How can FDI help rebuild Ukraine?

How can FDI help rebuild Ukraine?

Foreign direct investment (FDI) has always undergone mixed development in Ukraine. With growing international support and gaining political independence in 1991, the system change in Ukraine was coupled with reforms to improve conditions for foreign investment. Market regulation, tax reforms, and the signing of the EU-Ukraine Association Agreement in 2014 with the prospects of Ukraine joining the European Union all sent positive signals to foreign investors. However, between 2009 to 2019 Ukraine only managed to attract 320 FDI projects and was outperformed by small nations such as Bosnia and Herzegovina.

After more than 15 months into a devastating war with no end in sight, investors in Ukraine face a new normal. Even far outside the combat zone, power lines, electricity generation facilities, and other critical infrastructure are under attack. Most companies in Ukraine operate under harsh conditions and face enhanced operational and financial risk. However, given these conditions business operations are persisting. Findings from a survey by the American Business Chamber in Ukraine on international investors found that 64% of businesses in Ukraine are still operating in line with their company targets.  

Strengths of Ukraine as an investment location

Major sectors, such as agriculture and logistics remain a strong point of Ukraine. Businesses operating in Ukraine value major location advantages, such as the large internal market, the availability of qualified labor forces, and cost advantages.  

For instance, the German chemicals and pharmaceuticals company Bayer announced a €60 million investment into expanding its corn seed production in Ukraine in April 2023. Even amidst the conflict, the advantages in Ukraine outweigh the risks for Bayer. The company announced that the major drivers for the expansion were local agricultural production, availability of a well-skilled labor force, and good export conditions to the EU. Nestle and Unilever are further examples of companies that announced investments after the war broke out for similar reasons. Additionally, Russian aggression has put new sectors, such as renewable energy generation, on the map, which will become increasingly relevant for a post-war Ukraine.

Opportunity to build back better

The country will need enormous capital and effort to repair war damages. In March 2023, the World Bank estimated costs of $411 billion to rebuild war-torn Ukraine over the next ten years. This figure needs to be significantly adjusted according to the damage caused by the destruction of the Nova Kakhovka dam on June 6, 2023. However, these reconstruction efforts also offer an unprecedented opportunity to jump-start the Ukrainian economy and leap-frog into the future.

In regard to digitalization, Ukraine has been leading the way in the years prior to the war. It committed to 100% online government services by 2024 and established Diia.City as a digital space for entrepreneurs with legal and fiscal advantages. With the outbreak of war, the sector proved resilient and adaptive to the new circumstances. The sector managed to report a growth of 2.2% in 2022, with companies often locating to safer locations within Ukraine and Europe whilst retaining their staff. A fact that makes investors increasingly aware of Ukraine as a location for future investments in the IT sector.

Ukraine relied heavily on fossil fuels and nuclear energy for its power generation, proving a major headache for policymakers in Ukraine. The transition towards renewable energy is a necessity to comply with EU regulations. A process that seemed unattainable in the short run can now be expedited through new investments in solar and wind power.  

Leveraging the momentum for multilateral support

Organizations, initiatives, and companies are lined up to support reconstruction in Ukraine. They can all help reinforce investor relationships and generate trust for investing in Ukraine by backing efforts by the Ukrainian President Zelenskyy or Ukraine’s investment promotion agency, UkraineInvest. Stakeholders from the EU ensure that reconstruction will comply with EU regulations, such as emission reduction targets and judiciary requirements for Public-Private Partnerships. The European Bank for Reconstruction and Development is in place to support with capital. USAID is contributing with equipment and knowledge, the G7 has published targets and financial commitments for reconstruction, and events such as the Ukraine Recovery Conference in London on June 21 and 22 all support the rebuild. Other initiatives aim to mobilize the Ukrainian tech sector and international venture capital, such as the Future of Ukraine Summit in Berlin in June 2023.

Future outlook

Both private and public efforts will be needed to rebuild Ukraine and drive forward its efforts in advancing its economy and democracy. Large-scale support from multilateral development banks and governments is inevitable. However, the private sector and in particular foreign companies can mobilize extra capital, bring in new technologies, and help link companies in Ukraine with global value chains and the European market

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