Business
Valentin Katasonov
December 14, 2013
© Photo: Public domain

Street demonstrations in small areas of central Kiev and the delicacy with which the authorities are dealing with the subject of who created this chaos in the country’s capital city at some point overshadowed the infinitely more serious situation, namely: considered objectively, and in view of existing trade links and cooperation ties, Ukraine is expanding to the East rather than the West. And the same applies to a financial and economic sphere like investment…

* * *

In 2012, the share of CIS countries in Ukrainian exports consisted of 36.8 percent, while the share of just three Customs Union members – Russia, Belarus and Kazakhstan – amounted to 33.4 percent. The whole of the European Union, meanwhile, made up just 24.8 percent of Ukrainian exports. In terms of Ukrainian imports, the share of CIS countries in 2012 was even higher at 40.7 percent, and virtually all of these imports (40.6 percent) came from Customs Union members. The share of the European Union as a whole amounted to 30.9 percent. 

Ukraine’s main trade and economic partner was, and still is, the Russian Federation. All other countries, including Germany and other EU countries, are lagging behind Russia in terms of the volume of foreign trade turnover with Ukraine many times over. In 2012, Germany made up just 8 percent of Ukrainian imports, i.e. four times less than Russia. It is interesting that despite all the calls for «European elections», Russia’s share in Ukraine’s foreign trade turnover has continued to grow in recent years, rather than fall. Between 2009 and 2012, Russia’s share in Ukrainian exports grew from 21.4 percent to 26.5 percent, and in Ukrainian imports from 29.1 percent to 32.4 percent. 

The main argument used by ideologists of European integration is usually the foreign investment that is allegedly going to come from Europe and breathe new life into the Ukrainian economy. This argument is more than a little strange. Firstly, because for many years now foreign investors have not really faced any kind of formal restrictions for investing in the Ukrainian economy. Despite this, however, such investment has not been forthcoming. After all, it is easier to conquer Ukraine economically using goods rather than investment. Secondly, because the policy of attracting foreign investment carried out by Kiev has still not improved the country’s economic situation even a little. It is possible that it has even made the situation worse. Let me try and show this in numbers. 

* * *

One can find the general picture of Ukraine’s involvement in international investment exchange (the export and import of capital) in the country’s balance of payments, which is put together and published by the National Bank of Ukraine. Table 1 below shows every type of cross-border investment – direct, portfolio and other. You will recall that direct investment refers to those investments that give the investor control over the investment (the acquisition of more than 10 percent of the capital stock); portfolio investments only give the right to receive investment income (dividends, interest, rent) without effective control of the investment (less than 10 percent); and other investments cover various loans and credit lines (loanable funds). 

For many years now, the Ukrainian authorities have continuously proclaimed a policy aimed at stimulating foreign investment. They have also taken decisions which in effect have been conducive to the investment of foreign capital in the country. First of all, all foreign exchange restrictions on the cross-border movement of capital were abolished. In addition, the National Bank of Ukraine carried out, and is still carrying out, a policy to keep its national currency – the hryvnia – undervalued. In comparison with the purchasing power parity, the hryvnia’s exchange rate is undervalued by a factor of two, according to some estimates. With an undervalued national currency, it is cheaper for investors with reserve currencies like the US dollar and the euro to acquire assets in the country of investment. 

Table 1.

Ukraine’s participation in international investment exchange (the import and export of capital), millions of dollars

 

2000

2005

2008

2009

2010

2011

2012

 

Direct investments

 

Import

595

7808

10913

4816

6495

7207

7833

 

Export

-1

-275

-1010

-162

-736

-192

-1206

Surplus

594

7533

9903

4564

5759

7015

6627

Portfolio investments

 

Import

142

2757

-1292

-1551

4334

1605

4754

 

Export

-4

0

12

-8

-17

-48

-72

Surplus

138

2757

-1280

-1559

4317

1557

4682

Other investments

 

Import

-869

5453

27568

2867

10609

8017

2998

 

Export

-883

-7913

-22884

-10822

-10748

-9883

-8999

Surplus

-1752

-2460

4684

-7955

-139

-1886

-6001

All types of investment

 

Import

-132

16018

37189

6132

21438

16829

15585

Export

-888

-8188

-23882

-10992

-11501

-10123

-10277

Surplus

-1020

7830

13307

-4860

9937

6686

5308

An analysis of the data in Table 1 allows the following conclusions to be made: 

1. Since the mid-2000s, the influx of foreign investment into Ukraine has risen sharply in comparison with the turn of the century. Moreover, variations in the annual influx of foreign capital intended for Ukraine are quite considerable. In 2012, for example, the influx of all types of foreign investment was 2.4 times lower than in 2008, while the volume of other investments (loanable funds) in 2012 proved to be nine times lower than the 2008 level. Dramatic differences like these have had an adverse effect on the balance of payments, the hryvnia’s exchange rate and the general economic situation of the country. 

2. The structure of capital imports has changed in terms of types of investment. Direct and «other» investments have headed the list of foreign investments by turns. Altogether, over the five-year period from 2008-2012, investments to the tune of USD 97.3 billion were injected into the Ukrainian economy. The total amount of direct foreign investment injected into the Ukrainian economy over the period from 2008-2012 equalled USD 37.3 billion (38 percent of all foreign investments), portfolio investments amounted to USD 7.9 billion (8 percent) and other investments totalled USD 52.1 billion (54 percent).

3. In some years, the repatriation of foreign capital from Ukraine can be observed for some types of investment. This repatriation sometimes looked like a flight of capital from the country. During the global financial crisis, for example, there was no influx of portfolio investments into the country; on the contrary, foreign portfolio investors withdrew their capital from abroad. Over the course of two years, USD 2.84 billion of portfolio investments was repatriated. 

4. In some years, even the temporary positive impact of an influx of foreign capital on the balance of payments was neutralised by the export of capital from the Ukrainian economy. Over the period from 2008-2012, the withdrawal of capital from Ukraine amounted to USD 66.7 billion, so more than two thirds relative to the amount of foreign capital invested during the same period. In 2009, the withdrawal of capital even exceeded its import, resulting in a negative balance on capital transactions (USD -4.9 billion). In fact, the withdrawal of capital from Ukraine exceeds the amounts shown in the capital transactions section of the country’s balance of payments – this statistic does not take account of the various types of illegal capital export. The export of capital from the country in the form of other investments is being carried out particularly aggressively (USD 40.5 billion over the period from 2008-2012). A significant proportion of the exported capital was headed for offshore tax havens or countries with the characteristics of offshore territories (Cyprus, Switzerland, Lichtenstein, the Netherlands and others). Ukrainian authorities were unable – or did not want – to cut off the channels of capital flight from the country. 

* * * 

A peculiarity of loanable funds («other investments») is that they are only ever in a country temporarily; the investor’s presence in the country comes to an end after the debtor’s obligations have been paid. An exception is cases when a debtor is unable to pay his liabilities, in which case the creditor may become the owner of the assets that served as collateral (shares are the most commonly-used collateral). The creditor may also become the co-owner of the financed company. There have been plenty of cases like these in Ukraine in recent years, where creditors have become the co-owners or even the full owners of Ukrainian companies. As far as direct investments are concerned, they involve the investor’s full or partial right of ownership to the company’s assets. Let us use the figures provided by the State Statistics Service of Ukraine. As can be seen from Table 2, accumulated direct foreign investments by way of equity participation in Ukrainian companies and organisations have increased continuously. Over the period from 1995-2013 (19 years), their volume increased by 113 times (!) Accumulated investments totalling USD 50.3 billion at the end of 2012 make for a rather substantial sum. For comparison, it should be noted that according to the State Statistics Service of Ukraine, in 2012 the country’s gross domestic product in foreign currency equivalent equalled USD 176 billion. In other words, accumulated direct investments made up 28.5 percent of GDP. 

The growth of direct foreign investments has even continued in 2013. As at 1 October 2013, accumulated direct investments in the form of equity investment had reached USD 56,566 million – an increase of USD 2.1 billion since the beginning of the year, or 3.8 percent. 

It should not be supposed, however, that the acquisition of shares in the Ukrainian economy by foreign investors is necessarily due to the transfer of foreign currency from abroad. At present, most of the acquisitions by foreign investors are being carried out through the reinvestment of revenue they receive from previously-made investments in the Ukrainian economy. Foreign investments like these are not improving the state of Ukraine’s balance of payments. 

Table 2.

Accumulated direct investment in Ukraine and from Ukraine (at the beginning of the year; millions of US dollars)

Year

Accumulated direct investment in Ukraine

1995

483.5

1996

896.9

1997

1438.2

1998

2063.6

1999

2810.7

2000

3281.8

2001

3875.0

2002

4555.3

2003

5471.8

2004

6794.4

2005

9047.0

2006

16890.0

2007

21607.3

2008

29542.7

2009

35616.4

2010

40053.0

2011

44806.0

2012

50333.9

2013

54462.4

* * *

It is important to know the sectoral priorities of direct investors in the Ukrainian economy. As can be seen from Table 3 (information from the State Statistics Service of Ukraine), the main focus of direct foreign investment is Ukraine’s financial sector, which accounts for one third of all investments. Financial activities, together with trade and real estate transactions, account for 55.2 percent of all accumulated direct investments. These are types of activity that do not create social wealth, just redistribute it. High-tech manufacturing attracted a certain amount of foreign capital in the 1990s. Investors did not so much buy up businesses for a song as the advanced technologies that had been created or implemented by these businesses in Soviet times. Incentives for Western investors to invest in industrial enterprises fell noticeably after Ukraine joined the WTO. Customs barriers were reduced dramatically and it became more profitable to supply Ukraine with goods from more competitive countries than export capital to set up the manufacture of these goods in Ukraine itself. 

Table 3.

The structure of accumulated direct foreign investment in the Ukrainian economy by sector and activity type on 01.01.2012

Sectors and activity type

Share, %

Total:

100

Agricultural sector

1.6

Manufacturing industry

30.9

Construction

6.1

Transport and communications

3.8

Automobile trade and repair

10.5

Finance

33.1

Real estate transactions

11.6

Other sectors and activity types

1.4

The State Statistics Service of Ukraine and other organisations do not provide information on the share of foreign investors in the equity capital of individual sectors. An exception to this is the economy’s banking sector. According to the National Bank of Ukraine, the share of foreign capital in the authorised capital of banks grew from 19.5 percent in 2006 to 41.9 percent in 2012. At the beginning of 2012, 176 banks were operating in Ukraine including 53 banks with foreign capital, 21 of which were wholly owned by foreign investors, and in 20 of which investors owned more than 90 percent of the capital.

* * *

The geographical structure of direct investments in the Ukrainian economy is worthy of particular attention. As can be seen from Table 4, Cyprus ranks first among the countries of origin of foreign investments. It is possible to assume with a reasonable degree of certainty that Ukrainian individuals and companies are behind these Cypriot investments. Besides, after the well-known events in Cyprus (the confiscation of deposits in Cypriot banks in March 2013), one could also assume that Cyprus’ position as a country of origin of foreign investments is only going to worsen. In the list of countries exporting capital to Ukraine, we can also see a number of jurisdictions with the features of offshore zones: the Netherlands, the Virgin Islands and Belize. 

Table 4.

The structure of accumulated direct foreign investment in the Ukrainian economy by country of origin (on 01.10.2013)

Countries

Millions of dollars

Share of total, %

Total:

56565.2

100.0

including:

 

 

Cyprus

18712.0

33.1

Germany

6194.8

11.0

the Netherlands

5504.0

9.7

Russia

3842.1

6.8

Austria

3216.4

5.7

Great Britain

2724.4

4.8

British Virgin Islands

2452.4

4.3

France

1843.0

3.3

Switzerland

1277.5

2.3

Italy

1259.0

2.2

Belize

1036.6

1.8

USA

985.8

1.7

Poland

831.8

1.5

Other countries

6685.4

11.8

In terms of cumulative equity investments in Ukrainian companies, Russia currently occupies fourth place after Cyprus, Germany and the Netherlands. This is primarily Russian companies that supply Ukraine with natural gas, oil and oil products. It also includes Russian businesses that have long-established manufacturing links with Ukraine from Soviet times, including defence companies and certain unique industries. Russian banks also hold relatively strong positions in Ukraine. Foreign capital in the Ukrainian banking system is represented by 26 countries, and the largest foreign investors in terms of the amount of equity held in Ukrainian banks are Russia (19 percent), Cyprus (14 percent), the Netherlands (12 percent), Austria (9 percent) and France (7 percent).

(To be concluded…)

The views of individual contributors do not necessarily represent those of the Strategic Culture Foundation.
Ukraine: The Myth of its Salvation through Western Investment (I)

Street demonstrations in small areas of central Kiev and the delicacy with which the authorities are dealing with the subject of who created this chaos in the country’s capital city at some point overshadowed the infinitely more serious situation, namely: considered objectively, and in view of existing trade links and cooperation ties, Ukraine is expanding to the East rather than the West. And the same applies to a financial and economic sphere like investment…

* * *

In 2012, the share of CIS countries in Ukrainian exports consisted of 36.8 percent, while the share of just three Customs Union members – Russia, Belarus and Kazakhstan – amounted to 33.4 percent. The whole of the European Union, meanwhile, made up just 24.8 percent of Ukrainian exports. In terms of Ukrainian imports, the share of CIS countries in 2012 was even higher at 40.7 percent, and virtually all of these imports (40.6 percent) came from Customs Union members. The share of the European Union as a whole amounted to 30.9 percent. 

Ukraine’s main trade and economic partner was, and still is, the Russian Federation. All other countries, including Germany and other EU countries, are lagging behind Russia in terms of the volume of foreign trade turnover with Ukraine many times over. In 2012, Germany made up just 8 percent of Ukrainian imports, i.e. four times less than Russia. It is interesting that despite all the calls for «European elections», Russia’s share in Ukraine’s foreign trade turnover has continued to grow in recent years, rather than fall. Between 2009 and 2012, Russia’s share in Ukrainian exports grew from 21.4 percent to 26.5 percent, and in Ukrainian imports from 29.1 percent to 32.4 percent. 

The main argument used by ideologists of European integration is usually the foreign investment that is allegedly going to come from Europe and breathe new life into the Ukrainian economy. This argument is more than a little strange. Firstly, because for many years now foreign investors have not really faced any kind of formal restrictions for investing in the Ukrainian economy. Despite this, however, such investment has not been forthcoming. After all, it is easier to conquer Ukraine economically using goods rather than investment. Secondly, because the policy of attracting foreign investment carried out by Kiev has still not improved the country’s economic situation even a little. It is possible that it has even made the situation worse. Let me try and show this in numbers. 

* * *

One can find the general picture of Ukraine’s involvement in international investment exchange (the export and import of capital) in the country’s balance of payments, which is put together and published by the National Bank of Ukraine. Table 1 below shows every type of cross-border investment – direct, portfolio and other. You will recall that direct investment refers to those investments that give the investor control over the investment (the acquisition of more than 10 percent of the capital stock); portfolio investments only give the right to receive investment income (dividends, interest, rent) without effective control of the investment (less than 10 percent); and other investments cover various loans and credit lines (loanable funds). 

For many years now, the Ukrainian authorities have continuously proclaimed a policy aimed at stimulating foreign investment. They have also taken decisions which in effect have been conducive to the investment of foreign capital in the country. First of all, all foreign exchange restrictions on the cross-border movement of capital were abolished. In addition, the National Bank of Ukraine carried out, and is still carrying out, a policy to keep its national currency – the hryvnia – undervalued. In comparison with the purchasing power parity, the hryvnia’s exchange rate is undervalued by a factor of two, according to some estimates. With an undervalued national currency, it is cheaper for investors with reserve currencies like the US dollar and the euro to acquire assets in the country of investment. 

Table 1.

Ukraine’s participation in international investment exchange (the import and export of capital), millions of dollars

 

2000

2005

2008

2009

2010

2011

2012

 

Direct investments

 

Import

595

7808

10913

4816

6495

7207

7833

 

Export

-1

-275

-1010

-162

-736

-192

-1206

Surplus

594

7533

9903

4564

5759

7015

6627

Portfolio investments

 

Import

142

2757

-1292

-1551

4334

1605

4754

 

Export

-4

0

12

-8

-17

-48

-72

Surplus

138

2757

-1280

-1559

4317

1557

4682

Other investments

 

Import

-869

5453

27568

2867

10609

8017

2998

 

Export

-883

-7913

-22884

-10822

-10748

-9883

-8999

Surplus

-1752

-2460

4684

-7955

-139

-1886

-6001

All types of investment

 

Import

-132

16018

37189

6132

21438

16829

15585

Export

-888

-8188

-23882

-10992

-11501

-10123

-10277

Surplus

-1020

7830

13307

-4860

9937

6686

5308

An analysis of the data in Table 1 allows the following conclusions to be made: 

1. Since the mid-2000s, the influx of foreign investment into Ukraine has risen sharply in comparison with the turn of the century. Moreover, variations in the annual influx of foreign capital intended for Ukraine are quite considerable. In 2012, for example, the influx of all types of foreign investment was 2.4 times lower than in 2008, while the volume of other investments (loanable funds) in 2012 proved to be nine times lower than the 2008 level. Dramatic differences like these have had an adverse effect on the balance of payments, the hryvnia’s exchange rate and the general economic situation of the country. 

2. The structure of capital imports has changed in terms of types of investment. Direct and «other» investments have headed the list of foreign investments by turns. Altogether, over the five-year period from 2008-2012, investments to the tune of USD 97.3 billion were injected into the Ukrainian economy. The total amount of direct foreign investment injected into the Ukrainian economy over the period from 2008-2012 equalled USD 37.3 billion (38 percent of all foreign investments), portfolio investments amounted to USD 7.9 billion (8 percent) and other investments totalled USD 52.1 billion (54 percent).

3. In some years, the repatriation of foreign capital from Ukraine can be observed for some types of investment. This repatriation sometimes looked like a flight of capital from the country. During the global financial crisis, for example, there was no influx of portfolio investments into the country; on the contrary, foreign portfolio investors withdrew their capital from abroad. Over the course of two years, USD 2.84 billion of portfolio investments was repatriated. 

4. In some years, even the temporary positive impact of an influx of foreign capital on the balance of payments was neutralised by the export of capital from the Ukrainian economy. Over the period from 2008-2012, the withdrawal of capital from Ukraine amounted to USD 66.7 billion, so more than two thirds relative to the amount of foreign capital invested during the same period. In 2009, the withdrawal of capital even exceeded its import, resulting in a negative balance on capital transactions (USD -4.9 billion). In fact, the withdrawal of capital from Ukraine exceeds the amounts shown in the capital transactions section of the country’s balance of payments – this statistic does not take account of the various types of illegal capital export. The export of capital from the country in the form of other investments is being carried out particularly aggressively (USD 40.5 billion over the period from 2008-2012). A significant proportion of the exported capital was headed for offshore tax havens or countries with the characteristics of offshore territories (Cyprus, Switzerland, Lichtenstein, the Netherlands and others). Ukrainian authorities were unable – or did not want – to cut off the channels of capital flight from the country. 

* * * 

A peculiarity of loanable funds («other investments») is that they are only ever in a country temporarily; the investor’s presence in the country comes to an end after the debtor’s obligations have been paid. An exception is cases when a debtor is unable to pay his liabilities, in which case the creditor may become the owner of the assets that served as collateral (shares are the most commonly-used collateral). The creditor may also become the co-owner of the financed company. There have been plenty of cases like these in Ukraine in recent years, where creditors have become the co-owners or even the full owners of Ukrainian companies. As far as direct investments are concerned, they involve the investor’s full or partial right of ownership to the company’s assets. Let us use the figures provided by the State Statistics Service of Ukraine. As can be seen from Table 2, accumulated direct foreign investments by way of equity participation in Ukrainian companies and organisations have increased continuously. Over the period from 1995-2013 (19 years), their volume increased by 113 times (!) Accumulated investments totalling USD 50.3 billion at the end of 2012 make for a rather substantial sum. For comparison, it should be noted that according to the State Statistics Service of Ukraine, in 2012 the country’s gross domestic product in foreign currency equivalent equalled USD 176 billion. In other words, accumulated direct investments made up 28.5 percent of GDP. 

The growth of direct foreign investments has even continued in 2013. As at 1 October 2013, accumulated direct investments in the form of equity investment had reached USD 56,566 million – an increase of USD 2.1 billion since the beginning of the year, or 3.8 percent. 

It should not be supposed, however, that the acquisition of shares in the Ukrainian economy by foreign investors is necessarily due to the transfer of foreign currency from abroad. At present, most of the acquisitions by foreign investors are being carried out through the reinvestment of revenue they receive from previously-made investments in the Ukrainian economy. Foreign investments like these are not improving the state of Ukraine’s balance of payments. 

Table 2.

Accumulated direct investment in Ukraine and from Ukraine (at the beginning of the year; millions of US dollars)

Year

Accumulated direct investment in Ukraine

1995

483.5

1996

896.9

1997

1438.2

1998

2063.6

1999

2810.7

2000

3281.8

2001

3875.0

2002

4555.3

2003

5471.8

2004

6794.4

2005

9047.0

2006

16890.0

2007

21607.3

2008

29542.7

2009

35616.4

2010

40053.0

2011

44806.0

2012

50333.9

2013

54462.4

* * *

It is important to know the sectoral priorities of direct investors in the Ukrainian economy. As can be seen from Table 3 (information from the State Statistics Service of Ukraine), the main focus of direct foreign investment is Ukraine’s financial sector, which accounts for one third of all investments. Financial activities, together with trade and real estate transactions, account for 55.2 percent of all accumulated direct investments. These are types of activity that do not create social wealth, just redistribute it. High-tech manufacturing attracted a certain amount of foreign capital in the 1990s. Investors did not so much buy up businesses for a song as the advanced technologies that had been created or implemented by these businesses in Soviet times. Incentives for Western investors to invest in industrial enterprises fell noticeably after Ukraine joined the WTO. Customs barriers were reduced dramatically and it became more profitable to supply Ukraine with goods from more competitive countries than export capital to set up the manufacture of these goods in Ukraine itself. 

Table 3.

The structure of accumulated direct foreign investment in the Ukrainian economy by sector and activity type on 01.01.2012

Sectors and activity type

Share, %

Total:

100

Agricultural sector

1.6

Manufacturing industry

30.9

Construction

6.1

Transport and communications

3.8

Automobile trade and repair

10.5

Finance

33.1

Real estate transactions

11.6

Other sectors and activity types

1.4

The State Statistics Service of Ukraine and other organisations do not provide information on the share of foreign investors in the equity capital of individual sectors. An exception to this is the economy’s banking sector. According to the National Bank of Ukraine, the share of foreign capital in the authorised capital of banks grew from 19.5 percent in 2006 to 41.9 percent in 2012. At the beginning of 2012, 176 banks were operating in Ukraine including 53 banks with foreign capital, 21 of which were wholly owned by foreign investors, and in 20 of which investors owned more than 90 percent of the capital.

* * *

The geographical structure of direct investments in the Ukrainian economy is worthy of particular attention. As can be seen from Table 4, Cyprus ranks first among the countries of origin of foreign investments. It is possible to assume with a reasonable degree of certainty that Ukrainian individuals and companies are behind these Cypriot investments. Besides, after the well-known events in Cyprus (the confiscation of deposits in Cypriot banks in March 2013), one could also assume that Cyprus’ position as a country of origin of foreign investments is only going to worsen. In the list of countries exporting capital to Ukraine, we can also see a number of jurisdictions with the features of offshore zones: the Netherlands, the Virgin Islands and Belize. 

Table 4.

The structure of accumulated direct foreign investment in the Ukrainian economy by country of origin (on 01.10.2013)

Countries

Millions of dollars

Share of total, %

Total:

56565.2

100.0

including:

 

 

Cyprus

18712.0

33.1

Germany

6194.8

11.0

the Netherlands

5504.0

9.7

Russia

3842.1

6.8

Austria

3216.4

5.7

Great Britain

2724.4

4.8

British Virgin Islands

2452.4

4.3

France

1843.0

3.3

Switzerland

1277.5

2.3

Italy

1259.0

2.2

Belize

1036.6

1.8

USA

985.8

1.7

Poland

831.8

1.5

Other countries

6685.4

11.8

In terms of cumulative equity investments in Ukrainian companies, Russia currently occupies fourth place after Cyprus, Germany and the Netherlands. This is primarily Russian companies that supply Ukraine with natural gas, oil and oil products. It also includes Russian businesses that have long-established manufacturing links with Ukraine from Soviet times, including defence companies and certain unique industries. Russian banks also hold relatively strong positions in Ukraine. Foreign capital in the Ukrainian banking system is represented by 26 countries, and the largest foreign investors in terms of the amount of equity held in Ukrainian banks are Russia (19 percent), Cyprus (14 percent), the Netherlands (12 percent), Austria (9 percent) and France (7 percent).

(To be concluded…)