Viability test: is it possible to invest in Ukrainian business. And if so, which one..?

The problems of the Ukrainian investment market have been stable for years. Corruption, bureaucracy, absence of investment protection mechanisms and of an effective judicial system- all these factors are mentioned by experts each time. The pandemic also had its say. Artem Kovbel, a senior partner of Vigilant Forensic Boutique, a member of the Supervisory Board of Global Spirits, TM “Khortytsia”, discusses the exact impact of the pandemic and how big it’s impact on the investment environment in Ukraine really is…

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However, the coronavirus has slightly changed the balance of power: now we can say that the investment market has been shaken by the pandemic. That the lockdown at the beginning of the year led to serious disruptions in the work of the enterprises and this affected the cost of their securities. That investors are puzzled and are looking for new markets to invest.

However, in the case of Ukraine, the pandemic has practically nothing to do with it. It just “finished off” what was already on its last legs.

Of the six existing exchange markets on the domestic stock market, only two of them are actually operating, and 98,7 % of all the concluded contracts are

Government liabilities trade. Shares of Ukrainian companies are traded on the Warsaw, Frankfurt, London and other stock exchange markets. In short, anywhere, but not here. And they are not being bought there very actively. All because of the same old notorious corruption in the country and for other well-known reasons.

Does it make sense to invest in Ukraine now?

Ironically – yes. Coronavirus has severely damaged the industrial production and some domestic businesses – such as restaurants, construction industry, entertainment sphere. But it also created good starting opportunities for other companies. Let’s consider in more detail the most interesting spheres for investment:

  • pharmaceutical. In August, this market grew by 9.1% in hryvnia equivalent compared to the same period last year. According to forecasts, growth trends will remain the same until the end of the year.

Of course, there will be no sharp upward jump, even despite the pandemic – this requires reforms in the country and an overall improvement in the investment climate. Then large global pharmaceutical companies could enter Ukraine and intensify their production here. But even under the current conditions, the investor still has a chance to earn.

The attractiveness of the pharmaceutical market is enhanced by the law on legalization of distance selling of medicine, adopted in September, as well as the simplification of registration procedures for drugs purchased through the State Enterprise «Medical Procurement of Ukraine».

•telecommunication. The growth of the market is due to mobile communications and the internet. During the times of the pandemic, both are extremely important like never before. The process of redistribution of frequencies for 4G between key communications providers has also given impetus to the development. Because of this, the work on network connection of remote villages, cities, separate road sections has now intensified in Ukraine. Even the Kyiv underground’s turn came.

All this suggests that the market has potential for the near future. The financial statements confirm that, for instance, Kyivstar or Vodafone Ukraine have already reported an increase in their financial performance.

• delivery. According to the Tax Service of Ukraine, postal operators have paid 24% more taxes to the budget in the previous six months than in the same period last year.

The reason is considered to be the rapid growth in the share of online shopping, which has significantly increased the need for delivery services. And this trend is unlikely to change in the near future.

• medicine. To be more precise – medical clinics. Their turnover during the pandemic has also increased, which is to be expected.

• IT. Before the pandemic, this sphere was one of the most prosperous in Ukraine. Thus, in 2019, the volume of exports of IT services amounted to $ 4.17 billion, which is more, for example, than revenues from wheat exports ($ 3.65 billion).

The situation is not expected to worsen much this year. But not for all IT companies.

The most in-demand at the market are those that offer solutions in the field of communication and information security. But companies that are developing solutions for the hotel and restaurant business or tourism, for example, can hardly be advised to invest in at the moment.

And what about the agro-industrial complex?

Its share in Ukraine’s GDP has traditionally been one of the largest, with many agricultural companies showing regular profit growth. However, this year there appeared some nuances. More precisely, they appeared earlier, it’s just that now the problem has become more noticeable.

In short – the volume of agricultural production is falling. According to the preliminary forecasts, grain harvest will decrease by 9.5%. There are two reasons: droughts, caused by climate changes and outdated irrigation systems.

This, on the one hand, threatens to reduce the profits of farmers, which must be taken into account when investing. On the other hand, opportunities for investment in new irrigation technologies, new ways of growing agricultural crops and harvesting will appear. The question is whether the state will be able to organize effective work in this direction, to attract large foreign and domestic investors, to raise their money.

In any case, it is not worth hoping for a stable high return on investment in agro-industrial complex in its current state. This segment needs a full modernization to stay afloat. Otherwise, in a couple of years we may face a significant drop in the level of agricultural production, against which the currently projected 9.5% will seem as child’s play.

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Another thing is important: the world is rapidly digitalizing, resource economies are being transformed. The structure of GDP will change towards non-resource industries. This is already happening now. For instance, if a couple of years ago, an agro-industrial complex brought the most money to the domestic budget, now it is being rapidly replaced by IT. In the future, the gap will only widen.

Ukraine, domestic companies and investors should take this trend into account and follow it, so as not to lose to competitors and not remain on the sidelines of the world economy at one point.

Auditor, Fraud investigator Co-Owner, Partner, Forensic services at Crowe Erfolg Site: Member ASIS, ACFE, ASCP Board member GS

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