Economic Update
The visit of Prime Minister Victor Yanukovych to the US this week, his first since taking up the post in August, has once again put the spotlight on foreign direct investment (FDI) into Ukraine.

During a meeting at the Centre for Strategic and International Studies, Yanukovych gave assurances that the country was open to foreign investors and is driving through political and economic reforms. “We will not abandon the path we have chosen, the path of democratic market transformations,” he said, further indicating to the foreign business community that his government is focussing on judicial reform, increasing transparency and is working to develop the stock market and improve regulation, all areas which potential investors have asked the government to address.

Foreign direct investment into Ukraine continued to grow in 2006, reaching $3.07bn by the end of September, a threefold increase on the same period last year. Estimates for the year-end figure range from $4bn to $6bn. According to figures released by the economy ministry, the total volume of FDI into Ukraine following the opening up of the country to outside investment had reached $19.9bn by October 2006.

Foreign banks have continued to show great interest in Ukraine, with a report from the State Statistics Committee published on November 15 showing the main areas of interest for foreign investors in the year to date to be the financial sector ($993.9m), industry ($703.2m) and real estate ($385.3m). The purchase of Ukrsotsbank by Banca Intesa of Italy is due to be completed by end 2006 or early 2007.

Other major investments this year have included the start of construction of a $50m electronics plant by American firm Jabil, due for completion in early 2007. The project will include investment in local infrastructure and will offer significant employment opportunities. Also in the field of electronics, American company Tyco has been allocated land near Ivano-Frankivsk where it will invest $66m in a cable and components plant due for completion in 2009.

Although the total volume will not be comparable to levels seen in 2005, with the unprecedented scale of the privatisation of Kryvorizhstal and the sale of Bank Aval to Raiffeisen, which took the total volume of FDI to $7.6bn, the figure represents a measure of confidence among investors in the potential for growth.

The majority of interest in 2006 was from European investors, with the bulk of funds flowing into the country from France ($676m), Cyprus ($554.3m), the Netherlands ($433.9m), Great Britain ($350.3m), Austria ($221.4m) and Germany ($198.6m).

The European Business Association (EBA) predicts continued strong interest in 2007 with a forecast of $4bn to $5bn worth of investment. At a recent EBA investment forum in London it was noted that at present investors are more concerned about the practical aspects of conducting business in Ukraine, rather than the business climate. Despite this, indications of future investment opportunities were given, with around 900,000 sq metres of offices and industrial premises scheduled for completion in the centre of Kiev alone in 2007.

This month will also see the government host the first National Exhibition and Conference in the United States. The exhibition will showcase 50 Ukrainian companies from the aerospace, mining, metallurgy, machine building, chemicals, food processing,
light industries, consumer goods and IT sectors. The conference will highlight the availability of skilled and educated labour together with the proximity to European markets.

Meanwhile on December 4, the government announced that a proposal to re-open free economic zones has been dropped from tabled legislation. This followed pressure from President Viktor Yushchenko who has indicated that re-establishment of the zones could lead to a similar lack of transparency in the operation of businesses, which led to the closure of previous zones. The zones typically provide tax-breaks and investment incentives to businesses and are welcomed by many foreign investors. The cabinet will now vote individually on each zone, rather than including them all as part of the draft budget.

In 2007 analysts consider it likely that movement in the banking and real estate sectors will continue, together with an upsurge in interest in the retail sector. The anticipated membership of the WTO in February 2007 will also demonstrate that business reforms have been pushed through and raise the profile of Ukraine as a destination for investment.