Foreign investors: corruption and lack of trust in judiciary are still affecting the investment climate in Ukraine more than the conflict with Russia

13 September 2017

Dragon Capital, the European Business Association (EBA) and Center for Economic Strategy (CES) conducted in early September their second annual survey of foreign investors aimed to identify obstacles to investment in Ukraine and priority areas on which Ukrainian authorities should focus to improve the investment climate. The vast majority of participating investors were familiar with Ukraine: 92% of those surveyed either had investments in Ukraine or had invested in the past.

The survey found that the main barriers for foreign investors remain the same as a year ago, with first-ranked “widespread corruption” followed by “lack of trust in judiciary” (average scores of 8 and 7 out of 10, respectively). In foreign investors’ view, the negative impact on the investment climate from “market monopolization” and “state capture by oligarchs” (6 points) is greater than that from the “military conflict with Russia” and “unstable currency and financial system” (5 points).

“Oppressive law enforcement agencies” finished sixth in the ranking of investment hurdles, reflecting numerous complaints from the business community about unlawful actions by Prosecutor General’s Office, the SBU and police.

“Cumbersome and frequently changing legislation”, “complicated tax administration” and “foreign exchange controls” were mentioned among other discouraging factors. Closing out the list were low consumer purchasing power and anemic economic growth in the wake of an earlier downturn.

The share of foreign investors who, despite all the barriers, decided to invest in Ukraine or were actively seeking business opportunities in the country slightly increased compared to 2016 (up to 40% and 22% of those surveyed, respectively). This finding signals that, despite the aforementioned negatives, Ukraine retains its potential as an attractive investment destination.

In order to improve the business climate, investors think the government’s top-priority actions should include the following:

∙ effective anti-corruption activities (including criminal prosecution of officials of any rank and judges for corruption)
∙ ensuring the rule of law for law enforcement agencies
∙ reform and reset of the judicial system
∙ timely implementation of IMF program

Actions such as tax holidays for new investors, infrastructural improvements or lifting of the moratorium on agricultural land sales are less important investment-wise than other reforms, the survey found.

“Unfortunately, the lack of rule of law and corruption in courts and law enforcement agencies continue to negate Ukrainian leadership’s appeals to invest and create jobs in the country,” commented Tomas Fiala, CEO of Dragon Capital.

“It has become customary that corruption and distrust of courts top the list of issues that worry investors and impede Ukraine’s healthy economic development. As an organization representing private business in Ukraine, we step up our rhetoric every year, we all say loudly about the need for active counteraction to corruption, including through political decisions. Justice and transparency can not be selective, the country must not have double standards, a rigorous anti-corruption policy must apply to all, including high-ranking officials and judges. Investors are saying it openly and loudly. Politicians should finally pay attention to them,” said Anna Derevyanko, Executive Director of the European Business Association.

“Ukraine’s main problem, in foreign investors’ view, is not the economic downturn but weak and corrupt institutions that prevent business from investing and growing. The primary task for the authorities is to demonstrate they can effectively fight corruption and arbitrary law enforcement,” said Hlib Vyshlinsky, Director of the Center for Economic Strategy. “It is noteworthy that, according to the survey, capture of the state by oligarchs and monopolization of power are seen as a bigger obstacle to the investment climate than the conflict with Russia. The solution lies in the political realm and should include changes to election law and ensuring that courts and market regulators act independently.”

The above survey of foreign investors was conducted for the second consecutive year. Participating this year were 77 portfolio and direct investors, both with and without active investments in Ukraine, including Dragon Capital’s clients as well as foreign companies which are members of the EBA. The online survey was conducted by GfK Ukraine.