Ukraine lures investors with economic growth
Ukraine’s expanding economy and cheap labor force attract more and more German investors. “In the past two or three years German businesses have been showing significantly more interest in Ukraine,” says Ferdinand Pawel, member of the German Economic Consultative Group attached to the Ukrainian government. In the first quarter of 2003 alone, German direct investment in Ukraine’s economy was up 30%. From 1997 through 2002, Germany’s foreign trade with Ukraine increased by 56%. Germany is Ukraine’s biggest trade partner second only to Russia. However, experts claim that in general Ukraine’s investment climate remains quite problematic. Lack of legislative transparency, excessive controls, red tape, and corruption still scare away many investors.
Lars Handrich, a representative of the German Consultative Group explains that due to constant interference by the government and failure to embrace reforms, since 1991 no positive economic growth had been registered in Ukraine until recently. “All of the above cannot be called conditions attractive for investors,” Mr. Pawel added. However, owing to a fast pace of reforms at the beginning of this decade the situation has changed, with the economy growing at a record 9.2% in 2001 and 4.8% in 2002. According to NBU forecasts, this year’s GDP will reach 7%.
The major stumbling blocks for German investors, according to the consultative group members, are the lack of transparency on the Ukrainian market and excessive controls. According to a poll of 65 major foreign businesses, aside from the ambiguity of Ukrainian legislation they named exorbitant taxes, vested interests, and a weak infrastructure among the major obstacles for investors. “There are no rules of the game that everyone would abide by, as is the case in the EU,” Mr. Pawel said.
While corruption is a major problem faced by many foreign investors, experts claim some foreign companies are ready to pay even the so-called service toll only to be able to do business on the Ukrainian market. According to an analysis performed by Transparency International in early October, Ukraine ranks among the world’s most corrupt countries, placing 106th in a rating of 133 countries, compiled by major international investors, which shows the current level of transparency in the country in question.
According to German investors, aside from Ukraine’s high economic growth indices, its major advantages are its proximity to Germany and highly skilled and cheap labor force. After Poland, Slovakia, and Hungary join the EU next spring, labor force in these countries will become too expensive for some German investors. As a result, many businesses will relocate to Ukraine. Such is the belief of Harald Meier, director of the Kyiv office of the Federal Department of the Foreign Economy. Meanwhile, Ukraine’s movement toward Europe has been complicated of late, with the EU leadership criticizing Ukraine’s failure to guarantee freedom of speech and eliminate other shortcomings.
Before March 2003, total German direct investment in Ukraine came to $414 million. Thus, according to Mr. Meier, Germany rose from the seventh to the fourth place in the list of the biggest foreign investors in Ukraine. Over one thousand German companies have opened their offices in Ukraine. This year, major German investors in Ukraine were joined by a retail trade concern, Metro, and car supplier, Leoni. The Metro Concern has opened its first megamarket in Kyiv and plans to expand it operations in 2004, with four new megamarkets to be opened elsewhere in Ukraine. In the coming years, German businesses plan to invest an additional 200 million euros in Ukraine’s economy.
Experts believe that the next couple of years will see an increase in Germany’s foreign trade with Ukraine. According to Germany’s Federal Statistics Service, from 1997 through 2002 Germany’s foreign trade with Ukraine more than doubled to reach three billion euros. Notably, German exports to Ukraine increased by 67% against a 13% increase in the volume of Ukrainian imports. However, with the total German exports standing at 650 billion euros, Ukraine ranks only 42nd in the list of Germany’s foreign trade partners.
