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University of Luxembourg

Attracting foreign investments for the development of the Ukrainian economy: wartime challenges and postwar prospects

Teres Yu., PhD in Economics,

Annotation

The article discusses attracting foreign investments for the development of the Ukrainian economy. Analyzed wartime challenges and postwar prospects. It was determined that during the large-scale armed aggression of the Russian Federation against Ukraine and the implementation of the martial law, attracting foreign investments is one of the main measures to support the national economy. As a result of the military aggression of the Russian Federation, the economy of Ukraine suffered significant losses. Were analyzed the dynamics of attracting foreign investments in 2002-2022. The analysis of the development vectors of the FDI market allows us to conclude that their dynamics depends on global economic and political trends Debt instruments are prevalent in the structure of the FDI instruments of the investor countries, and the sectoral structure of the investments is determined by the secondary sector, meaning manufacturing of goods. Prospects for attracting foreign investments are outlined, which will primarily be aimed at the post-war recovery of Ukraine according to the "Marshal Plan" for Ukraine. In particular, a list of sectors of the Ukrainian economy that will be interesting for foreign investors has been determined.

Keywords: development of the Ukrainian economy, foreign investments, wartime challenges for foreign investments, postwar prospects foreign investments.

Анотація

Залучення іноземних інвестицій для розвитку економіки України: виклики воєнного часу та післявоєнні перспективи

Терес Ю. Люксембургський університет

У статті йдеться про залучення іноземних інвестицій для розвитку економіки України. Проаналізовано виклики воєнного часу та повоєнні перспективи. Визначено, що в умовах широкомасштабної збройної агресії Російської Федерації проти України та запровадження воєнного стану залучення іноземних інвестицій є одним із основних заходів підтримки національної економіки. Внаслідок військової агресії Російської Федерації економіка України зазнала значних втрат. Проаналізовано динаміку залучення іноземних інвестицій у 2002-2022 рр. Аналіз векторів розвитку ринку ПІІ дозволяє зробити висновок, що їх динаміка залежить від світових економічних і політичних тенденцій. У структурі інструментів ПІІ країн-інвесторів переважають боргові інструменти, а галузева структура інвестицій визначається вторинний сектор, тобто виробництво товарів. Окреслено перспективи залучення іноземних інвестицій, які передусім будуть спрямовані на післявоєнне відновлення України згідно з «планом Маршала» для України. Зокрема, визначено перелік галузей української економіки, які будуть цікаві іноземним інвесторам. Підтримка України у відбудові пошкодженої критичної інфраструктури - це можливість для партнерів використовувати інноваційні технології та зелені рішення у відновленні та модернізації об'єктів. Забезпечення інклюзивності під час відновлення та відновлення є важливим. Зосередження уваги на конкретних секторах, таких як технології, логістика та транспортні коридори, зелена енергетика, природні ресурси, відбудова інфраструктури, цифровізація, сільське господарство та продовольство, охорона здоров'я та фармацевтика, дозволить Україні висвітлити інвестиційні можливості та заохотити учасників до партнерства та співпраці. На сьогодні першочерговим завданням залишається усунення перешкод для інвестицій та впровадження реформ Урядом України за підтримки міжнародних партнерів та громадянського суспільства.

Ключові слова: розвиток економіки України, іноземні інвестиції, виклики воєнного часу для іноземних інвестицій, післявоєнні перспективи іноземні інвестиції.

Introduction

At the moment, Ukraine is a developing market economy. Considering that Ukraine aims at the integration into the European and global economy, the attraction of foreign investments is one of the forms of the development of the national economy. Since the first days of Ukraine's independence, foreign investments were one of the most important factors in the development of its economy. In recent years, since Ukraine announced over its course for European integration, the role of foreign investments in Ukrainian economy has gained even greater importance. Ukraine started moving towards reforming of the economic processes on the way to the international integration into the European economic area. Foreign investments play an important role in the process of ensuring the growth of financial and economic indicators, attracting the latest technologies and facilitating structural changes in the Ukrainian economy.

In the current conditions of the large-scaled armed aggression of the Russian Federation against Ukraine and the implementation of the martial law, attracting foreign investments is one of the key measures to support the national economy. As a result of the military aggression of the Russian Federation, the economy of Ukraine suffered significant losses.

According to the estimates of the World Bank, the European Commission and the Ukrainian government, the costs of rebuilding Ukraine and its economy have already reached about 349 billion US dollars. During more than six months since the beginning of the invasion of the Russian Federation, Ukraine has suffered large-scaled destruction. In particular, the World Bank report states that the consequences of the invasion will be felt for several generations, because families were separated and displaced, the development of human potential was disrupted, cultural heritage was destroyed, and the positive trajectory of economic development and the level of poverty changed to a negative one. The analysis of the experts of the World Bank covers only the period until June 1, meaning the losses caused in the last months are not taken into account in the report. According to the estimates presented there, the direct damages caused primarily to the housing complex, transport, trade and industry of Ukraine amount to 97 billion US dollars. While the losses caused by the disruption of economic flows and production chains estimate of 252 billion dollars. The research defines the scale of the challenges Ukraine faces as it tries to rebuild its economy while fending off Russia's unrelenting aggression.

Without exaggeration, Ukraine faced a civilizational threat to the independence, unity and the very existence of the state and the Ukrainian people. This is also a difficult test for the economic system. Almost every day, the aggressor inflicts devastating and brutal blows on the territory of our state, destroying the country's economic infrastructure.

Also, the World Bank report emphasizes that, despite the critical importance of a gradual approach to reconstruction after several years, in the short term, Ukraine requires about $105 billion to restore social infrastructure, in particular, schools and hospitals, transport connections, and prepare for a possible energy shortage this winter.

Unfortunately, with the beginning of the war, the inflow of the funds by private foreign investors in the Ukrainian economy practically stopped. According to the results of just the first quarter of 2022, foreign direct investments in Ukraine decreased by 314 million USA dollars, investments from Ukraine amounted to 106 million USA dollars, as a result, the deficit (capital outflow) reached 420 million USA dollars. The exception is the IT sector of Ukraine, which continues to accumulate investment resources. This is primarily due to the fundamental difference between doing business in the IT sector compared to the real sector of the economy. However, investments in the IT industry do not solve the issue of restoring the country's economy and its destroyed infrastructure.

At the same time, Ukraine receives unprecedented financial aid from the international financial organizations and foreign governments, which allows to avoid a deep financial and economic crisis and facilitates the state's defense capability. According to the Ministry of Finance of Ukraine, since the beginning of the war from February 24 to mid-September 2022, Ukraine received financial assistance from the international organizations, the EU and the governments of foreign countries in the amount of more than 542 billion hryvnias in the form of loans, credits and grants, directed to the general fund of the State Budget of Ukraine for financing priority expenses. As of October 18, Ukraine also received the first 2 billion euros under the exceptional eighth EU macrofinancial assistance program, the total funding of which is 5 billion euros. Since the beginning of the full-scale military invasion of the Russian Federation, Ukraine has already received 4.2 billion euros of macro-financial assistance from the EU. This preferential financing aids in the support of the Ukrainian economy and mostly ensures financing of priority socioeconomic and humanitarian needs. Obtaining loans from macro-financial assistance will contribute to maintaining financial stability in Ukraine. Ukraine is supposed to receive the next tranches under the eighth EU macro-financial assistance program by the end of 2022. It should be mentioned that on September 7, 2022, the European Commission announced a decision to allocate additional financial aid resources to Ukraine by implementing a new (exceptional) EU macro-financial assistance program in the amount of EUR 5 billion. On October 3, the signing of the Memorandum of Understanding and the Credit Agreement between Ukraine and the EU regarding the receipt of the specified funds was completed.

However, these allocated financial resources are used exclusively to support the functioning of the financial and economic system of Ukraine, to meet social and humanitarian needs. Unfortunately, under the martial law, almost no investment is made in the real sector of the economy, which might ensure the recovery of the Ukrainian economy and bring it out of a deep crisis. First of all, this is caused by a number of risks for investors caused by Russia's armed aggression against Ukraine. Regular missile attacks throughout the country, destruction of the energy infrastructure by the Russian occupants, active hostilities and the occupied territories have slowed down the investment process and economic development of Ukraine in general.

Now, Ukraine hopes to end military operations with the support of the international partners by ensuring the complete liberation of the occupied territories. This will create conditions for the attraction of foreign investments, which will ensure the recovery of the Ukrainian economy and the renewal of the economic growth.

Literature review. The issue of attracting foreign investments for the development of national economies is the subject of study by many researchers.

The authors of many publications prove that inward foreign direct investment contributes to economic growth. Each country attracts foreign investment by offering and improving the location advantages, such as those determined by geography (Rasvanis, & Tselios, 2022). It is noted that direct foreign investments will have the following outcomes for the economy: technological re-equipment of companies; personnel training; improvement of product quality; access to new sales markets, etc. (Soare, Chiurciu, David, B?lan, & Dobre, 2015). The notion of foreign direct investment, the impact of various factors on the attraction of foreign investment, the importance of legislation on foreign investment, the instruments used by the state to regulate investment activity are determined. A scientific generalization of the best practices of government regulation of foreign investment in the USA, the United Kingdom, France, Germany, and Austria is being carried out (Sagynbekova, Allanina, Babaeva, Dzhabrailova, & Gaybatova, 2018).

A number of studies were about the features of foreign investment in European countries, which is interesting considering the subject of our study. In particular, the development of foreign investment in the Republic of Macedonia is analyzed (Roљtбrovб, & Rentkovб, 2015). The main problems of the inflow of foreign direct investments and their functioning in Slovakia during the period of transformation after 1990 are studied (Buиek, 2003).

The impact of the foreign direct investments on the gross domestic product and exports of the Baltic countries (Lithuania, Latvia and Estonia) is analyzed. Correlation analysis and the method of Student's criteria are used to test the hypotheses (Љeиkute, & Tvaronaviиius, 2007).

The features of attracting foreign investments to the economy of Ukraine are determined, in particular, the investment attractiveness of Ukraine is investigated, as well as measures to attract foreign investments (Denysenko, 2016). The prospects of the foreign policy directions and the area of public investment policy of Ukraine are analyzed (Kossak, & Yanovytska, 2020). The mechanisms and trends of foreign investments in the agricultural sector of Ukraine during instability in international commodity and capital markets are revealed (Nagachevska, Apostol, Fedun, Kuzioma, & Prygara, 2021).

The cause-and-effect relationships between gross domestic product, foreign direct investment, export and import of goods and services in Ukraine for the period of 1996-2019 are analyzed (Plaskon, Shevelova, Ruska, Martyniuk, Lesyk, & Seniv, 2021).

The analysis of the above-mentioned publications and many other scientific studies proves the importance of foreign investments for the development of national economies, especially for the developing countries. At the same time, there are no scientific publications dedicated to the study of foreign investment during the period of large-scaled military operations. All the more so, as Russia's military aggression against Ukraine turned into the largest continental European war since World War II.

The purpose of the article is to carry out a systematic analysis of the attraction of foreign investments in various sectors of the economy of Ukraine and to evaluate their effectiveness in the pre-war period, under the martial law, as well as to determine the prospects for the post-war development.

Data and methods. Using the dialectical method of cognition, which makes it possible to study economic phenomena in the process of development and interrelationship, the economic notion of foreign investments as a factor of ensuring GDP growth was investigated. Graphical financial analysis was used to study the dynamics and trends of foreign investment attraction to Ukraine. The methods of analysis and synthesis, induction and deduction were used to substantiate the prospects and directions of investment development taking into account the challenges of the wartime. Methods of correlation-regression analysis and economic-mathematical simulation were used to determine the efficiency and the relationship between foreign investments, economic development of the state and global innovation indices.

The research was based on the information on the regulatory legislation of the EU and Ukraine regarding the foreign investment process. To evaluate the dynamics of investment development, official data of the European Commission, the data of the State Statistics Service of Ukraine, data of statistical yearbooks and informational and analytical bulletins, as well as other official sources of information are used. Scientific publications containing data on volumes, dynamics and trends in the development of foreign investment are analyzed.

Empirical results and discussion

Foreign investments are valuables invested by foreign investors into the objects of investment activity with the aim of obtaining profit or achieving a social effect. Classification of foreign investments is carried out based on a number of features, in particular, by the object of investment, form of ownership, period, investment goals and other criteria. Most often, foreign investments are classified according to the degree of control over the object of investment, namely, portfolio and direct. At the same time, foreign direct investment is a more desirable form of attracting foreign capital for the recipient country, because unlike portfolio investments, they have a significant long-term impact on the host country's economy and play the role of a key element of international economic integration.

Having analyzed the main FDI trends in the world, in particular in recent years, it can be concluded that the dynamics of FDI depends on other world trends, as well as economic and political shocks in different countries of the world. Debt instruments are prevalent in the structure of instruments of foreign investments of investor countries, and the sectoral structure of investments is dominated by the secondary sector, that is, manufacturing of goods. The sectoral structure of FDI in the world confirms the conclusion regarding the dependence of FDI on other global trends. The dynamics of foreign direct investment in Ukraine is shown in the Table 1.

In general, Ukraine is a net recipient of the FDI, which is mainly consists of equity instruments, and is directed into the real sector of the economy.

The years of 2014 and 2020 are characterized by capital outflow and a decrease in absolute income growth. Such trends are due in particular to the beginning of Russia's armed aggression against Ukraine (occupation of a part of the territories of the Donetsk and Luhansk regions and the annexation of Crimea). Also, political instability in the state was observed in 2020, which causes the outflow of capital and the exit of foreign investors from the market.

The analysis of the data of the State Statistics Service of Ukraine also allows us to draw a number of conclusions. The main industries that received financing from foreign investors during 2002-2021 were: supply of electricity, gas, steam and air conditioning, financial and insurance activities, as well as information and telecommunications industries. Among the regions, Poltava and Mykolaiv regions received the largest share of foreign investments, while the city of Kyiv continues to attract the lion's share of the FDI. The leaders by the FDI inflows are Switzerland, the United Kingdom, Sweden, Turkey and Austria, however, in absolute terms, investment inflows from Turkey and Sweden had a significant increase compared to the previous year. The predominance of financial centers among the FDI countries of origin indicates that a large part of the FDI does not actually originate from these countries, instead, funds are taken abroad by Ukrainian enterprises and returned to Ukraine in the form of the FDI.

Table 1

Foreign direct investment in Ukraine from 2002 to 2022 (million USD)