Ukraine’s Broken Government Scares Off Investors

It is not easy being the president. Being the president of a country that has a military conflict with Russia, and is the source of negative headlines in the U.S. on account of privately held energy firm Burisma makes it all the harder to paint Ukraine with a clean brush.
But paint he must. Volodymyr Zelenskiy, a former successful TV actor and producer, was entrusted with doing just that. Everyone is counting on him to wrestle Ukraine from the brink of what was, not too long ago, a failing state. Elected last year with 73% of the vote, now his popularity is hovering around 40%. It’s not great.

Foreign direct investment is in decline. The last reported numbers were $2.4 billion in 2018, down around 10% from the previous year. Kazakhstan has higher FDI than Ukraine. The 2019 economic growth disappointed.
Looked at from 30,000 feet, Ukraine’s debt burden dropped from 80% of GDP in 2016 to 52% today and inflation is around 4%. Interest rates have dropped over the last couple of years by around 700 basis points and are now at 11%. This is a growth killer. Ukraine’s economy is fragile.

Ukraine’s GDP grew 0.1% in the fourth quarter, slowing from a 0.6% in the third. It was the lowest growth rate since 2016. Last year, the Ukrainian economy grew 1.5% which is better than its new rival Russia, but below market forecasts of 2.3%.
Business isn’t booming.

“Investors were looking forward to 2020 with Zelenskiy. They all thought it would be a stable year of expansion. But all of a sudden, many of them are taking a second look at it and putting plans on hold.”
— Morgan Williams, CEO of the U.S. Ukraine Business Council, Washington, DC.
The good news for Zelenskiy is that he was not hired to bring an economic boom. Zelenskiy was hired to end the war with Russia and clean up politics as usual in Ukraine. Stories like Burisma are are fairly typical in Ukraine. Big business owners have carved out niches, like little feudal systems, and they have needed, historically, to be on the right side of politicians to keep their part of Ukraine in their hands.

It sets the table for political in-fighting and feudal battles between billionaire business owners well known to the West, from Dmitry Firtash, managing his natural gas and fertilizer empire in Ukraine from self-exile in Europe, to Ihor Kolomoisky who had a famous battle over his Privat Bank re-nationalization with the man Zelenskiy beat, Petro Poroshenko.

Burisma and Kolomoisky’s Ukrnafta are probably the best known battles in the U.S. But many cases involving Ukrainian’s business elite give foreign investors pause.

Two weeks ago, Zelenskiy fired the first Cabinet of his administration just six months after taking office. Prime Minister Oleksiy Honcharuk left his post and was replaced by the obscure regional governor Denys Shmyhal. Many senior members of the government also departed in the reshuffle, with new finance and foreign ministers hired.

“This was the first government where there was no high-level corruption,” Zelenskiy says, in case anyone was thinking they were corrupt somehow. “But not stealing is not enough. This was a government of new faces, but faces are not enough. New brains and new hearts are needed.”

“The government reshuffle couldn’t have come at a worse moment for Ukraine, with the coronavirus outbreak, a global market downturn, no IMF deal, secondary market bondholders becoming itchy, and significant sovereign debt repayments due. The key priorities of the new government should be to ensure macroeconomic stability…and boost foreign direct investment.”
— Andy Hunder, president of the American Chamber of Commerce in Ukraine.

To help that along, Ukraine watchers say that the country’s leaders need to convince foreign firms that it’s a safe country to invest in.