When Russia launched a full-scale invasion in February 2022, many feared it would be the end of business in Ukraine. Concerns about the safety of their employees led many international companies to shut down operations in the country, while promises for new investments almost dried up.

Ever since then, the country has made an impressive rebound. In July 2023, net inflows hit $403m, up from $150m recorded in 2022. According to the National Bank of Ukraine, overall FDI net inflows stood at $1.3bn in Q2 2023 compared to just $286m in the same quarter last year.

Yet, setting up business in Ukraine during wartime continues to be challenging.

With many companies looking to ensure the safety of their rooftops against unforeseeable Russian bombings, investors are calling for better protection from governments and insurance companies.

Several international agencies, including the World Bank and the US International Development Finance Corporation (DFC), have allocated millions of dollars in insurance against war-related risks. But this isn’t enough considering the extent of damage – reaching in the hundreds of billions of dollars, according to some estimates – done by Russia’s war against Ukraine.

In addition to that, businesspeople are increasingly urging officials in Kyiv to crack down on the country’s corruption and bureaucracy.

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Matt Simpson is the CEO of Black Iron, a publicly traded company listed on the Toronto Stock Exchange that is looking to build a new iron ore mine in Ukraine.

The mine project, located in Kryviy Rih, a city in central Ukraine, has a current valuation of $1.2bn. Investing in an iron ore mine is vital in the context of post-war rebuilding.

According to Simpson, “Any time you have major infrastructure projects, it requires a tremendous amount of steel for which iron ore is the main input.”

“This project is highly important because, with bulk commodities like iron ore, the economics are all about moving large volumes of material at low costs,” he continues. “It’s how close you are to rail, ports, power and skilled labour that makes or breaks the economics of an iron ore project. In our case, the government-owned railway is within one mile of the project, high-voltage power lines trace that railway, and you can access five different ports in the Black Sea between 120 and 250 miles away.”

But hitting the ground running comes with another struggle of its own, namely bypassing Ukraine’s bureaucratic machinery, as well as institutional corruption. For officials in Kyiv, designing anti-graft measures is not just needed in the context of joining the EU – it is deeply rooted in the country’s own economic revival.

Ukraine’s president Volodymyr Zelensky has promised a toughened stance on corruption crackdown, equating it with treason. But the recently uncovered attempt of defence officials trying to embezzle $40m via a fake arms deal, as well as long-standing accusations of corruption and institutional bureaucracy, are making investors reluctant to sign any prospective business deals.

“In general, I think many people are optimistic that Ukraine will be successful in winning this war, and they want to look for opportunities to participate in its rebuilding upon peace,” Simpson adds. “I think a lot of them experienced similar frustration to us with some of the inaction and need for better engagement with Ukraine’s government. And there is a lot of talk about corruption, which unfortunately still occurs.”

Q: How has the ongoing conflict between Russia and Ukraine affected your business plans with the Shymanivske mine?

Simpson: To clarify, where our project is located, there has not been any act of fighting on the ground. It’s several hundred miles away from where the fighting takes place. However, there have been missile strikes in the area, including to the adjacent operating iron ore mines. And more so, in the city of Kryviy Rih, near where our developments are located, there have been a few strikes on power infrastructure and water dams.

Q: Ukraine’s reconstruction can only take place when businesses and its industry have been rebuilt. There’s mostly been a lot of government guarantees from the West about supporting Ukraine militarily and financially to recover from the war, but how do you assess current works to restore the country’s business infrastructure?

Simpson: Ever since the war began, government-backed agencies have been investing money into Ukraine’s rebuilding, such as replacing roofs to prevent rain from causing further damage, and that money makes sense to stop further damage from occurring.

But to get Ukraine’s economy going sustainably, once there’s peace in the country, we must get private investor money into the country. Unfortunately, you are not going to see a tremendous amount of private investor money at this point in time because people are just too concerned that if they are to build anything, such as a physical mine like in our case, it could get hit by a Russian missile and destroyed.

There’s also the unlikely possibility that that part of the country [where you are looking to invest] could be taken over by Russian forces, so you would lose your asset completely. For this reason, you are not seeing a lot of private active investment in physical assets at this moment in time.

Q: What concrete steps has Ukraine’s government taken to improve investor sentiment in the country?

Simpson: The biggest thing Ukraine’s government has done in recent times to attract FDI is to adopt investment support agreement legislation about two years ago. This is crucial legislation because it aims to provide several guarantees to foreign investors coming into Ukraine. Most importantly, this legislation includes the concept of an investment nanny – this is a senior government official who would be a single point of contact for the investor.

To qualify, there’s a minimum amount of €12m that needs to be invested; you also need to create from 10 to 50 jobs and more for substantially larger investments.

However, the point is that having a single point of contact helps you navigate through all the different ministries to get your project realised. And then also provides you with protection as you operate your business. For example, if you have issues with a corrupt, mid-to-low-level government official, it gives you a direct channel to someone senior in government to discuss and, ideally, quickly resolve those issues.

Another important benefit is this legislation locks in current tax and royalty rates against future increases and eliminates import duties on any equipment purchased to realise the investment. Hence, I think it is really promising legislation.

But the problem is that not one agreement has been signed despite this legislation being in place for two years. So, getting some of these investment support agreements signed with companies including Black Iron is a key initiative that the government really needs to work on to attract FDI.

Q: What are the main challenges with the legislation?

Simpson: The problem is Ukraine’s Ministry of Economy, which is responsible for the implementation of this legislation, continues to adjust it. And as they continue to do so, they’re not willing to accept applications under the already approved legislation.

That is problematic because it has taken quite a bit of time to get some runs on the board, so to speak. I think it is really important for a few meaningful projects to get constructed quickly upon their being in peace because that will provide a lot of confidence to other investors to move forward with their investment ideas.

Q: Just to quickly clarify, is it because of the constant change in legislation that investors are not so excited to come to Ukraine?

Simpson: At this point in time, it’s, quite bluntly, the war. But beyond the war, the key opportunity right now is to sign investment agreements so Ukraine’s government will then have a number of vetted actionable case studies of investment opportunities that can be used by groups like JP Morgan and BlackRock, which Ukraine’s government has mandated to seek FDI for Ukraine’s rebuilding, to market to investors for consideration.

Q: Black Iron has worked closely with Ukrainian officials to develop an iron ore project. What are some of your first-hand experiences that you can recall in your work with Ukrainian officials?

Simpson: Frankly, Black Iron’s experience with Ukraine’s government has been mixed. I’d say that the main challenge has been getting direct access and engagement from senior government officials to negotiate the transfer of government-owned land needed to build the iron ore mine.

In Black Iron’s case, we are talking about a $1.2bn investment. So far, we have already invested $90m to bring the project to its current near-construction phase.

Another challenge with Ukraine’s federal government is it’s a revolving door. You have someone in a ministerial position who gets up to speed on Black Iron, and after a very short period – maybe four to six months – that person gets replaced, and that just goes on and on. And this is challenging because, in order to get things done, you need stability and to build relationships.

Finally, officials in Kyiv need to cut down on bureaucracy. In our case, if you’re building a mining project, you need to complete two sets of multimillion-dollar independent technical, economic, environmental and social studies to meet the needs of international investors and the second set for Ukraine’s government.

A prerequisite for most international banks, Export Credit Agencies and International Financial Institutes such as IFC or EBRD to invest is the completion of an environmental and social impact assessment following the Equator Principles.

The Equator Principles are an extensive set of guidelines developed by the World Bank to ensure environmental and social impacts are thoroughly assessed and risks mitigated following best practices.

Ukraine, however, doesn’t accept the Equator Principles. You have to redo the environmental and social assessment work according to Ukrainian legislation.

Similarly, an international investor will be looking at things like a feasibility study, which needs to be done in accordance with the JORC Code 2012 (The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves), S-K 1300 (USA standards) or NI 43-101 (Canadian standards).

This requires independent, qualified engineers to complete the engineering and economic study. Investors take comfort in knowing that this work is properly done independently from the company and that it can be trusted.

However, even though you can get an international investor, in our case, to fund one billion dollars of construction relying on this documentation, you have to repeat all of this work following Ukrainian legislation, which requires significant expense and time.

The reason I bring this up is that once there’s peace in the country, I think there’s going to be a lot of excitement with people wanting to invest. And it’s really important that Ukraine’s government adopts internationally recognised standards because this will allow investors’ money to flow quickly and efficiently.

Q: Businesses are looking for a war insurance scheme to provide safety guarantees in Ukraine. What do you think it takes to come up with a comprehensive insurance mechanism for businesses? 

Simpson: There are two types of political risk insurance. The first comes from privately owned insurance companies, and the second is provided by international or government-backed organisations like the World Bank, which has MIGA (the Multilateral Investment Guarantee Agency).

The nice thing about getting investments backed by groups like MIGA is they are proud of the fact that they almost never have to pay out. The reason why MIGA typically doesn’t pay out is that they require a host country guarantee. And that host country guarantee is a legal document by the country that promises to back a specific investment – in this case, Ukraine.

So, if a company has any issues when implementing its project, such as the host government trying to seize the assets or some unreasonable, corrupt official trying to extort, MIGA being part of the World Bank, which through IFC is one of the largest lenders to Ukraine, will go directly to the most senior government officials in Ukraine to seek resolution. And if the issue is not resolved, the World Bank could halt any further investment support to Ukraine.

Hence, MIGA can provide a very effective political risk insurance policy to comfort foreign investors. MIGA is interested in working with Ukraine but needs to have projects run by management that they trust are able to obtain a Ukraine government support guarantee. The only way to obtain a support guarantee in Ukraine is by signing an Investment Support Agreement. So, all leads back to the Investment Support Agreement.

Q: From your interactions with other businesspeople in Ukraine, what is their take on the government’s efforts to restore the economy?

Simpson: We are constantly in discussions with various businesspeople that are active or interested in Ukraine. We are part of the Canada-Ukraine Chamber of Commerce, which has several different Canadian companies actively working in Ukraine.

In general, I think many people are optimistic that Ukraine will be successful in winning this war, and they want to look for opportunities to participate in its rebuilding upon peace. I think a lot of them experienced frustration similar to ours with some of the inaction and the need for better engagement with Ukraine’s government. And there is a lot of talk about corruption, which unfortunately still occurs.

But again, I think a lot of these issues are manageable by just starting with the simple basics like Ukraine’s government signing some Investment Support Agreements to show its seriousness in welcoming and protecting foreign investors’ interests.

Q: Have you come across corruption in the government while working there?

Simpson: Yes, we have had issues over the years and fought each other in court. We experienced, especially early on in our project development, a number of behaviours from government inspectors that were highly questionable.

In Black Iron’s case, we took each questionable license issue to court, and we were successful in getting these unreasonable requests from different officials overturned. But it’s painful because every time you do that, especially as a publicly traded company, you have to disclose it to your investors, which could negatively impact the share price and damage Ukraine’s investment reputation.

Ukraine is making good strides in this regard through the introduction of an independent court and dedicated corruption inspectors. But again, the best way to stop corrupt behaviour is to have an ethical senior direct contact within Ukraine’s government who can be called to deal with any such issues immediately. Having senior government intervention will send a strong message to corrupt officials to stop such behaviour or risk jail time.