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The population, as well as investors, needs to see that there is a fair treatment in the judicial system and that there are real consequences if you violate the system


03.04.2020 (№ LDaily #10)

The population, as well as investors, needs to see that there is a fair treatment in the judicial system and that there are real consequences if you violate the system

Kristian Andersson, Chairman of the Management Board JSC “SEB CORPORATE BANK”.

As a foreign bank in Ukraine, we see an accelerated growth rate in the economy and a substantial increase in Foreign Direct Investments (FDI’s) as the most important issue that will affect the country and the financial sector positively. However, certain things need to come in place to enable this. Having been here since 2008, I would first like to say that a lot of positive things have already happened, or are happening, in the financial sector. Compared to 5 years ago, we have today a far more stable situation with the banking sector that has been partly “cleaned up” with the closure of a large number of banks, we have a more or less stable exchange rate, and there are other reforms which have been implemented and positively affected the financial sector as well as the economy in the country.

A major negative thing which remains in the banking system is that non-performing loans are still at unbelievably high levels of more than 50% in the Ukrainian banking system (in Sweden, the comparable number is around 1%). This is often a result of that many of the largest clients do not pay, and they get away with it because the legal system and the courts don’t work in a proper and sufficient way. In turn, this leads to that available financing for businesses is a limited resource in Ukraine – banks do not trust the legal system and is therefore very reluctant to lend any money. Further, this also negatively affects investments – firstly, it is hard for investors to find financing, and secondly, especially foreign investors are of course reluctant to put their money and investment in a country where they don’t trust that the legal system will work in a proper way to protect their rights and investment if needed.

The most urgent thing which would lead to so many positive effects throughout the whole system in this country would be to redo the failed judicial reform in the country to be sure that all Supreme court judges can be verified as honest and competent people. If that happened and the market trusted the system, I am sure you would see a banking system which would attract both capital and deposits, you would also see a decrease in capital outflow and investors would be far more comfortable and interested to invest in the Ukrainian economy, including that state-owned banks could attract investors and be privatized. The same is true for foreign investors who would substantially increase investments if they felt comfortable in that they can trust and rely on a legal system and courts in the country, which work in a fair and proper way.

Although the economy now is growing according to the statistics, which is good, it should be remembered that it is growing from very low levels after the sharp decline the economy experienced in 2014-15. The growth rate should double in a country like Ukraine considering where it is coming from, the potential of this country, not least including a well-educated and, in my experience, very ambitious population, its excellent geographical location, the Free Trade Agreement the country has entered with the EU, etc.

What we instead see today is a modest growth level of the economy and, unfortunately, FDI’s on embarrassing low levels.

If the country should be able to grow its economy in a material way and thereby also dramatically improve conditions for its population, it will be of crucial importance to get a decent judicial reform in place, enabling having a Court system in place which shows the population, as well as investors, that they can trust and rely on the rule of law in the country. In addition, this would make financing for businesses far more available in the country.

It is easier said than done after so many years of a corrupted system, and it will take time to cure, so, patience is needed, still, it is important that everyone, not only investors but also the population in general, can see that it moves in the right direction and with proper speed.
However, I am an optimist and believe this will happen and it is now important to take drastic actions up-front instead of slowly trying to change it. The population, as well as investors, needs to see that there is a fair treatment in the judicial system and that there are real consequences if you violate the system.

Indicators to watch for this is the level of FDI’s that works as a very clear judgment of how interesting Ukraine is for foreign investors. I also think that most investors watch developments in the Corruption Perceptions Index as published by Transparency International where Ukraine has improved in the last couple of years, which is good, but still, the country is down at a far too low position as the country’s number is 120 out of 180 countries indexed.

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