Foreign Direct Investments into Ukraine

1
Foreign Direct Investments
into
Ukraine
Daniyil Pasko
Harvard Business School
December 2009

2
Contents:
1. Introduction 3
2. Global FDI trends 4
3. FDI in Eastern Europe 8
4. FDI into Ukraine in historical perspective 10
5. Ukraine’s current investment climate 13
6. FDI by industry 18
7. Conclusion 39

3
Introduction
Foreign direct investment as one of the main vehicles of development and globalization in the
World economy is a complex phenomenon.
Most common definition used in the modern economic theory states that Foreign Direct
Investment (FDI) – “is acquisition of at least ten percent of the ordinary shares or voting power
in a public or private enterprise by nonresident investors. Direct investment involves a lasting
interest in the management of an enterprise and includes reinvestment of profits.”1
It is important to understand that FDI is not just the flow of capital between economies but also
a flow of technologies, management practices and established customer/supplier bases.
Usually FDI has a spillover effect for the host economy when management practices and
technologies are propagated from the initial target company to other companies in the region.
This propagation is achieved through moving labor force, reverse-engineering and intensified
competition.
FDI is crucial for Developing and Transition economies not just because they suffer from the
lack of capital but because they don’t have access to new technologies and their managerial
and business techniques are outdated.
Different countries have achieved different results in their ability to attract FDI. In order to
analyze reasons driving country specific performance it is important to look at the following
issues:
- Dynamics and trends of global FDI flows
- General investment climate in a given country
- Industry specific opportunities provided by current situation in the host economy
This framework is used to analyze Ukraine’s competitive positioning to attract foreign direct
investment.
1
IMF Glossary of Selected Financial Terms http://www.imf.org/external/np/exr/glossary/showTerm.asp#F

Global FDI had been experiencing
increasing investment activity. FDI flows were not evenly distributed between the countries of
different stages of economic development.
Exhibit 1
Source: United Nations, World Investment Re
Production and Development, Figure I.1., p. 4. (Data source: UNCTAD FDI/TNC database
(www.unctad.org/fdistatistics) and UNCTAD Secretariat estimates.)
Most of FDI was realized through cross
flows and Global M&A activity (All in
Exhibit 2 Global FDI flows and cross border M&A deals
Source: United Nations “World Investment Report 2009
Production and Development”, stats.unctad.org/FDI,
4
Global FDI Trends
Global FDI had been experiencing cycles of growth and decline, but there is a strong trend for
different stages of economic development.
World Investment Report 2009: Transnational Corporations, Agricultural
, Figure I.1., p. 4. (Data source: UNCTAD FDI/TNC database
(www.unctad.org/fdistatistics) and UNCTAD Secretariat estimates.)
Most of FDI was realized through cross-border M&A deals which can be seen from graphs of FDI
flows and Global M&A activity (All in US Dollars at current prices in millions).
flows and cross border M&A deals
World Investment Report 2009 Transnational Corporation
”, stats.unctad.org/FDI, accessed December 2009
cycles of growth and decline, but there is a strong trend for
port 2009: Transnational Corporations, Agricultural
, Figure I.1., p. 4. (Data source: UNCTAD FDI/TNC database
als which can be seen from graphs of FDI
Transnational Corporations, Agricultural

Further analysis of M&A data shows that share of Services as a target for FDI had been
increasing.
Exhibit 3 Historical breakdown of cross
and petroleum, Agriculture, Forestry, and Fishing; Secondary industry
Production and Development”, stats.unctad.org/FD
Exhibit 4 Industry breakdown of cross
Production and Development”,stats.unctad.org/FDI,
5
Historical breakdown of cross-border M&A deals (Primary industry - Mining, quarrying
and petroleum, Agriculture, Forestry, and Fishing; Secondary industry – all other)
World Investment Report 2009 Transnational Corporations, Agricultural
stats.unctad.org/FDI, accessed December 2009
wn of cross-border M&A deals in Services
Mining, quarrying
all other)

6
Among Services most Global FDI flows were registered in:
1. Transport, storage and communications is 27% of 2006 Services FDI with a growth
trend;
2. Finance is 25% of 2006 and stable over the period;
3. Business activities- Legal, accounting, market research, and consultancy, architectural,
engineering, and other technical activities, advertising (21% of 2006 Services FDI);
4. Hotels and restaurants 6% of 2006 and growing compared to 90s and early 2000s but
still below the level of the 80s;
5. Electric, Gas, and Water Distribution 4% in 2006 and declining;
Among secondary Industries global FDI was mostly flowing into following:
1. Chemicals and chemical products is 22% of secondary industries FDI and a stable leader;
2. Metal and Metal Products 18% and growing with growing steel prices;
3. Electrical and electronic equipment 14% stable;
4. Food, beverages and tobacco 9% and at all-time low;
5. Printing, Publishing, and Allied Services 9% and close to historic maximums;
6. Machinery 7% stable;
7. Motor vehicles and other transport equipment 6%;

Exhibit 5 Industry breakdown of cross
In primary industries the share of
certain periods agriculture was more than 10% (1994, 1997).
Exhibit 6 Historical breakdown of Primary industr
Source: United Nations “World Investment
7
Industry breakdown of cross-border M&A deals in secondary Industries
In primary industries the share of Mining, quarrying and petroleum had been dominant, but in
certain periods agriculture was more than 10% (1994, 1997).
Historical breakdown of Primary industries FDI
”, stats.unctad.org/FDI, accessed December 2009
ndustries
had been dominant, but in

Comparing the amount of FDI attracted by Ukraine to other countries of the region it is clear
that Ukraine is not considered attractive by foreign investors.
Exhibit 7 FDI as a % of nominal GDP
Source: International Monetary Fund “
http://www.imfstatistics.org.ezp
Ukraine’s ability to attract FDI as a factor of GDP had been significantly lower comparing to
most countries in the region. 1994
result of the legislative amendments in the pre
their business environment and climbed higher in terms of the FDI performance index. Bulgaria
gained the prestigious 7th spot in the world in 2006 from the 92nd place in 1990
Romania climbed to the 21st spot from the 101st. The index is based on the ratio between FDI
and GDP in the past three years, including the indicated year. Bulgaria is among the leaders in
the region in terms of FDI influx. The prestigious position can be attributed to the combination
between the EU membership and the labor market prices, which have remained competitive”
2
“Rainfall of Investments over the Balkans”
8
FDI in Eastern Europe
is not considered attractive by foreign investors.
FDI as a % of nominal GDP in comparable countries
International Monetary Fund “IFS - International Financial Statistics, country tables
http://www.imfstatistics.org.ezp-prod1.hul.harvard.edu/imf/ accessed December 2009
most countries in the region. 1994 – 2000 Poland had been a clear leader of the region. “As a
result of the legislative amendments in the pre-EU accession, Bulgaria and Romania improved
7th spot in the world in 2006 from the 92nd place in 1990
e region in terms of FDI influx. The prestigious position can be attributed to the combination
between the EU membership and the labor market prices, which have remained competitive”
“Rainfall of Investments over the Balkans” Capital Weekly 27 October 2007, Factiva, accessed December 2009
International Financial Statistics, country tables”,
accessed December 2009;
nd had been a clear leader of the region. “As a
EU accession, Bulgaria and Romania improved
7th spot in the world in 2006 from the 92nd place in 1990-1992.
e region in terms of FDI influx. The prestigious position can be attributed to the combination
between the EU membership and the labor market prices, which have remained competitive”2
.
activa, accessed December 2009

Exhibit 8 FDI per capita
To be objective it is important to mention tha
contributed to the success of other Eastern European countries. They were faster integrated
into EU economy especially after the dissension about their EU membership was made.
Geographically they are closer to E
barriers.
On the other hand their governments were much more effective in improving investment
climate. Most of them were fast to introduce simple taxation systems with lower taxation rates.
Privatization in most of the compared courtiers was more transparent and fast then in Ukraine.
9
To be objective it is important to mention that there were several important factors which
Geographically they are closer to EU and the export potential to EU is bigger due to lifted trade
ivatization in most of the compared courtiers was more transparent and fast then in Ukraine.
nternational Financial Statistics, country tables”,
t there were several important factors which
U and the export potential to EU is bigger due to lifted trade
ivatization in most of the compared courtiers was more transparent and fast then in Ukraine.

FDI into Ukrainian in historical perspective
Ever since its independence Ukraine was struggling to attract FDI both as a source of needed
capital and as engine for innovation.
Exhibit 9 FDI into Ukraine 1994-2008
Government Comity of Statistics
During 1994-2003 FDI was growing but in dollar terms amount of FDI was not significant
considering the size of the economy and
was slow in implementing reforms. Corruption, unstable currency, cumbersome legal
framework were few among many problems of Ukraine’s investment climate. Ukraine is
viewed as unattractive region by foreig
1997 – “During a trip to Ukraine in October, Morningstar made waves by telling reporters that
severe corruption was blocking reforms and investment and urging the government to take
action. Many businessmen say the situation has not improved,
pulled out of a planned $500 million investment last month, citing ever
by the government”3
.
1998 – “Potential investors are interested in Ukraine, but the investment climate is distinctly
unfavorable at present”4
.
3
Associated Press “Clinton aide pushes Ukraine on reform, investment
2009
4
Metal Bulletin “It's even worse in Ukraine
10
into Ukrainian in historical perspective
or innovation.
2008
zp-prod1.hul.harvard.edu/imf/ accessed December 2009
ics “Annual statistics report of 2008” p.239
FDI was growing but in dollar terms amount of FDI was not significant
considering the size of the economy and amount of FDI needed for restructuring. Government
viewed as unattractive region by foreign investors:
“During a trip to Ukraine in October, Morningstar made waves by telling reporters that
action. Many businessmen say the situation has not improved, and the U.S. firm Motorola
pulled out of a planned $500 million investment last month, citing ever-changing conditions set
“Potential investors are interested in Ukraine, but the investment climate is distinctly
Clinton aide pushes Ukraine on reform, investment” 24 April 1997, Factiva, accessed December
It's even worse in Ukraine”, October 15 1998, via Factiva accessed December 2009
FDI was growing but in dollar terms amount of FDI was not significant
amount of FDI needed for restructuring. Government
“During a trip to Ukraine in October, Morningstar made waves by telling reporters that
and the U.S. firm Motorola
changing conditions set
“Potential investors are interested in Ukraine, but the investment climate is distinctly
24 April 1997, Factiva, accessed December
via Factiva accessed December 2009

11
1999 - “The World Bank on Thursday called Ukraine one of the most hostile places for foreign
investors throughout the former Soviet Union, and the International Monetary Fund said it may
delay further loans because of Ukraine's lagging reforms”5
. "The investment climate in Ukraine
is one of the worst in the region," said head of the World Bank delegation Lily Chu, acting
country director for Ukraine and Belarus during a news conference. Chu said Ukraine presents
investors too many licensing regulations and inspections, and a complicated tax system6
.
2000 – “George Munoz, the president of the U.S. Overseas Private Investments Corporation,
told the Bloomberg Business Information Service that Kyiv has failed to create a favorable
climate for foreign investment, ITAR-TASS reported on 25 December.”7
2002 - "The level of future investment in Ukraine depends on improvements in the Ukrainian
investment climate though changes in the taxation system, and the creation of a truly
independent legal system. This includes real steps to fight corruption, which is the biggest
impediment to investment. EBRD believes the primary problems in Ukraine are a non-
transparent taxation system and an imperfect legal system which, thanks to insufficient
financing, is prone to the influence of the authorities and business."8
“In 2000-04 Ukraine showed somewhat greater commitment to economic reform and to
making the business environment more friendly to investors. The governments in place during
that period made some progress on regulatory, administrative and fiscal reform, and took
important steps towards privatization of the agricultural sector. They also accelerated the
privatization of large enterprises”9
.
After 2003 Ukraine had experienced big surge in the FDI activity.
Some of this success can be attributed to changes in government policies. “Since 2005 efforts
have been accelerated to level the playing-field and simplify the tax and regulatory
environment. However, government policies have continued to scare away investments
occasionally, and vested business interests will remain politically powerful in the medium term.
This will slow structural reforms and regulatory improvements”10
.
5
Associated Press Newswires “World Bank criticizes Ukraine's investment climate” 2 December 1999, Factiva, accessed
December 2009
6
Associated Press Newswires “World Bank criticizes Ukraine's investment climate” 2 December 1999, Factiva accessed
December 2009
7
“ OPIC HEAD SAYS UKRAINE'S INVESTMENT CLIMATE NOT OPTIMAL” 30 December 2000, Factiva accessed December 2009
8
Ukrainian news “Finance - EBRD Urges Ukraine To Fight Corruption” 30 September 2002, Factiva accessed December 2009
9
Economist Intelligence Unit - Business Eastern Europe “Looking to the future: Ukraine” 10 September 2007,
Factiva, accessed December 2009
10
“Looking to the future: Ukraine” Economist Intelligence Unit - Business Eastern Europe 10 September 2007, via
Factiva accessed December 2009

12
On the other hand this success can hardly be attributed to implementation or introduction of
fundamental reforms. 70% FDI in 2005 is attributed to privatization of the biggest Ukrainian
steel producer JSC Krivorozhstal. Although clearly a successful deal and a sign of new strategy in
privatization this event does not represent positive shifts in investment environment in general.
Increase in FDI after 2005 can also be attributed to external factors. Global foreign direct
investment inflows grew in 2006 for the third consecutive year to reach US$1.2 trillion. “The
total is a 34% increase from 2005. FDI inflows to developing countries and economies in
transition (the latter comprising South-East Europe and the Commonwealth of Independent
States (CIS)) rose by 10% and 56%, respectively, in 2006, and reached record levels for both
groups of economies.”11
11
States News Services “FOREIGN DIRECT INVESTMENT ROSE BY 34% IN 2006” 1 September 2007, via Factiva
accessed December 2009

Ukraine’s
In order to analyze Ukraine’s competitive position in terms of attracting FDI several factors
should be analyzed:
1. Attractiveness of the country for foreign investors
2. Barriers for FDI
1. Ukraine has several attracti
Market size and growth.
Ukraine has a big internal market of 46 million people and disposable income had been growing
constantly over the last 8 years.
Exhibit 10 Dynamics of disposable income
Source: Aidan Manktelow, The Economist Intelligence Unit
http://secure.alacra.com.ezp-prod1.hul.harvard.edu/cgi
December 2009
Potential for growth had been demonstrated in the past despite poor economic policies of t
government.
Ukraine is well positioned for further growth of its internal market.
13
Ukraine’s current investment climate
Attractiveness of the country for foreign investors
Ukraine has several attractive features as an FDI destination
Dynamics of disposable income
The Economist Intelligence Unit “Country Data Notes
prod1.hul.harvard.edu/cgi-bin/alacraswitchISAPI.dll
Potential for growth had been demonstrated in the past despite poor economic policies of t
Ukraine is well positioned for further growth of its internal market.
Country Data Notes” 2009,
bin/alacraswitchISAPI.dll , accessed
Potential for growth had been demonstrated in the past despite poor economic policies of the

14
Exhibit 10
Source: World Economic Forum, Foundation for Effective Governance “The Ukraine
Competitiveness Report” 2008, http://www.feg.org.ua/ru/cms/projects/economic_concept,
accessed December 2009 (Data source: Economist Intelligence Unit)
Ukraine is located close to two big external markets of EU and CIS. Recently Ukraine became a
member of WTO which will increase its export potential. In future there is possibility to sign a
free trade agreement with EU.
In 2009 Ukraine is ranked 31 in the World on the “Market Size” pillar of Global Competitiveness
Index12
with only Poland and Russia surpassing it in the region.
High quality, cheap labor force and labor market efficiency.
Ukraine is ranked 43rd
in Global Competitiveness Index 2008-2009 pillar of education and
training. “In this pillar it is ahead of all the CIS countries and Slovakia, Romania and Bulgaria.
Ukraine is 14th
in the world by the number of students enrolled in the higher education. It has a
strong school of math and sciences.”13
Labor market in general is ranked 54th
by the pillar of efficiency. “De facto” hiring and firing
procedures are easy. Ukraine’s labor force is the cheapest in the region.
12
World Economic Forum, Foundation For Effective Governance “The Ukraine Competitiveness report 2009”, 2009
p.46.
13
World Economic Forum, Foundation For Effective Governance “The Ukraine Competitiveness report 2009”, 2009
p.38.

Exhibit 11 Labor cost per hour
Source: Aidan Manktelow, The Economist Intelligence Unit
http://secure.alacra.com.ezp-prod1.hul.harvard.edu/cgi
December 2009
Unfortunately on other pillars of competitiveness used by
Ukraine is either behind or on par with peer countries.
Exhibit 12
Forum, Foundation for Effective Gov
http://www.feg.org.ua/ru/cms/projects/economic_concept
15
Aidan Manktelow, The Economist Intelligence Unit “Country Data Notes
prod1.hul.harvard.edu/cgi-bin/alacraswitchISAPI.dll
Unfortunately on other pillars of competitiveness used by Global Competitiveness Index
Ukraine is either behind or on par with peer countries.
Source: World Economic
Foundation for Effective Governance “The Ukraine Competitiveness Report” 2008,
http://www.feg.org.ua/ru/cms/projects/economic_concept, accessed December 2009
Country Data Notes” 2009,
ISAPI.dll , accessed
Global Competitiveness Index
Source: World Economic
ernance “The Ukraine Competitiveness Report” 2008,
, accessed December 2009

16
2. Barriers for FDI
In 2008 - 2009 Ukraine is ranked 143 out of 183 in the Ease of Doing Business Index created by
World Bank14
. All of the compared countries in the region are ranked higher than Ukraine
Exhibit 13 Ease of Doing Business Index of comparable countries
Economy
Ease of
Doing
Business
Rank
Starting a
Business
Dealing with
Construction
Permits
Employing
Workers
Registering
Property
Getting
Credit
Protecting
Investors
Paying
Taxes
Trading
Across
Borders
Enforcing
Contracts
Closing a
Business
Slovak Rep. 42 66 56 81 11 15 109 119 113 61 39
Bulgaria 44 50 119 53 56 4 41 95 106 87 78
Romania 55 42 91 113 92 15 41 149 46 55 91
Poland 72 117 164 76 88 15 41 151 42 75 85
Turkey 73 56 133 145 36 71 57 75 67 27 121
Russia 120 106 182 109 45 87 93 103 162 19 92
Ukraine 142 134 181 83 141 30 109 181 139 43 145
Source: The World Bank Group, “Ease of Doing Business Index” , 2009
www.doingbusiness.org accessed December 2009
Taxation
Ukraine has one of the worst taxation systems in the World (ranked 181 out of 183 countries).
Exhibit 14 Assessment of Ukrainian taxation system by the World Bank
Source: The World Bank Group, “Ease of Doing Business Index” , 2009
High labor taxation does not allow Ukraine’s investors to take full advantage of high skilled and
cheap labor force. Foreign companies are usually in disadvantaged position compared to local
companies in the process of navigating cumbersome tax legislation and bureaucratic
procedures needed to fulfill tax obligations. Corruption makes things even harder for foreign
investors.
14
http://www.doingbusiness.org/EconomyRankings/

17
Trade barriers
Problems with trading across borders are preventing Ukraine form realizing its potential in
external market size and logistics.
Exhibit 15 Assessment of ease of trading across borders by the World Bank
Source: The World Bank Group, “Ease of Doing Business Index”, 2009
As with taxation, barriers for trade are not just the direct costs associated with import or export
but the number of necessary documents and procedures and time it take to fulfill them.
Registering and protecting property
Time and number of procedures needed for property registration is much bigger than in other
countries.
Exhibit 16 Assessment of ease of registering property rights in Ukraine by the World Bank
Source: The World Bank Group, “Ease of Doing Business Index”, 2009
Protection of property rights can be an issue considering high level of corruption. In 2008-2009
Ukraine is ranked 146 out of 180 countries by Corruption Perceptions Index (CPI) published by
Transparency International (Most of the other countries in the region are ranked from 49 to 75
except Russia 146)15
.
15
Transparency International “Corruption Perceptions Index”, 2009, www.transparency.org accessed December 2009

FDI by industry – achievements, challenges and opportunities
Exhibit 17 Historical structure of FDY by industry
Source: Government Comity of Statist
Several industries were initially well positioned
Due to big share of agriculture in GDP
been the industry which historically attracted a lot of FDI
income level and internal consumption. Population was consuming more and more products
with higher share of value added. Barriers for investments were less prohibitive because most
of the investments went into small a
interfering with unnecessary regulation. Amount of FDI into processing was increasing on
average 25% annually (Exhibit18).
Retail was the industry which was underdeveloped in the Soviet Union thus with
consumption foreign investors were well positioned to enter the market. Foreign investors
were investing on average 35% more money into this industry which was booming with growing
levels of disposable income (Exhibit18).
18
achievements, challenges and opportunities
17 Historical structure of FDY by industry
Government Comity of Statistics “Annual statistics report of 2008” p. 273
initially well positioned for attracting FDI.
Due to big share of agriculture in GDP and big, underserved internal market
been the industry which historically attracted a lot of FDI. It was driven by rise in disposable
of the investments went into small and medium size facilities where government was not
average 25% annually (Exhibit18).
was the industry which was underdeveloped in the Soviet Union thus with
levels of disposable income (Exhibit18).
273
and big, underserved internal market processing had
It was driven by rise in disposable
nd medium size facilities where government was not
was the industry which was underdeveloped in the Soviet Union thus with increase in

Exhibit 18 Yearly growth rates of FDI attracted by biggest industries
Source: Government Comity of Statist
Several industries demonstrated
Financial sector is by far one of the most
“On July 7 2005 Ukrainian parliament made drastic changes to the banking legislation equating
the rights of foreign banks' subsidiaries and local banks. According to the amendments to the
law on banks and banking activities passed by Verkhovna Rada (VR) the subsidiaries of foreign
banks are included in Ukrainian banking system, according to IntelliNews”
“Under the previous legislation the activ
open their branches in throughout Ukraine and provide services to private clients. These banks
were just able to open their representative offices in the country. The new legislation removes
all restrictions on foreign banks' activities”
“Ukraine's banking sector has been transformed in the last 18 months attracting
billion of foreign capital. A wave of foreign banks has
lenders, often in fierce bidding competitions. The prices west European banks are willing to pa
worry some observers, but as Julian Evans reports, the sector is growing so fast that there
16
UNIAN, 12 July 2005, Capital IQ, accessed December 2009
17
ibid
19
owth rates of FDI attracted by biggest industries
Government Comity of Statistics “Annual statistics report of 2008” p. 273
Several industries demonstrated significant achievements in attracting FDI.
is by far one of the most successful in its ability to increase FDI
nd banking activities passed by Verkhovna Rada (VR) the subsidiaries of foreign
banks are included in Ukrainian banking system, according to IntelliNews”16
.
“Under the previous legislation the activities of foreign banks were limited. They could not
heir branches in throughout Ukraine and provide services to private clients. These banks
all restrictions on foreign banks' activities”17
.
tor has been transformed in the last 18 months attracting
. A wave of foreign banks has bought many of the country's biggest
lenders, often in fierce bidding competitions. The prices west European banks are willing to pa
UNIAN, 12 July 2005, Capital IQ, accessed December 2009
273
flows.
nd banking activities passed by Verkhovna Rada (VR) the subsidiaries of foreign
es of foreign banks were limited. They could not
heir branches in throughout Ukraine and provide services to private clients. These banks
tor has been transformed in the last 18 months attracting almost $4
bought many of the country's biggest
lenders, often in fierce bidding competitions. The prices west European banks are willing to pay

20
should be plenty of room to make money, and the foreign-owned players have the advantage
of a ready source of capital”18
.
Exhibit 19 Foreign investments into Ukrainian financial sector 2005-2006
Name of the Bank Acquirer Value (m$) Date
Raiffeisen Ukraine OTP 47 Apr-06
Index Bank Crédit Agricole 257 Mar-06
Ukrsotsbank Banca Intensa 1160 Feb-06
Mirya Bank Vneshtorgbank 70 Jan-06
Bank NRB Sberbank 100 Jan-06
Ukrsibbank BNP Paribas 349 Dec-05
Aval Bank Raiffeisen Int 1000 Oct-05
Aggio SEB 27 NA
KreditBank Bank Polski 30 NA
Source: Evans, Julian, Euroweek “Banking sector attracts investors” by; May2006 Supplement,
p8-10 via Capital IQ, accessed December 2009
Financial sector remained attractive for foreign investors even after several international
players moved in.
24 January 2008 “UniCredit announces that today Bank Austria Creditanstalt AG (‘BA-CA’),
responsible within the UniCredit Group for commercial banking activities in CEE has finalized
the acquisition of 94.2% of the total issued share capital of CJSC Ukrsotsbank (‘USB’) from a
group of investors represented by EastOne, an international investment advisory firm (the
‘Selling Shareholders’).
The purchase price at closing is EUR1,525 million (or ca. US$2,211 million at current exchange
rates), which includes the pro-rata capital increase subscribed by the Selling Shareholders in
June 2007. In addition, the final consideration will include a post-closing adjustment to be
based on USB’s net asset value at closing”19
.
After entering the market foreign companies usually continue to invest into the expansion:
"Ukraine is a very important market for UniCredit that is why we decided to expand our
presence here. We see good perspectives of economic growth of your country, which has high
GDP growth, joins the WTO and is going to create single trade zone with the UN, - said
Alessandro Profumo, CEO of UniCredit. UniCredit is going to be a long term investor since
18
Evans Julian, Euroweek “Banking sector attracts investors”; May2006 Supplement, p8-10 via Capital
IQ, accessed December 2009
19
ENP Newswire “UniCredit Group: Bank Austria finalizes the acquisition of a majority stake in Ukrsotsbank”, January 2008, via
Factiva, accessed December 2009

21
Ukraine is a key country representing one of our most promising markets in terms of potential
growth"20
.
Steel manufacturing is another example when simple government decision regarding fare
privatization dramatically influenced FDI landscape increasing yearly FDI by 4.5 times and
positioning steel sector for a continued investment.
“In a competitive and nationally televised auction held on October 24th
2005, Mittal won the
tender for a 93% stake in Kryvorizhstal, Ukraine’s leading steel enterprise, with a massive bid of
$4.8bn. The price was six times the $800m paid for the same assets in a mid-2004 tender that
was won by a Ukrainian grouping including Viktor Pinchuk, the son-in-law of the then-president,
Leonid Kuchma, despite the fact that higher offers—including from Mittal—had been tabled. In
the wake of the “Orange Revolution”, however, that privatisation was cancelled by the
authorities via the courts and Kryvorizhstal was prepared for sale once again”21
.
Foreign investors continue to move into Ukrainian metals and mining sector.
“Dec 12 2007- Evraz Group is buying a host of mining and metals assets in Ukraine from Privat
group. They are 99.25% of Sukhaya Balka GOK, 95.57% of Dnepropetrovsk Metallurgical Plant
and stakes of over 90% in three coke plants. Evraz will pay for the acquisitions with new shares
and cash. The deals will be closed in the first quarter 2008”22
.
Evraz Group deal is rumored to be around 2 bln$.
Most importantly after the acquisition of Kryvorizhstal Mittal continued to invest into Ukrainian
steel sector, modernizing the plant itself and expanding into new ventures:
“Mr Yushchenko also confirmed that Arcelor-Mittal remains interested in developing the Kryvy
Rih iron ore deposit, which requires around US$800m of investment to become operational.
Analysts say that access to the deposit is critical for Arcelor-Mittal to meet growing demand at
its steel-making plants in Ukraine, Romania, Poland and the Czech Republic”23
.
“Ukrainian steel smelter ArcelorMittal Kryviy Rih will invest $398 mln (255.5 mln euro) in
organic development by the end of 2008, Volodymyr Sheremet, head of the plant's production
20
RIA Oreadna “Ukrsotsbank Wants to Attract USD150 bln from Bank Austria Creditanstal” 12 February 2008, via
Factiva, December 2009
21
Economist Intelligence Unit - Business Eastern Europe “Mittal Europa”, October 2005 via Factiva, December
2009
22
Russia & CIS Business and Financial Newswire “Evraz buying a number of mining, metals assets in Ukraine from
Privat (Part 3)”, December 2007, via Factiva, December 2009
23
“Ukraine industry: Arcelor-Mittal to invest up to US$10bn in its local steel operations” June 2007 via Factiva,
December 2009

22
department, told journalists on August 4, 2008. The steel smelter channeled $145 mln (93 mln
euro) in development in the first half of 2008, he added.
By 2012, Arcelor Mittal Kryviy Rih plans to build a new sinter plant and a rolling mill. The plant
intends to put into operation blast furnace No 8 in August 2008 after a 630 mln Ukrainian
hryvnia ($134.9 mln/86.6 mln euro) overhaul, which will produce 5,000 tons of steel daily.
The steel smelter will also launch in September the upgrade of blast furnace No 6, which will
resume operation in 2009 with a capacity of 4,000 tons a day”24
.
Certain industries have hidden opportunities to attract more FDI.
Agriculture, processing and agricultural infrastructure.
Ukraine has 9th
largest reserves of arable land in the world.
Exhibit 19 Reserves of arable land
Source: World Resources Institute, NationMaster,
http://www.nationmaster.com/red/graph/agr_ara_and_per_cro-agriculture-arable-and-
permanent-cropland&b_printable=1, accessed December 2009
On the other hand due to inefficient farming and lack of investments yields on most widely
produced crops are low comparing to other countries.
24
“Ukraine Arcelor Mittal To Invest $400 Mln in Development by End-2008” Ukrainian News Digest, August 2008,
via Factiva, December 2009

Exhibit 20 Crop yields (Metric tons per hectare, 2003/2004
Source: Production Estimates and Crop Assessmen
http://www.nationmaster.com/red/graph/agr_ara_and_per_cro
permanent-cropland&b_printable=1
There is potential for increasing yield which will lead to growth in
inputs and infrastructure (Elevators, tractors, pesticides etc.)
Agriculture itself is an industry that at
GDP agriculture attracts less than 2% Ukraine’s FDI.
On the one hand share of Global FDI dedicated to agriculture is fairly low.
world FDI inflows in agriculture exceeded $3 billion per
1% of total world FDI inflows25
.
On the other hand some countries have been very successful in attracting FDI into the
agriculture sector. Malaysia was able to attract 373 $ of FDI per hectare of arable land. For
Papua New Guinea this number is 316 $. But even if these outliers are excluded Ukraine still
lags behind most other countries.
See Exhibit 20 FDI per hectare of arable land
Source: United Nations, World Investment Report 2009: Transnational Corporations, A
Production and Development, Figure
25
United Nations “World Investment Report
December 2009
23
Metric tons per hectare, 2003/2004)
Source: Production Estimates and Crop Assessment Division, FAS, USDA via NationMaster
http://www.nationmaster.com/red/graph/agr_ara_and_per_cro-agriculture-arable
cropland&b_printable=1, accessed December 2009
There is potential for increasing yield which will lead to growth in demand for
(Elevators, tractors, pesticides etc.).
is an industry that attracts minimal amount of FDI. Being more than 10% of
GDP agriculture attracts less than 2% Ukraine’s FDI.
one hand share of Global FDI dedicated to agriculture is fairly low.
world FDI inflows in agriculture exceeded $3 billion per annum. This still constituted less than
this number is 316 $. But even if these outliers are excluded Ukraine still
lags behind most other countries.
See Exhibit 20 FDI per hectare of arable land
World Investment Report 2009: Transnational Corporations, A
, Figure III.9., p.117. and authors calculations
World Investment Report”, p. 111, 2009, via http://www.unctad.org/en/docs/wir2009_en.pdf
t Division, FAS, USDA via NationMaster
arable-and-
demand for all agricultural
tracts minimal amount of FDI. Being more than 10% of
one hand share of Global FDI dedicated to agriculture is fairly low. By 2005– 2007,
annum. This still constituted less than
this number is 316 $. But even if these outliers are excluded Ukraine still
World Investment Report 2009: Transnational Corporations, Agricultural
http://www.unctad.org/en/docs/wir2009_en.pdf

24
Exhibit 21
Source: United Nations, World Investment Report 2009: Transnational Corporations, Agricultural
Production and Development, Figure III.9., p.117. (Data source: UNCTAD, based on annex table
A.III.3. (www.unctad.org/fdistatistics) and UNCTAD Secretariat estimates.)
There is a direct correlation between amounts of FDI attracted by a country and its average
yields per hectare, although it is hard to talk about causality. Countries who succeeded in
attracting FDI into agriculture are implementing several policies:
“China has adopted a selective support policy on foreign investment in agriculture. FDI for the
production of some agricultural products and TNC involvement in related activities are
encouraged. According to the Catalogue for the Industrial Guidance of Foreign Direct

25
Investment, for instance, foreign investment in the production of products such as rubber, sisal
and coffee is encouraged (e.g. through tax incentives)”26
.
“Papua New Guinea, under the rural development incentive, encourages agricultural
production of any kind by inter alia granting a 10-year exemption from corporate income taxes
for businesses engaged in agricultural production that are established in specified rural
development areas. Also, accelerated depreciation rates are offered for new plants (other than
residential property with a cost exceeding kina 100,000 – approximately $37,250) with a life
span exceeding five years that are used in Papua New Guinea’s agricultural production”27
.
“Viet Nam had set a target of mobilizing approximately $8.2 billion from 2006 to 2010 for
investments in agricultural development”28
.
“Nigeria offers, inter alia, (i) unrestricted capital allowance for agribusinesses, and up to 50%
for agrorelated plants and equipment, (ii) guarantees of up to 75% of all loans granted by
commercial banks for agricultural production and processing under the Agricultural Credit
Guarantee Scheme Fund (ACGSF), and (iii) 60% repayment of interest provided by the Interest
Drawback Program Fund paid by those who borrow from banks under the ACGS for the purpose
of cassava production and processing, provided such borrowers repay their loans on schedule.
Also, processing of agricultural produce has been declared a pioneer industry which entitles the
companies involved to 100% tax exemption for a period of five years”29
.
Besides general barriers for FDI there are several agriculture specific problems in Ukraine that
prevent FDI from growth:
- Government intervention in price setting (sugar and bread prices)
- Export quotas (for grains and cereals)
- Moratorium on land sale and purchase and undeveloped system of property rights
protection.
Although in many countries there are restrictions on land ownership for foreign investors,
moratorium on land sale in Ukraine is a problem for increasing sizes of the farms. Foreign
investors would be willing to invest even if the land would be leased but in order to achieve
economies of scale they need access to larger farms.
26
“World Investment Report”, United Nations p. 170, 2009, http://www.unctad.org/en/docs/wir2009_en.pdf
27
Ibid.
28
Ibid.
29
Ibid.

Tourism is the second largest and the most dynamic (in terms of growth) industry which is
exported by Ukrainian economy (See exhibit 22). Most of its success is attributed to
simplification or cancellation of visa procedures after the orang
“Foreign Minister Borys Tarasyuk has previously said the experiment was successful and the
number of EU tourists to Ukraine has more than doubled since May 1 when the cancellation
took effect”30
.
Exhibit 22 Export of Services, Ukraine
In 2008 being 32% of exported services and 6% of total exports it attracted only 1.4% of total
FDI inflows31
. The industry is experiencing a rapid growth and expected to attract more FDI in
the future. In foreign countries number of tourists has been in
years.
In Ukraine this process has just begun which means that it is positioned for a long
There is a trend for faster growth in numbers of tour
30
Reuters News “Ukraine scraps visas for Canadian, EU citizens” 28 July 2005, via Factiva, accessed December 2009
31
International Monetary Fund “IFS - International Financial Statistics, country tables”
prod1.hul.harvard.edu/imf/ accessed December 2009
26
is the second largest and the most dynamic (in terms of growth) industry which is
simplification or cancellation of visa procedures after the orange revolution in 2004.
Foreign Minister Borys Tarasyuk has previously said the experiment was successful and the
kraine
the future. In foreign countries number of tourists has been increasing a lot for the past 20
In Ukraine this process has just begun which means that it is positioned for a long
There is a trend for faster growth in numbers of tourists to developing countries than to
as for Canadian, EU citizens” 28 July 2005, via Factiva, accessed December 2009
International Financial Statistics, country tables”, http://www.imfstatistics.org.ezp
is the second largest and the most dynamic (in terms of growth) industry which is
e revolution in 2004.
Foreign Minister Borys Tarasyuk has previously said the experiment was successful and the
creasing a lot for the past 20
In Ukraine this process has just begun which means that it is positioned for a long-term growth.
ists to developing countries than to
as for Canadian, EU citizens” 28 July 2005, via Factiva, accessed December 2009
fstatistics.org.ezp-

27
developed ones. “In 1990 only 18% of international tourism receipts were earned by developing
economies as tourist destinations; by 2005 this share had risen to 30%, as these countries
continue to attract visitors at a faster pace than their developed peers (an average of 10.2% to
7.1% increase during 2000-2005). The UNWTO forecasts that by 2020 there will be 1.6 billion
tourists (twice the numbers in 2006) and, at the current rates of growth, a majority of these will
be going to developing market destinations”32
.
“Ukraine already has a relatively high number of foreign visitors. However, each tourist spends
on average only USD 200 per visit, several times less than in other European countries and half
the level in Russia”33
.
Exhibit23
Avetik Chalabyan, Vitaly Klintsov, Georges Massoud, McKinsey and Co “Reviving Ukraine’s
economic growth”, October 2009, p. 7
“Globally FDI in Tourism accounts for no more than 1 or 2 percent of total outward FDI stocks
from the largest source countries. However accounts data on tourism-related FDI are likely to
underestimate the true extent of Trans-National Corporation’s activities, where managerial
contracts rather than equity ownership is increasingly important. Moreover, the indications are
that tourism-related FDI and TNC activities are likely to increase significantly in the medium
32
UNITED NATIONS “FDI in Tourism: The Development Dimension” 2007 p.121, www.unctad.org, accessed December 2009
33
Avetik Chalabyan, Vitaly Klintsov, Georges Massoud, McKinsey and Co “Reviving Ukraine’s economic growth”, October 2009, p. 7

28
term, in virtually all developing regions”34
. This hypothesis is based upon the UNCTAD survey of
international hotel investors presented in Exhibit24:
UNITED NATIONS “FDI in Tourism: The Development Dimension” 2007, Figure II.4. p 21.
www.unctad.org, accessed December 2009
The project focused mainly on hotels because, contrary to perceptions, there is relatively little
FDI in other activities such as tour operations or airlines35
.
Same research also studies factors which influence the decision about the region for future
expansion. Findings are presented in Exhibit 25 Based on the data on current number of foreign
tourists Ukraine is very well positioned in terms of main criteria for decision about the region of
expansion – “Demand from the developed country tourists”.
34
UNITED NATIONS “FDI in Tourism: The Development Dimension” 2007, www.unctad.org, accessed December 2009
35
Ibid.

29
Exhibit25
UNITED NATIONS “FDI in Tourism: The Development Dimension” 2007, Figure II.5. p 34.
All of this data suggests that Ukraine is positioned for a high growth in FDI into tourism
industry.
Infrastructure projects are the biggest in terms of global FDI flows. “Infrastructure consists of a
group of industries, including electricity, gas, telecommunications, water and sewage, airports,
roads, railways and seaports (the last four collectively referred to as transport
infrastructure)”36
. Combined those industries attracted 31% of all Services FDI flows and 19% of
total global FDI flows in 200637
. Unfortunately, Ukraine was not able to participate in
infrastructure FDI flows to the needed extent. In its FDI balance infrastructure industries
combined add up to just 5% of total attracted FDI38
.
Further analysis suggests though that most of infrastructure FDI flows were attracted by
developed economies rather than developing.
36
UNITED NATIONS “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge” 2007 p.87, www.unctad.org,
37
United Nations “World Investment Report”, stats.unctad.org/FDI, accessed December 2009
38
Government Comity of Statistics “Annual statistics report” of 2008, p. 276

30
Exhibit 26
UNITED NATIONS “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge” 2007, www.unctad.org,
On the other hand some developing countries have clearly been more successful than others.
“In electricity, for example, Brazil alone attracted 54% of the total foreign commitments in Latin
America and the Caribbean during 1996-2006. In the same period China accounted for almost
one quarter of the Asia in total, and Morocco was the largest recipient in Africa, with almost
50% of that region’s commitments”39
.
This can be explained by the fact that government policies are much more important factor in
infrastructure projects than other factors like profitability, market size or synergies. Globally
governments gradually shifted from complete control over the infrastructure assets towards
liberalization of infrastructure-asset related markets. “The process of changing the role of the
State and increasing private sector participation involved a series of reforms, such as enterprise
restructuring, market liberalization and regulatory changes. Today, the private sector is a
significant participant in many infrastructure industries globally, in countries of all political
hues, and its role is likely to increase further because of the huge investment, technology, skills
and management needs in developed and developing countries alike”40
. “TNC involvement is an
39
UNITED NATIONS “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge” 2007 p.105,
40
UNITED NATIONS “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge” 2007 p.94, via

31
important source of infrastructure financing for developing countries. For instance, according to
the World Bank PPI Database, the share of foreign investors in total investment commitments
in developing economies in infrastructure industries was 29% over the period 1996–2006”41
.
Within infrastructure investments to developing countries energy and telecommunications
dominated the scene in the nineties but recently the emphasis shifted to transport.
Exhibit 27
UNITED
NATIONS “World Investment Report 2008: Transnational Corporations and the Infrastructure
Challenge” Figure III.5. 2007, www.unctad.org, accessed December 2009
Within sub-segments of infrastructure there is different FDI attracting potential.
In transport Ukrainian government was not effective in attracting FDI. Most assets are still
government owned or dominated by government monopolies. Railway being the most
important means of transportation is dominated by government monopoly. Construction and
maintenance of roads is also conducted by a state owned company. Ports and airports are in
government property. Privatization plans are unclear because of the constant political turmoil.
41
UNITED NATIONS 2007 “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge” p.100, via
www.unctad.org, December 2009

32
Public – Private Partnerships and concessions proven to be effective in other countries have not
been successful in Ukraine due to poor legislation.
Several small infrastructural investments were made by commodity TNC:
“Glencore Grain put into operation a grain terminal at the Illichivsk port. Simultaneous storage
capacities of the CJSC Illichivsk Grain Terminal are 116 thousand grain. Many transnational companies
(like Toepfer International) and large domestic holdings (in particular, Nibulon) possess their own grain
transfer systems. Kernel Company, one of the largest exporters of sunflower oil in Ukraine, purchased a
transfer terminal Transbulk in Illichivsk sea port for USD 100 million in June 2008”42
.
These investments are hardly an achievement of the reform in the government policy but rather the
need by TNC to solve bottlenecks in their main operations.
“Globally In the transport infrastructure of developing and transition economies over 1996-
2006 period foreign participation was largely in the form of concessions: these alone accounted
for 86% of the number of projects. Privatizations, the second most important form, accounted
for less than one-tenth of the total. The dominance of concessions in transport worldwide has
resulted in a proliferation of individual operators. This is particularly evident in ports, where the
majority of international players have expanded by winning new concessions, and only more
recently, through M&As”43
.
Energy sector is potentially very attractive for foreign investors.
In natural gas sector import substitution is possible since Ukraine imports more than half
consumed natural gas. In 2008 Ukraine produced 19.985 billion cubic meters of natural gas,
which is just 40% of consumption in 2009 (53 bcm)44
.
Internal reserves allow increasing domestic production. By government statistics total proven
reserves of natural gas in Ukraine amount to 1098.4 billion cubic meters. They are spread
around three main basins:
42
Ukrainian National News Agency “Transnational companies in Ukraine invest in construction, purchase of facilities for grain
transfer – experts” 22 July 2008, via Factiva, December 2009
43
UNITED NATIONS “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge” 2007 p.106,
via www.unctad.org, accessed December 2009
44
Intrefax “Ukraine boosts gas production by 1.3% in 10 months”, 14.11.2009 www.inerfax.com.ua, accessed December
2009

33
Exhibit 28
BCM %
West - Carpathian basin 118.2 11%
East - Dnipro-Donetsk basin 921.9 84%
South - Black Sea/Azov Sea basin 58.3 5%
Total 1098.4 100%
Source: Ukrainian Government Geological company “Geo.Inform”
Drilling activities currently are approximately 200 000 – 220 000 meters per year. “In the
national program Oil and Gas of Ukraine to 2010 and the Energy Strategy to 2030, the Ukrainian
government notes that it expects to increase exploration drilling activities 2.5 times to 415 000
meters per year by 2030. This would add 670 bcm to the gas reserves by 2030 in the pessimistic
scenario, or 1 023 bcm in the optimistic scenario. Exploration drilling is a very expensive and
risky activity. To achieve the targets of the program, it would be necessary to invest some $ 12
billion, an amount that cannot be secured from Ukrainian sources.”45
So far Ukraine had not been able to attract sufficient non government investments into
exploration and extraction due to several factors:
- Lack of transparency. Government had been not fully transparent in publishing data
about the gas reserves. Moreover the data which is published can hardly be considered
reliable due to differences in valuation methods and absence of independent audits.
- Unattractive legal regulation of exploration and production. In current law on
Production Sharing Agreements the limit to 40% of foreign participation is implemented.
This significantly reduces attractiveness of PSA for foreign investors. Besides that
Ukrainian legislation demands acquisition of two different licenses: 5 year exploration
license for each individual site; and 20 year production license. In practice this means
that the company which made a discovery during exploration is not guaranteed access
to the site making it a very risky investment. In the past there were several disputes
around this issue resulting in lost time and money.
- Legal disputes around previously rendered licenses scare away potential investors. .
Production licenses of a UK based company Regal Petroleum had been disputed in
courts in 2005, 2006. “The contract with an affiliate of Vanco International Ltd. - a
subsidiary of Houston’s Vanco Energy Company – was “revoked and terminated” on 21
May 2008”46
.
45
OECD “Ukraine Energy policy overview 2006”, www.iea.org, accessed December 2009
46
Tammy Lynch “Exploring Ukraine’s Vanco dispute” By 28.07.2008, www.unian.net , accessed December 2009

34
- Barriers for gas sales at competitive prices.
Considering huge demand for natural gas in Ukraine, well developed gas transportation
infrastructure and availability of domestic reserves this sector should be very attractive for
foreign investors if government changes its policy.
Electricity sector can become attractive after privatization. “Despite of the fact that currently
Ukraine is a net exporter of electricity the sector will require significant investment in the
future:
- 95% of power units have worked out their useful life; the residual life of thermal power
plants is 5-7 years.
- The level of technological losses constitutes 14.4% of the electricity produced, which is
2-2.5 times higher than in developed countries. In order to decrease the losses, it is
necessary to invest in modernization of transmission and distribution networks.
- Despite constant increase of electricity production and consumption since 2000, Ukraine
may soon face a technical problem of electricity supply to final consumers, especially in
large cities. The growing demand for electricity cannot be satisfied using the old
transmission and distribution networks”47
.
Privatization of the sector can open way for foreign investors. “Ukraine privatization agency
plans to auction blocking stakes in five regional power companies as part of a plan to generate
more than $1bn from property sales in 2009. Companies to go on the block include
Prykarpatoblenergo, Lyivenergy, Chernihovblenergo and Sumyoblenergo. Privatization of the
electricity sector, until now delayed by political infighting, may now be prompted by the
financial crisis engulfing the economy”48
.
Electricity is one of the most active service industries in terms of FDI flows into developing
countries:
47
Anna Tsarenko “Overview of Electricity Market in Ukraine”, 2007 p. 18
48
Petroleum Economist “News in brief Eastern Europe and CIS” 1 April 2009, via Factiva, December 2009

35
Exhibit29
UNITED NATIONS 2007 “World Investment Report 2008: Transnational Corporations and the
Infrastructure Challenge, www.unctad.org, accessed, December 2009
Russia can be a very successful example of FDI inflow into the electricity sector after market
liberalization. “In 2008, the reorganization of the power generation industry was completed,
and the unbundling of RAO UES was carried out. The reform involved the lifting of the
company’s quasi-monopoly and the divestment of stakes in 72 vertically integrated affiliates,
each of which has a regional monopoly on electricity generation and distribution. Through a
subsequent process of consolidation, these entities were transformed into six wholesale
generation companies (WGCs) and 14 territorial generation companies (TGCs). This
restructuring and sales of assets have provided opportunities for foreign investors to enter the
industry. A number of the stakes in WGCs and TGCs have already been acquired by various
European TNCs such as Fortum (Finland), Enel (Italy), E.ON (Germany), CEZ (Czech Republic),
RWE (Germany) and EDF (France). In 2008, Fortum (Finland) purchased a controlling stake in
TGC-10 and RWE (Germany) bought a majority share in TGC-12, while EDF (France) has entered
into a partnership with the Russian bidder TransNeftServis-S to acquire OGC-1, one of RAO UES’
most valuable assets”49
.
49
United Nations “World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge”, p. 76, 2009,
http://www.unctad.org/en/docs/wir2009_en.pdf accessed December 2009

36
In Telecom there had been significant achievements in the mobile telephony where both
biggest operators Kyievstar and UMC have the participation of foreign investors Telenor
(Norway) and MTS (Russia).
The biggest opportunity for the future is the privatization of government fixed line telephone
monopoly Ukrtelecom. Government had been postponing privatization of this company several
times due to internal conflicts. While the government is hesitating with privatization of
Ukrtelecom the company financials are deteriorating.
Chemicals and chemical products is 22% of secondary industries global FDI. “In Ukraine In 2007,
chemical sector shared 6.4% in the structure of industrial production (6 place), 2.7% - in the
structure of GDP”50
.
“Until 1990, Ukraine was producing 16% of the total of mineral fertilizers in the former Soviet
Union, 24% plant-protection chemicals, 18% sulfuric acid, 25% soda ash, 16% caustic soda, and
13% chemical fiber”51
.
“The structure of the chemical sector includes two groups of enterprises – chemical and
petrochemical ones. Within the structure of the industry, predominant are asset- and energy-
intensive basic chemistry enterprises. This sector is represented by production of mineral
fertilizers, non-organic acids and soda. Nitric fertilizers are manufactured in Donbas
(Severodonetsk, Horlivka) and Prydniprovia (Dniprodzerzhinsk). Rivne and Cherkasy enterprises
use natural gas in their production. Phosphate fertilizers are manufactured in sugar-beet
producing areas (Sumy, Vinnytsia) and in Odesa and Kostyantyniv (Donetsk oblast). Production
of sulfuric acid is concentrated in the regions where it is consumed and in the centers of
phosphate fertilizers production. Basic chemistry is concentrated in the Crimea and comprises
production of bromine, magnesium and iodine. State-owned enterprises are less than one-fifth
of the total number of chemical industry enterprises manufacturing about one-third of the
products.”52
Theoretically industry in general should be attractive for foreign investors due to developed
infrastructure and skilled labor force. On the other hand most of the physical assets were built
in the soviet era and are physically and technologically deteriorated. Most of the current
industry players are using energy inefficient technologies which are dependent on supply of
cheap gas and electricity. Gas and electricity prices are projected to grow in the near future
moving most of the current producers into zones of negative profitability.
50
“Chemical industry in Ukraine”, by www.export.by. http://www.export.by/en/?act=s_docs&mode=view&id=7191&doc=64
51
Ukraine Gateway “Chemical and petrochemical industry”, http://www.ukraine-
gateway.org.ua/gateway/gateway.nsf/webcontent/05020300, accessed December 2009
52
Ibid

37
For foreign investors who have experience and technological capabilities in increasing energy
efficiency this situation can create opportunities. Current owners might be willing to sell
money-losing assets at significantly lower valuations.
Other opportunity is the privatization of “Jsc Odessa Port Plant” a major urea and ammonia maker
in Ukraine. The privatization tender was scheduled to occur in 2009 and the company’s value was
estimated to be around 1bn $. Tender in fact took place on 29 September 2009 but later on its results
were cancelled by court. On the one hand “The Ukrainian prime minister reportedly accused bidders of
conniving to purchase Odessa Port Plant at a bargain price”53
. On the other hand President Yushchenko
accused Tymoshenko of conducting a prearranged tender. In any case the company is still available for
privatization and may be attractive for foreign investors if the tender is conducted in a transparent
manner.
In Manufacturing there is potential for FDI increase. “In many sub-sectors, such as car
manufacturing, metals and mining machinery, power machinery, instruments, and agricultural
machinery, local production accounts for less than half the domestic market. Therefore, there is
the potential for (at least partial) import substitution by increasing domestic production. For
example, if the total Ukrainian car market growth returns, then in five to ten years the country
will reach the scale necessary to attract large foreign manufacturers to set up integrated
production plants locally, with a view to possible future car export to neighboring countries.
Another possible manufacturing success story is agricultural machinery: Ukraine uses four
times fewer tractors per hectare of cultivated land than Turkey and six times fewer than France.
To reach the level of Turkey would mean a total market of 60,000 to 80,000 units per year,
more than the size of an average European plant”54
.
In global FDI flows in Machinery, Motor vehicles and other transport equipment are enjoying
13% share in secondary industries and 4% of all FDI (by 2007 data)55
. Ukrainian statistics are not
separating this subsector but based on up to date publicly known investments the potential has
not been reached.
On the other hand there had been some achievements.
“Skoda Auto (SA) (Mlada Boleslav, Czech Republic), automobile company, started to assemble cars in
Solomonov, the Ukraine, in 2001. On the basis of licensed fees, SA started to co-operate with Eurocar
(Ukraine). Eurocar built an assembly plant on an area of 2.7 ha during a nine-month period”56
.
53
NITMET “Odessa plant sales in confusion” 18 November 2009, via Factiva, accessed December 2009
54
Avetik Chalabyan, Vitaly Klintsov, Georges Massoud “Reviving Ukraine’s economic growth” McKinsey and Co, October 2009,
p. 4
55
United Nations ““World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge””, via
56
Access Czech Republic Business Bulletin “Attack on the Ukraine” 23 October 2003, via Factiva, accessed December 2009

38
“Ukraine’s second largest car producer, the Lutsk Motor Plant (LuAZ), and one of China’s largest
carmakers, Dongfeng Motor Corporation, signed a contract on June, 30 to jointly develop a new
freight and cargo truck manufacturing plant in Cherkasy Region.
In a recent press release, LuAZ announced that the new facility will produce freight and cargo
trucks with a capacity of 2-10 tons, and is expected to be operational by the end of 2007. The
plant will have the capacity to produce 12,000 freight and cargo trucks annually and potentially
about 1,000 new jobs as early as next year”57
.
57
Orysia Kulick “Ukraine’s LuAZ and one of China’s largest carmakers sign contract” , Kyiv Post Jul 13 2006, 02:27, via
www.chinacarforums.com, accessed December 2009.

39
Conclusion
Ukraine’s pace of economic and technological development and level of integration into global
economy will be driven by its ability to attract FDI.
In general Ukraine is an attractive territory for foreign investors due to big internal market size,
geographic location and cheap but educated labor force. On the other hand poor investment
climate prevents Ukraine form realizing its potential to the full extent.
Achievements in several industries have shown that at this point the success lies not in complex
government programs, but in simple but smart decisions which dramatically change FDI
landscape:
Finance - change in legislation allowing foreign banks to enter the market;
Steel – transparent privatization of Krivorozhstal;
Tourism – simplification of visa procedures.
In the short-term perspective there is potential for such simple but very effective
improvements in other sectors:
1. Termination of moratorium on sale of agricultural land;
2. Simplification of gas exploration and extraction legislation;
3. Transparent privatization: Ukrtelecom; Odessa Port Plant; Electricity market etc.
In the medium term government should focus on legislative improvements:
1. Taxation reform and simplification of procedures;
2. Improvements in legislation regulating private-public partnerships and concessions;
3. Improving the easiness of cross-border trade
Most importantly, the suggested decisions are not FDI specific and it’s not a zero-sum game.
Proposed reforms are as beneficial for internal investors as they are for foreign and their
implementation is just a question of political will.

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