Ukraine, economics: investment prospects, Jan 2022

Investment recovered weakly in 2021, while the outlook remain subdued amid heightened geo-political tensions

(for the EIU)

The volume of capital investment in Ukraine grew by 9.7% year on year in the first three quarters of 2021, according to latest data from the State Statistical Service. Against the backdrop of a year-on-year fall in investment by almost a quarter in 2020, as the pandemic and official responses to it hit economies worldwide, the pace of investment recovery looks weak.

Nonetheless, according to a survey of almost 1,500 industrial firms by the Ukrainian statistics agency in October 2021, business expectations for production, sales prices, employment and capacity usage in the fourth quarter of last year remained on a broad upward trend. Meanwhile, construction growth, as an indicator of firms’ confidence in realising a return on investment, slowed relatively abruptly in final months of 2021, against a strengthening base a year earlier.

Towards the end of January this year, however, investor confidence in Ukraine has been hit, first by the increasingly threatening rhetoric of Russian leaders, backed by a build-up of Russian troops at points along the Ukrainian border; and, second, by Western governments’ increasingly open warnings that another invasion by Russia forces could be imminent. This has triggered a rapid deterioration in key coincident indicators of investor confidence, for both Ukraine and Russia—that is, it has undermined exchange rates and stock prices, while boosting the cost of borrowing from abroad. The Ukrainian hryvnya, for instance, is now trading at around HRN28.7:US$1, down from HRN27.3:US$1 at the start of the month. In response to these development, Ursula von der Leyen, the head of the EU Commission, has promised Ukraine a package of Euro1.2bn as emergency macro-financial aid.

Ukraine’s investment record in the post-communist era has been a poor one. Levels of foreign direct investment (FDI) attracted, as well as the ratio of fixed investment to GDP, have both been low in comparison to most other east European post-communist economies. This, in turn, is linked chiefly to insecurity of property rights.

Raising the level of investment in the Ukrainian economy is, of course, a vital development goal for Ukraine. This will depend on the ability of the authorities to develop and sustain a range of governance reforms that lead to the routine, relatively even-handed enforcement of property rights. While the return to heightened geo-political tensions could galvanise such reform efforts, in the short run, the threat military escalation is likely to deter both domestic and foreign appetite for investing in Ukraine, even if another large-scale attack does not materialise, so subduing the pace of recovery still further.


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