Will Ukraine’s Reform Progress Boost Investor Climate?

Standing at the first Ukraine Reform Conference in London last year, Prime Minister Volodymyr Groysman promised foreign partners and potential investors that Ukraine was capable of reform. Nearly one year to date, Ukraine’s parliament has adopted a series of bills that signal the country is on track to transforming key sectors, including healthcare, energy and judicial.

On paper, Ukraine is moving forward with long-promised reforms that aim to boost the country’s investment climate. But whether these legislative changes bolster foreign investment and economic growth remains to be seen.

As Ukraine prepares for its second Western-backed reform conference, set to take place in Copenhagen on June 27, Hromadske sat down with Acting Ukrainian Finance Minister Oksana Markarova and Center of Economic Strategy’s Executive Director Hlib Vyshlinsky to discuss the country’s reform progress and economy.

Corruption and distrust of the judiciary system have long been flagged as the most significant deterrents for foreign investors.

Earlier this month parliament adopted what has been touted as a key tool for fighting corruption in the country – the law on the anti-corruption court. But while Ukraine’s key lender, the International Monetary Fund (IMF), welcomed the move, last week it also called for amendments to the bill.

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In its current form, anti-corruption activists say the new court won’t be able to process appeals on cases that received a ruling in the unreformed courts. IMF Managing Director Christine Lagarde said she and President Petro Poroshenko have agreed to work on amending the legislation.

The anti-corruption court forms part of a reform package tied to an IMF $17.5 billion loan program. But its creation could also have a significant impact on foreign investment.

Vyshlinsky said the recent adoption of the law on the anti-corruption court could break the barriers that for years have held investors back.

“If we have a critical mass of those corrupt judges going to jail [...] another court will see that [...] the potential risks in taking corrupt decisions is just very high,” he said. “And they will stop making these decisions and it will slowly but very significantly improve the investment climate in Ukraine.”

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Ukraine’s economy saw a modest growth of 2.5 percent in 2017, according to The World Bank. However, its April report shows that foreign direct investment “remained weak” at 2.1 percent of last year’s GDP, “compared to 5 percent on average before the crisis”. While the financial institution in April stated that investor confidence was improving, it flagged the slow pace of reforms as a key concern that was holding back potential investors.

Markarova told Hromadske that Ukraine now had everything in place to attract foreign capital.

“Our numbers are good, we already have two years of consecutive growth, this is the third year, the macroeconomic stabilization is there, we have a good trend on inflation,” she said.

“We already see that investors are interested. But it's all about trust and convincing them that it is actually a very good time to come, that the economy will grow.”

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Among the government’s priorities this year will be privatization – a key step to reforming the largely state-controlled energy sector. For years the government has been promising to sell off its energy shares to foreign investors but has repeatedly delayed and in some cases failed to auction off key assets, including chemical manufacturing company Odesa Portside Plant.

Earlier this year Ukraine passed the long-awaited and IMF-supported privatization law aimed at streamlining the privatization process.

Markarova said the privatization law provides an attractive option to investors, who will be allowed to use English law to ensure protection of their investment.

“Without going through the Ukrainian system if there are any disputes with regard to privatization, [they can] go to the London court right away,” she said. “That is very positively accepted by many of the investors we are talking to.”

Furthermore, she said using a tried and tested model of privatization will help with the process.

“We have investment advisors and we have investment bankers that will be working with us, and this process of selecting highly reputable international companies that will prepare the companies for the sale is very important as well,” Markarova said. “That's the additional layer of confidence and checks, essentially, for potential buyers.”

Vyshlinsky said it appeared the laws and processes in place were without significant loopholes, but the key issue that remained was speed.

“Even with the best laws and regulations, you could have a sabotage of the process on the level of technical execution, because you couldn't adjust changing, for example, essential bank interest rates. Just make one decision and the interest rate is different on the morning of the next day,” he said.

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“No, in this case, you need to have a lot of technical things to privatize the company successfully.”

Vyshlinsky says another obstacle that affects not only privatization but a myriad of sectors is the lack of electoral reform. Under the current electoral law, adopted during the presidency of ousted Viktor Yanukovych, deputies are elected according to a majority vote system with closed party lists.

“It's part of an investment cycle when politicians, in the current electoral system, have an opportunity to buy seats in the parliament and then be part of the government coalition, and then take positions of ministers, and then manage state-owned enterprises and milk them to in fact get a return on this investment of buying seats in parliament,” he said.

“In fact, breaking this vicious cycle, to fully do so we need to not only look from economic policy but to look from electoral code and the electoral system.”
While Ukraine continues to face criticism about over its reform progress and political will, Markarova says the country was moving forward.

“[Prime Minister Volodymyr Groysman] came to London [last year] and promised five key reforms to be accomplished, the health care reform, pension reform, education reform, privatization starting to reform, meaning the adoption of the new law, and the public sector reform,” she said.

“We are very glad that we are coming to Copenhagen now to say we have accomplished all five of them.”