Despite the country rising by seven places in the World Bank’s Doing Business 2020 report, to 64th from a previous position of 71st, Ukraine has suffered during the Covid-19 pandemic, and its foreign direct investment (FDI) inflows have been negatively affected. This is a trend observed in all transition economies, however.
According to the UN Conference on Trade and Development (UNCTAD) Investment Trends Monitor report, FDI flows to transition economies – including Ukraine – plummeted during 2020, shrinking by 77%, to around $13bn.
The main sectors attracting FDI in Ukraine in 2019 were finance, ICT, mining, real estate and electricity, and gas, according to UNCTAD’s World Investment Report 2020. However, the report also estimated that about one-third of FDI in Ukraine in 2019 corresponded to round-tripping, where capital comes from offshore centres but the investor is a Ukrainian resident.
Obstacles to FDI in Ukraine
Corruption, poor infrastructure and weak protection of property rights are some of the main obstacles for foreign investors in Ukraine, according to a US Department of State report on the investment climate in Ukraine. The conflict with Russia is one of the main impediments to foreign investment in the country, with infrastructure in the areas occupied by Russia severely damaged. The US report states that freight rail, mines and industrial facilities are some of the infrastructures in poor condition due to the conflict.
However, according to the report, the investment potential in the country stems from its large consumer market, highly educated and cost-competitive workforce, as well as its natural resources. On top of this, the country established an official investment promotion agency in 2016, called UkraineInvest.
This drive to boost FDI into the country has seen the construction of more than 100 manufacturing plants between 2015 and 2019, according to UkraineInvest, including a seed processing plant established by Germany’s Bayer, a $150m grain terminal by the US’s Cargill, and other multinational companies such as IKEA, H&M and Decathlon arriving in Ukraine.
As transition economies take a big hit from Covid-19, FDI in Ukraine is facing further hits in the coming months and years, with the ongoing conflict with Russia not helping matters. However, the moves by government to draw in FDI have experienced some success, and this is something the country will be hoping to emulate as the world recovers from the pandemic.