significant growth (+38% in annual terms) is mainly due to investments in Russia and Kazakhstan. At this stage Ukraine does not have a prominent place on the world map of investment.
According to Mergermarket survey on expectations of activity in the global M&A, finance (banks, insurance), pharmaceuticals and retail sectors are considered the most interesting among the major industries. With the above, the interest in rapidly developing industries is also quite correlated: finteh, digital technologies in medicine and Internet commerce. This means that investors are interested in both the basic prospects of the sector and the increase in productivity through the introduction of high technology.
Innovations and technologies will substantially move the investors; the strategists will more likely pay for the technology than for the extensive materials (assets, market share, etc.).
The pursuit of high technologies and productivity, as evidenced by world M&A trends, will not stir up investors’ interest in the basic sectors of the Ukrainian economy (we cannot boast of the dominance of innovations in metallurgy, chemical industry, engineering, energy, etc.), but It can also increase the interest of global market players in our engineers and IT specialists.
What frightens foreign investors:
- Weak protection of property rights and creditors
- Restrictions on capital flows and currency controls
- Still complicated tax administration
- Over-regulation (antimonopoly legislation, licenses, price regulation)