Investment potential of ukraine: current state and prospects

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Investment potential of ukraine: current state and prospects

Korsun I., Kyiv National University of Construction and Architecture,

Slynko M., Cherkasy State Technological University)

Introduction

According to Article 1 of the Constitution of Ukraine, Ukraine is a sovereign independent, democratic, social, and law-bound state (Constitution of Ukraine, 1996). Ukrainian citizens abide by and accept European laws, which guarantee the right to defend human dignity and liberties, the right to self-identification, the right to high-quality education, medical support and social security. Considering the aforementioned information, it can be concluded that the government of Ukraine diligently strives to support a new Ukrainian vector of development related to European integration. The government achieves this goal by adopting new specialized laws, implementing new social and economic reforms, European living standards etc. investment potential european law

We believe that ensuring the development of Ukraine related to European integration is possible only by committing to the principles of a social-oriented market economy. This economy can be primarily characterized by a clear legal basis, a lack of shadowy dealings on the labor market (fair wages), the development of socially responsible medium-sized enterprises, an efficient taxation system that positively affects national budget income, positive investment environment. The investment environment is a very important variable in evaluation of consistency of economic growth (GDP, GNP, HDI), as well as effectiveness of implemented reforms and efficiency of legal system.

Investment resources are also very important as the primary driving power for uniting the global capital resistant to global challenges of the modern world. Taking into the account the aforementioned information, we believe it necessary to describe the current state of the investment potential of Ukraine as EU candidate country, as well as its growth prospects.

Presenting main material. During our research of the investment potential of Ukraine, we have analyzed scientific works of both foreign and domestic scientists. In this regard, we would like to highlight a substantial contribution of Ukrainian scientists related to research of both the investment environment and investment potential of Ukraine. All of these researches, as well as their results, are based on the experience of European partners and scientists.

Foreign scientists, such as Gitman L.J. and John M.D., (Gitman L.J. and John M.D., 1997), William C. Sharpe (William C. Sharpe, 1998, p. 2-16), have studied nationwide factors which affect development of regional investment environment. For example, in his research related to the functionality of investment environment Blank I. A. (Blank I. A., 1995), distinguishes several types of factors of influence on three levels: macroeconomical, mesoeconomical and microeconomical. Scientist notes that many factors that are considered a part of the “investment environment” are not taken into consideration on the regional level. Those are political, legal, inflationary factors, etc.

Domestic scientists, such as Nechitailo U.P., structurize these factors on the basis of both domestic and foreign definitions of key categories of investment process, as well as research modern approaches for description of investment potential. They also define a connection between related definitions, such as “investment potential”, “investment resources”, “investment climate”, and “investment attractiveness” (Nechitailo U.P., 2010, p. 25-29).

Professor Shabliy O. I. has carried out a complex analysis of the “investment potential” and grouped up all modern descriptions of this definition by three parameters: owner (host), property, relation (Shabliy O. I., 1999, p. 104). In addition, a number of domestic scientists dedicate their research to the investment potential of Ukraine in relation to other branches of the economy. For example, professors Lutsiv B. and Stechyshyn T. (Lutsiv B. L., Stechyshyn T. B., 2009, p. 67-77) research investment attractiveness of banking system; Kucheruk G. and Vovk O. (Kucheruk G.Yu., Vovk O.M., 2008, p. 6-7) conduct research in order to justify complex evaluation of investment potential of Ukrainian aircraft enterprises. Another trending line of research in Ukraine is investments in human capital as a prerequisite for economic modernization. The main topics of research are dynamics, structure and problems of investment in the social infrastructure of Ukraine. Scientists of M. V. Ptukha Institute of Demographics and Social Studies greatly contribute to this research. With Ella Libanova as its leader, the team consists of Panchyshyn T. V., Hvozdyk N. M., Novikova V. M., Kariahin Yu. O., Hvelesiani A. H. and others (Institute of Demographics and Social Studies of M. V. Ptukha, 2022).

Taking into account modern European trends, as well as domestic circumstances, we believe it necessary to go further with scientific research related to improving the investment potential of Ukraine during post-war reconstruction.

The methodological framework of this article includes theoretical definitions of financial science and scientific research of both domestic and foreign scientists. We have used the following methods of research writing: logical and historical methods for analysis of scientific approach used to define the meaning of investment potential; statistical, analysis, synthesis, grouping and generalization methods for analysis of volumes and structure of direct foreign investments in Ukrainian economy during 2015-2022, dynamics of these investments, their percentage in GDP. Another important aspect is the structure of direct investments in general, which can be divided into different categories: by type of economic activity, %; direct foreign investments of EU countries in 2022, GDP % etc. Methods of induction, deduction and analogy were used to define ways to improve the investment climate of Ukraine while taking into account the best practices of the EU.

We have used the Constitution of Ukraine, the Customs Code of Ukraine, the laws of Ukraine, data from the Ministry of Economics of Ukraine, Ministry of Justice of Ukraine, as well as statistical data from the National Bank of Ukraine, Office for National Statistics of Ukraine and OECD as data sources for our research. Firstly, it is important to note that the government of Ukraine is interested in improving its investment potential. Thus, in collaboration with the government and the Ministry of Economics, the parliament of Ukraine has developed and adopted numerous laws for regulating investment activities in Ukraine. Examples of such laws are the law of Ukraine No.1560-XII from 18.09.1991 “Of investment activities” [3], the law of Ukraine No.1540a-XII from 10.09.1991 “Of protection of foreign investments in Ukraine” [4], the law of Ukraine No.93/96- ВР from 19.03.1996 “Of modes of foreign investments” [5], the law of Ukraine No.№ 1116-IX from 17.12.2020 “Of state support of investment projects with great investments in Ukraine” [6].

This allows us to conclude that from the moment of the declaration of independence of Ukraine in 1991, the government has dedicated its effort to open the economy to foreign partners, foreign trade and international cooperation in the best way possible. In terms of economic development of independent Ukraine, however, there were numerous political, economic and social obstacles. These obstacles have adversely affected the investment climate of Ukraine. For this exact reason, there have been no great foreign investments.

We will now analyze volumes of direct foreign investments to domestic economy by using data from table 1.

Table 1

Volumes of direct foreign investments to domestic economy by 2015 - 2022 рр.

Source: compiled by the author based on data from the National Bank of Ukraine https://bank.gov.ua/ua/statistic/sector- external#5

Table 1 contains data related to direct foreign investments in the Ukrainian economy from year 2015 to year 2022. At first, we can see that with a value of 3-3,5 billion US dollars in 2015-2016 these investments were at their peak compared to all 7 years. The great majority of these investments came as capital participation instruments, while debt instruments have negative value.

Throughout 2017-2019, the total value of direct investments slightly dropped compared to 2015-2016. Total amount of investments was evaluated as 2,2-2,7 billion US dollars. During this time, however, the structure of these direct investments has stabilized. 65% of them came as capital participation instruments, while the rest 30-35% came as debt instruments.

The COVID-crisis of 2019 has adversely affected volumes of direct foreign investments, leading to a noticeable reduction from 2,8 billion US dollars to 452 million US dollars in 2020. The situation with the spreading of COVID-19 has stabilized to a certain degree in 2021, allowing the world economy to gradually return to its previous levels. Foreign partners resumed their investment activities and began investing into Ukraine on a pre-crisis level. Total amount of these investments was 2,4 billion US dollars. An interesting observation is that the value of both capital participation instruments and debt instruments invested in the Ukrainian economy was equalized (50:50).

However, the escalation of conflict with Russia followed by a full-scale war against the independence and territorial integrity of Ukraine has negatively affected the economy and investment climate of Ukraine. This resulted in reduction of direct investments from 2,4 billions of US dollars to 230 million of US dollars with a negative value of debt instruments. Total amount of direct foreign investments from 2010 to 2022 is 43,8 billions of US dollars. 84% of these investments came as capital participation instruments.

It should also be noted that the domestic economy alongside with the enterprises are negatively affected by a lack of foreign investments. According to picture 1, the percentage of direct foreign investments in the current-price GDP of Ukraine is very low and has lowering dynamic. The percentage of investments in 2015-2016 was 3,4-3,7% of GDP and even then it tended to lowering. In 2019 this percentage lowered to 1,8%, and in 2022 it reached the value of 0,14%.

Fig. 1. Dynamics of the volume of direct investments in Ukraine and their share in GDP,%

Source: compiled by the author based on data from the National Bank of Ukraine https://bank.gov.Ua/ua/statistic/sector-external#5

By analyzing the dynamic shown on picture 1, we can conclude that such low amounts of foreign investments is insufficient. The Ukrainian government and other state authorities strive to create an appropriate environment for good investment climate. These attempts are reflected in creation of a legal basis for protection of investors, establishing cooperation with European partners, rooting out corruption etc. For example, in 2021 the government has adopted National Strategy for Increasing Direct Foreign Investments. This strategy was created in cooperation with USAID as part of the Program for Improving the Competitiveness of the Ukrainian Economy [12]. The aforementioned Strategy for Increasing Direct Foreign Investments (hereinafter referred to as “Strategy”) consists of three plans: operation plan, legislation plan and communication plan.

The Strategy itself is aimed at improving separate branches of the economy, namely: transportation infrastructure; power supply; digital infrastructure; high-tech manufacturing; high-cost agriculture.

The aforementioned branches are considered the most productive and lucrative. The following types of economic activities receive the most direct investments: industry (mining industry and quarry mining; processing industry; metallurgy and manufacture of fabricated metal products); agriculture, forestry and fishery; wholesale and retail trade; automotive maintenance; financing activity and insurance.

We will now analyze the structure of direct investments in Ukrainian economy in 2021 by types of economic activity. Table 2 illustrates these data.

Table 2

The structure of direct investments in Ukraine: by types of economic activity, %

Source: compiled by the author based on data from the National Bank of Ukraine https://bank.gov.ua/ua/statistic/sector-external#5

According to this table, we can conclude that direct investments in the Ukrainian economy have the following structure by types of economic activity: 55% of these investments go into industry. Specifically, 23% are invested in mining industry and the rest 25% -- in processing industry. On its own, processing industry is based on metallurgy and manufacture of fabricated metal products. 15,41% go into agriculture, forestry and fishery; wholesale and retail trade combined with automotive maintenance receive 8,97%, while 8,81% go into financing activity and insurance.

Among the chief investing countries are: Cyprus with 31,7% of total investments; the Netherlands with 21,6% of total investments; Switzerland with 5,8% of total investments; Great Britain with 4,6% of total investments; Germany with 4,6 % of total investments; Austria with 3% of total investments; Luxembourg with 2,4% of total investments and France with 2% of total investments. In order to better display the Ukrainian investment potential, the government of Ukraine in cooperation with the President of Ukraine and European partners has created the investment platform called “Advantage Ukraine”. This platform was first presented at the stock market of New York in 2022. Today this platform is actively in use and functions as a hub for both domestic and foreign investors.

There is also a list of investment-worthy branches of economy available on the Advantage Ukraine platform. The following branches from this list have pre-calculated investment potential [15]:

military-industrial complex with an investment potential of 43 billion US dollars and more than 10 projects for investment.

metallurgy and metal processing with an investment potential of 26 billion US dollars and more than 20 projects for investment.

agro-industrial complex with an investment potential of 34 billion US dollars and more than 300 projects for investment.4. power supply with an investment potential of 177 billion US dollars and more than 50 projects for investment.5. pharmacology with an investment potential of 19 billion US dollars and more than 30 projects for investment.6. natural resources with an investment potential of 5,6 billion US dollars and more than 10 projects for investment.7. logistics and infrastructure with an investment

potential of 123 billion US dollars and more than 30 projects for investment. 8. furniture and wood processing with an

investment potential of 5 billion US dollars and more than

40 projects for investment. 9. innovative technologies

with an investment potential of 11 billion US dollars and more than 2000 startup projects for investment. 10. industrial

manufacturing with an investment potential of 16 billion US dollars and more than 20 projects for investment.

To further motivate strategic foreign investors, new industrial estates have been created to improve investment attractiveness of Ukraine. As of 2023, there is 61 industrial estate in Ukraine. Examples of such industrial estates are The First Ukrainian Industrial Estate, Vinnytsia industrial estate, INNOVATION FORPOST, Eco-smart industrial estate “HALIT”, BIONIC Hill and others. Running an enterprise or investing into industrial estates confers a number of advantages, for instance: exemption from VAT from all operations related to the import of new equipment to customs territory of Ukraine; exemption from income tax for the duration of 10 years; according a right to the local government authorities to establish a favorable tax rate for immovables and land. According to the Customs Code of Ukraine, new equipment is exempt from customs duty if it is explicitly imported for personal use of industrial estate users in the branch of processing industry or for scientific research within the industrial estate (without rights related to leasing).

Another effective way of encouraging investments in the domestic economy is public private partnership. In our opinion, there are many important branches in domestic economy, which require additional investments, primarily education and health care. The aforementioned type of cooperation can increase human capital investments. We believe it to be one of the most important instruments among the existing ones.

In our article, we have analyzed the dynamics of investments in the domestic economy from 2015 through 2022. We believe total amount of investments to be lacking since their value has never exceeded 3% of GDP. Contrary to the Ukrainian economy, the amount of direct foreign investments is much higher in EU countries. For example, in 2022 this amount was 27% of GDP in Germany, 48% of GDP in Lithuania, 39% of GDP in Poland, 35% of GDP in Slovenia, 22% of GDP in Turkey, with a total of 71% of GDP in the EU. These values are illustrated on picture 2. The aforementioned values of direct foreign investments into EU countries can be considered a standard of comparison for Ukraine.

Fig. 2. Foreign direct investment to the countries of the European Union in 2022, % of GDP

Source: compiled by the author based on resource: https://www.oecd.org/ investment/statistics.htm

Having analyzed European investment practices, we would like to highlight scientific research of domestic scientist of the Alfred Nobel University of Dnipropetrovsk Anatoliy Zadoia (Zadoia A.O., 2018, p. 73-79). A. Zadoia explains that the volume of direct foreign investments in EU countries closely correlates with economic growth, mainly with GDP per capita. According to the scientist, the correlation coefficient between these two values equals 0,78. This allows for confirming a very strong connection between each individual country's level of development and activities of foreign investors.

Conclusions

By analyzing the results of our research related to the current state and future prospects of the investment potential of Ukraine, we can establish that the domestic economy currently undergoes many difficulties caused by Russia's military aggression. In the future, Ukraine will have to face other difficult stages, from post-war reconstruction to political and social reforms. Starting from 2019, the Ukrainian government has begun actively launching platforms to attract foreign investors. A good example is the active platform “Advantage Ukraine”. In addition, numerous modern industrial estates with favorable tax treatment are being created.

It is also necessary to highlight the active support of the Polish government related to the development of the investment potential of Ukraine through close economic cooperation. Several bilateral agreements have been signed between Poland and Ukraine as a result of the aforementioned cooperation. Those agreements are: Mutual declaration signed between the Polish Ministry of Funds and Regional Politics and the Ukrainian Ministry of Community and Territorial Development; Mutual declaration signed between the Polish Ministry of Internal Affairs and Ukrainian Ministry of Internal Affairs related to improvement of cooperation between border police; Memorandum on cooperation between the Polish Ministry of Energy and Ukrainian Ministry of Energy related to improvement of cooperation in the energy branch; Memorandum on creation of the Polish-Ukrainian commission for cooperation between Polish- Ukrainian enterprises.

Our research proves that Ukraine strives for improvement of its investment potential. The main driving force behind the success of such endeavor is the will for quality changes, positive results obtained from economic, cultural and diplomatic relationships with partner countries, as well as efforts of talented youth and students. With great support coming from both the USA and EU, Ukraine will continue to defend its independence and territorial integrity while protecting European democratic principles.

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