A view from on the ground
Graham Conlon, Managing Partner, Head of Private Equity– CEE/CIS, CMS
Ukraine is at a turning point as a new reform-focused government seeks to put the country on track for an economic resurgence. President Volodymyr Zelenskiy has set an ambitious transformation programme, which he hopes will result in GDP growth of 40% over the next 5 years, raising USD 50bn in the process.
Expectations that Ukraine will benefit from reforms that have swept across the former Communist Bloc are stimulating interest from foreign investors. Solid economic growth has also helped confidence and overshadowed concerns about the conflict in the east of the country. Anecdotally, those working in the M&A field have reported the busiest period in five years.
Over 2019, 132 deals were recorded, a 25.7% increase against a year earlier making it the strongest year since 2015. Deal value was also up and reached EUR 1.77bn, the highest for six years.
Previous reform attempts made some progress, but disillusionment at the slow pace helped Zelenskiy’s landslide election as president in May, and that of his Servant of the People party in July. The new president may be a former comedian, but according to Graham Conlon, partner at CMS, he is being taken extremely seriously by foreign investors when it comes to modernisation and tackling bureaucracy and corruption. Conlon said: “Ukraine now has a new leadership with the political will, mandate and parliamentary majority to really transform the country and take it to the next level.”
Ukraine now has a new leadership with the political will, mandate and parliamentary majority to really transform the country and take it to the next level.
It is still early days, but the World Bank’s Doing Business 2020 report ranked Ukraine 64th out of 190 countries for ease of doing business, up from 71st a year previously. An ambitious and hectic legislative agenda has now been set out and early signs are that officials are showing a new willingness to listen to businesses. One of Zelenksiy’s pledges is closer harmonisation of legislation with that of the EU as it becomes a more stable and predictable market for business expansion.
A signal of the West's approval of Zelenskiy’s agenda was delivered in December when the country reached a staff-level agreement with the International Monetary Fund in relation to a three-year USD 5.5bn loan to Ukraine.
As one of Europe’s largest countries by area and with a population of 45 million, it has vast potential. Known as the breadbasket of Europe, other important industries include infrastructure, IT, energy, mining, chemicals, automotive, aerospace, and tourism. In November, the European Bank of Reconstruction and Development (EBRD) predicted GDP growth of 3.5% in 2020, up from 3.3% for 2019. GDP is expected to increase further as land reforms and a lifting of red tape kick in.
Major deals in 2019 included Saudi agricultural fund SALIC’s purchase of a stake in United Farmers Holding Group, Singapore’s Delta Wilmar’s holding in food and drink group Chumak and Swiss agrichem producer Syngenta’s purchase of agri-tech business Cropio Group. Also, in November, Russian telecoms operator MTS Group agreed to sell Vodafone Ukraine to Azerbaijan’s Bakcell and, in December, German drugs maker STADA announced the purchase of the pharmaceutical business of Ukraine’s Biopharma.
Renewable energy is an area of focus, with Scatec Solar, Acciona and NBT, to name a few, being very active. Ports are expected to benefit from increased trade and successful investment stories, such as the grand opening of new MV Cargo/Cargill and Posco/Orexim grain terminals in September 2019, have highlighted the attractions of this key industry.
At the heart of this reform is sweeping privatisation. The government plans to remove scores of state-owned enterprises from a list of those previously excluded from sale. Among the significant assets that will be put up for sale are the Dnipro Hotel in Kyiv and alcoholic drinks maker UkrSpyrt. State-owned Ukrainian Railways (UZ) is also being prepared for restructuring and an eventual IPO.
A major change will be the potential lifting of a longstanding moratorium on selling agricultural land from October 2020 to increase competition and innovation. The World Bank has estimated it could boost annual output by USD 15bn and add 1.5% to annual GDP, calling it the “most powerful measure the government could take”. However, foreign ownership of land is contentious and it is likely that the initial reform will therefore be limited to domestic purchasers.
CMS Ukraine partner Maria Orlyk said: “I expect land reform and privatisation to open up a great deal of opportunity. It is a very challenging plan, so let’s see how much they achieve in the first year.” Other legislation in the pipeline covers the reform of banking, capital controls, public private partnerships and foreign investment protection, plus a clampdown on corporate raiding.
I expect land reform and privatisation to open up a great deal of opportunity.
History tells us that securing foreign investment can supercharge growth. De-escalation of conflict in the east and wider reforms should ease multinationals’ concerns. Tetyana Dovgan, a partner at CMS Ukraine, said: “What’s important is for them to see the country going in the right direction. They should assess and distinguish between the types of risks they might encounter and use local expertise combined with best international practices to mitigate them.”
Ukraine is arguably the last major untapped economy in Europe, and Zelenskiy’s young, energetic and ambitious government has paved the way for transformation. His stated ambition is to put Ukraine alongside Japan, South Korea and Singapore in the economic textbooks. In November, he described Ukraine as one of the most attractive start-ups in the world and anticipation that he will deliver on his promises makes the country a magnet for investors.