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27 April, 2012  ▪  Bohdan Tsioupine

Capital Drought

The Ukrainian Investment Summit in London has once again proved that the Ukrainian government does not take attracting foreign investments very seriously

Stephen Butler of Adam Smith Conferences faced a problem. His brainchild, the annual Ukrainian Investment Summit, attracted a record-low number of participants for its eighth instalment: this year, only 250 people came to the British capital for a few rainy days in April. Butler began with roughly the same crowd (300) when he decided that a forum to discuss investments into Ukraine could be lucrative to him and beneficial to participants. “In better days, over 700 delegates came to talk about Ukraine’s economy and learn about investment opportunities. That got harder after the 2008-2009 crisis,” Butler said as he surveyed an exquisite hall in the majestic 5-star Grange St Paul hotel on the final day of the Ukrainian Investment Summit 2012.

That the economic crisis makes businessmen and officials less eager to participate in conferences is nothing new, and Butler can simply wait to see better times and approach future events with more innovation, but Ukraine needs foreign investments as much as ever – or even more – in light of its complicated economic situation. So a mere 250 delegates at the business forum is evidence of problems faced by both Adam Smith Conferences and by Ukraine.


“I don’t know any other economy in the world that depends so much on the export of metals,” Chris Bowman, EBRD senior specialist for metallurgy, admitted as he spoke on the first day of the conference dubbed the Ukrainian Metals and Mining Summit by the organisers. Steel accounts for 40 per cent of Ukraine’s exports. What threat this heavy dependence on one product poses becomes clear every time the world economy slows. Prices of Ukrainian-made metal products have dropped by 20 per cent since September 2011. Specialists, Bowman among them, warn that Ukrainian exporters, and hence officials, need to pay attention to China, where a slowdown in the construction business leads to an enormous reduction in demand and thus world prices, and to Turkey, which has become a serious competitor to Ukrainian metal producers.

Ukrainians find it especially hard to stay afloat due to the colossal energy consumption and overall cost-intensiveness of Ukraine’s metallurgy. Kevin Krogmann, consultant with McKinsey, said tongue in cheek that students can go on tours to Ukraine to see historical equipment like open-hearth furnaces which have been abandoned by most countries of the world. Meanwhile, the Donbas continues to use 19th-century technology. Krogmann shared his calculations with the conference participants: Ukrainian foundries use three times more energy, 3.6 times more sand, 161 times more water and 3.6 times more labour per tonne of products than their European counterparts. Specialists gently hinted that our metallurgy plants would have had to invest more in modernisation in good times to be able to more favourably compete on international markets in difficult times like now.


Ukraineneeds about $6 billion in the course of 2012 to pay its foreign debt, including $3.5 billion to pay off an IMF loan it received to fight the 2008-2009 banking crisis. National Bank of Ukraine representative Olena Shcherbakova emphasised in London that Kyiv does not admit to even thinking about defaulting on its debts, but when The Ukrainian Week asked where the government could obtain the necessary billions, Shcherbakova did not have a simple answer. Rather, she spoke about entering external markets and “converting some of the external debt into internal debt.” Finance Minister Yuri Kolobov also confirmed that this is an important way to solve the problem and spoke about issuing internal bonds pegged to the dollar. EBRD economist Alexander Pivovarsky agreed that this is indeed one way for the Ukrainian government to survive the difficult summer and the election campaign. But he said it would not solve the problem completely. The policy of pegging the Ukrainian currency to the dollar gives peace of mind to the population but deprives the hryvnia of flexibility as compared with, say, the Turkish lira or the Russian rouble. In unfavourable conditions the dollar may become a burden to Ukraine’s financial system like the strong euro was a weight on economically weak Greece.

A longer-term solution to servicing Ukraine’s foreign debt as its national budget receipts are dropping would be to obtain a new loan from the IMF, a loan which has already even been promised. However, Max Alier, the IMF’s Resident Representative in Ukraine, did not give any signals in London that requirements given Ukraine could be relaxed: “We are ready to help but expect our conditions to be met.” Sergei Voloboev, Credit Suisse’s Chief Economist for Russia and the CIS, is convinced that Ukraine risks losing $9 billion of its hard-currency reserves unless it cooperates with the IMF or Russia.


The parliamentary election scheduled to take place in the autumn were viewed by the summit’s participants as a wide divide in Ukraine’s political and economic life, splitting it into “before” and “after”. Leaving its pre-election concern for voters’ demands in the past, the government may take such unpopular steps as raising gas tariffs for consumers, which is one thing the IMF insists on. If the international community recognises the election in Ukraine as free and fair, there is hope that the free trade zone agreement with the EU will be signed.

Valeriy Piatnytsky of the Ministry of Economic Development and Commerce spoke about this agreement as if it were his own four-year old child. No-one in the audience could or would challenge the claim that removing barriers on the way of Ukrainian products to Europe would open great economic opportunities for many years ahead. The problem is that the state needs its billions now. Piatnytsky was perhaps the most convincing and emotional presenter among Ukrainian officials. Presentations by a representative from the National Bank and the Finance Minister must almost by definition be filled with assurances to conference participants that the Ukrainian market is open and advantageous, yet this year these arguments  were not made convincingly.

State Property Fund Head Oleksandr Riabchenko was another key presenter, but he fumbled for words and his loudest argument was that “Our auctions can be watched online.” Arguments that would attract foreign investment to Ukraine’s economy were clearly not on the top of his agenda.

In general, it is hard to expect that the Ukrainian Investment Summit 2012 could attract investors to Ukraine. The thoughts of entrepreneurs and financiers who have shown some interest and even tried certain businesses were summed up in one statement by Steffen Gruschka, Founder and Chief Investment Officer of SG Alpha, who identified himself as a German with a Polish surname: “The investment situation in Ukraine is actually not as bad as it seems from a distance, but it is worse than its first impression up close.”

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