"Within one month our revenues had jumped over 50%."

Doing Business in Ukraine

business in Ukraine

The Ukranian economy has come a long way, ever since the dissolution of the Soviet Union. It has gone through serious ups and downs in the past two decades, and continues to face challenges in the future. However, the Ukranian economy holds a good amount of potential providing that its government takes proper policy measures in the future. Does this mean that business in Ukraine is thriving? There are still current issues policy issues in the economy that could hinder growth in the future. According to a report by the US embassy in Ukraine, Ukraine could again be placed on the Priority Watch List of countries violating intellectual property rights, which is compiled by the U.S. Chamber of Commerce, if the country fails to take urgent measures to fight such violations. Despite all this, Ukraine’s economy is still grew by around 3.5% in 2010. So clearly there are some strong drivers of growth in the Ukrainian economy.

Business in Ukraine and The Economy

The Ukranian economy has a strong technological base that is growing rapidly, probably a legacy of its Soviet past. Since, the Soviet Union engaged in a large amount of technological research in the Ukranian and Russian SSRs. According to an analysis by Microsoft, the Ukranian IT sector was bigger than the IT sectors of all other Central and Eastern European countries in 2007, and was growing at some 40 percent. Ukraine also has a very large heavy-industry base and is one of the largest refiners of metallurgical products in Eastern Europe. Ukraine is relatively rich in natural resources, particularly in mineral deposits. Although oil and natural gas reserves in the country are largely exhausted, it has other important energy sources, such as coal, hydroelectricity and nuclear fuel raw materials. The country is also well known for its production of high-technological goods and transport products, such as Antonov aircraft and various private and commercial vehicles.

There are also other sectors of the economy that hold potential for growth. The tourism industry has been one of the consistent bright spots in the Ukranian economy, with the  World Tourism Organisation ranking Ukraine in 8th place in Europe in terms of number of tourists visiting on an annual basis. Agriculture is another similarly bright spot, since Ukraine possesses 30% of the world’s richest black soil, its agricultural industry has a huge potential. According to agricultural consulting firm UkrAgroConsult, Ukraine is the world’s largest producer of sunflower oil, a major global producer of grain and sugar, and future global player on meat and dairy markets. It is also one of the largest producers of nuts and also produces more natural honey than any other European country, according to commodities statistics site Faostat. As a result, the Ukrainian agricultural industry is highly profitable, with some farms running a profit margin of  40-60% profits. Furthermore, in an article by the New York Times, agricultural analysts said that there is still potential for agricultural output to rise by up to fourfold.   However, farmland remains the only major asset in Ukraine that is not privatized, hampering access to international investments and best farming technology. Which brings us to some of the problems that businesses should consider, when investing in Ukraine.

Swinging Economy Takes Toll on Business in Ukraine

The Ukranian economy has posted very uneven growth rates in the past two decades. Ukraine’s economy contracted severely following the years after the Soviet dissolution. For example, the economy went through such strong contractions in growth that for the year 1993, Ukraine holds the world record for inflation in one calendar year. Prices stabilized only after the introduction of new currency, the Hryvnia, in 1996. In the meantime, by 1999, the GDP had fallen to less than 40 percent of the 1991 level according to the CIA World Factbook, but recovered to slightly above the 100 percent mark by the end of 2006. In the early 2000s, the economy showed strong export-based growth of 5 to 10 percent, with industrial production growing more than 10 percent per year.  However, Ukraine was hit by the economic crisis of 2008 and in November 2008, the IMF had to approve a stand-by loan of $16.5 billion for the country. In addition, Ukraine currently faces a number of major public health issues, and is considered to be in a demographic crisis due to its high death rate and low birth rate (the Ukrainian birth rate is 10.8 births/1,000 population, and the death rate is 15.2 deaths/1,000 population for the year 2010). According to the CIA World Factbook, in 2008, the country’s population was one of the fastest declining in the world at ?5% growth. Which means that there is a shrinking market for goods, and a shrinking labor force to produce more goods.

Then there is the issue of poor governance, with poor governance and taxation causing the rise of a huge shadow economy. For example, according to Interfax Ukraine, Ukrainaian politicians estimate that 40% of the economy is in fact a shadow economy. While Ukraine encourages foreign trade and investment and the Parliament of Ukraine has approved a foreign investment law allowing Westerners to purchase businesses and property, to repatriate revenue and profits, and to receive compensation if the property is nationalized by a future government; the overall foreign direct investment in Ukraine has been relatively low. Since, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts, and corruption all continue to stymie direct large-scale foreign investment in Ukraine. While there is a functioning stock market, the lack of protection for shareholders’ rights severely restricts portfolio investment activities. In fact, according to statistics published by the Ukranian government, as of April 2011, the total foreign direct investment stock in Ukraine stood at a paltry $44.7 billion.

Overall, Ukraine as a place to invest seems promising, only if you are willing to take some risks. But for the average small business or investor, Ukraine is still a very rough place to invest and not somewhere where it would be easy to build market share. If you are still interested in learning more about investing in Ukraine, the State enterprise InvestUkraine was created under the State Agency for Investment and National Projects, to serve as a one stop shop for investors and to deliver investment consulting services. You can visit their website at this url. (http://investukraine.com/)

-Jay Zadey

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Author:Globial International Business Team

The Globial International Business Team researches, analyzes, and reports on all things related to global trade and business.

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