Сергей  Цивкач

Сергей Цивкач, исполнительный директор UkraineInvest, поделился мыслями с LDaily об инвестиционной политике государства в...

Сергей Цивкач, исполнительный директор UkraineInvest, поделился мыслями с LDaily об инвестиционной политике государства в условиях полномасштабной войны, поведении и ожиданиях внутренних и внешних инвесторов, перспективных отраслях, региональных и глобальных особенностях инвестирования в Украину.

Сергей  <span>Цивкач</span>

Как для военного положения, украинский инвестор, работает достаточно активно

07.08.2023 (№ LDaily #20)

On the state’s investment policy during a full-scale war, the behavior and expectations of domestic and foreign investors, prospective sectors, regional and global peculiarities of investing in Ukraine, the executive director of UkraineInvest, Sergiy Tsivkach, spoke to LDaily.

LDaily: How has the formation of Ukraine’s investment policy changed under the conditions of war? What tools and support programs for investments have been introduced? How do they function and what results do they show?

S. Tsivkach: The most important thing is that during the war, the government and the Verkhovna Rada of Ukraine did not stop working on investment incentives, – and this is very important. Thus, we have amendments to subordinate acts – for example, to the law on state support for significant investments. A bill is also being read for the second time, which improves the law on state support for investment projects with significant investments. It introduces such important things as the ability of an investor to start a project before submitting an application, or to submit an application later, already in the process of project implementation. This unblocks activity for investors, makes the system more flexible. And an investor can invest a certain amount (in the previous version this is up to 30% of the project) and then apply for state support. There is also an expansion of economic sectors that are covered by it. And such novelties as, for example, reducing jobs, are provided. Because reducing jobs is very important for introducing high-tech investments in Ukraine.

Also, a system has already been introduced for industrial parks. There is an opportunity to reimburse for the construction of engineering networks, get exemption from income tax for up to 10 years, as well as other incentives, such as in the law on investment nannies. For example, exemption from tax on the import of equipment and from import duties.

These are the systems introduced by the government and the Verkhovna Rada of Ukraine, they are incentives for industrial projects. Industrial projects are those that have a high attachment to a certain location. That is, it is both a location and a built physical asset. And from the point of view of investment projects during the war, they are the most risky for private investors, because each of them worries whether, God forbid, such an object will be destroyed… There are already the first applications, we are preparing the next ones, the number of such projects will significantly increase.

Investors are interested in cooperating with Ukraine. We can look at a similar system, called “Diia”. “Diia” is a virtual economic zone for IT companies. And just such companies are less tied to a certain location and do not have significant physical assets, but more intellectual, technological. Now they already have 607 residents in this system. There is a special labor tax, a 5% personal income tax, a corporate level of 9% on withdrawn capital or 18% on profit.

So, we see investor interest. However, they, of course, primarily try to take advantage of those benefits that are less tied to assets. Despite this, investments are being made in the real sector. The Ukrainian investor, as for the state of war, is quite active. This year we have seen investments in the pharmaceutical sector, in the chemical industry, in metallurgy, in building materials. Such investments have already been worked out for more than 250 million US dollars and there are still over 200-300 million in the process.

Foreign investors have also been actively working. For example, Kingspan, an Irish global company. It will build a facility in the Lviv region worth about 300 million US dollars. These are about six factories that will produce high-tech energy-efficient building materials. The company Carlsberg is also investing – 40 million US dollars. Bayer company – over 60 million dollars in investments. CRH company – 20 million dollars in investment. The company “Cersanit” – 20 million dollars in investment. There are quite a lot of other companies that are currently working with us.

So, returning to incentives, that is, to what the state is doing to restore, transform the economy. Now, as an authorized institution to accompany investors – according to the law on investment nannies, we must look for investors, help them prepare an application, and the Ministry of Economy with other CEA evaluates it and gives a positive or negative conclusion. Such projects under development for submission of applications – currently there are 8 for the amount of 1.3 billion US dollars. Sectors: building materials, agro-processing, energy, mining, tourism.

LDaily: What were the indicators before the war? How much has the interest of investors in Ukraine decreased or increased during the war?

S. Tsivkach: Perhaps this question should be divided into two parts: the level of direct foreign investment inflows and investor interests. The level of direct foreign investment inflows for 2021 was 7.3 billion US dollars. That was a record amount. 2022 – a very strong decline, a decrease in the indicator, that is, minus 321 million US dollars. The difference between 2021 and 2022 is 7.6 billion US dollars, which is significant.

But let’s look at 2023. The first quarter – direct foreign investment inflows are already 1.1 billion US dollars. So the investment process is beginning to recover. Of course, the key share in these investments is reinvestment. And the inflow of direct new capital investments – at the level of 128 million US dollars. Therefore, we need to work on attracting new investments to the country. Reinvestment is good, it means that the investor trusts the jurisdiction, the state, and therefore reinvests. Of course, during the war this may also be related to the fact that the withdrawal of funds is complicated, so as not to reduce the financial volumes in the country to support the functioning of the economy. But still: even though they are reinvested, they work for the economy, for the real sector.

Now about interest… Before the full-scale military aggression, we had 28 investment requests amounting to 2.3 billion US dollars. Now we see much more interest in contacts with us, but we do not yet see the same level of project execution. I think this is still related to the war, as we only work with private investors. And they are very worried about their money, and that’s natural. But as soon as we get closer to our victory – and there will be one! – the level of real investment projects will significantly increase and become higher than in the pre-war years.

LDaily: You’re confident it will happen.

S. Tsivkach: I am convinced of this, that’s why we already see investment interest now. The only key thing holding investors back is the war. And then secondary, subsequent issues begin: land allotment, the rule of law, etc. But the first issue is indeed the war.

LDaily: What are the obstacles and risks for investors considering Ukraine as a potential investment direction during the war? How is the government trying to reduce these negative factors?

S. Tsivkach: The main risk, as I mentioned, is the war. And the government with the Verkhovna Rada of Ukraine also works here in several directions. The first direction is using the capabilities of the state itself. There is bill 9015, which enables investment insurance through the Export Credit Agency of Ukraine. That is, they can take on the additional mission of insuring investments into the country.

We are also working with international partners. Key players here are the American Development Corporation, US DFC (Development Finance Corporation). They are ready to provide insurance for investment projects, and not only those related to an American investor, but any international investments in Ukraine and actually Ukrainian investments in the country. As of today, we have submitted 11 projects to them for consideration and are waiting for their decision on insurance for such investments.

There is also a division of the World Bank, MIGA. It also creates an insurance pool for investments in Ukraine. It has already provided the first contract worth 40 million dollars (if I’m not mistaken), and it is also agreed with the DFC that the DFC will not only insure separately through its system, but also provide funds, resources for MIGA, so they have a larger investment pool and can insure more projects.

Here are export credit agencies that are beginning to resume cooperation with Ukraine, specifically with regard to investment insurance. For example, the Ministry of Economy of Germany. They have a system that operates through PWC, assesses projects, and then this Ministry of Economy can insure German investments in Ukraine. We held negotiations with SACE — the Italian export credit agency, — they are also ready to consider such projects.

The European Bank for Reconstruction and Development. About 6-8 months ago, the institution launched a separate risk insurance program for goods in transit. Because when we talk about war risk insurance, we have to separate such types. For example, this can be insurance from problems related to the supply of goods, physical damage to the object, issues with the counterparty, transit of goods, etc. So, since then, the EBRD has been working on such a program and is already implementing it.

However, it is very important: to have a product, there needs to be demand. That’s why my colleagues in the government and I always call on Ukrainian and international business to submit applications, to work on projects. The more applications there are, the more organizations will be able to insure such risks and provide the corresponding programs.

LDaily: What factors influence investors’ decisions to invest in Ukraine during the war? Do they consider the political situation important? Are stable legal and regulatory frameworks a decisive factor for investors?

S. Tsivkach: Again, we return to the same thing. For an investor right now, the number one issue is the war, and then the others follow. From our experience, it’s very important for investors to have transparent business conditions, and that they are the same for everyone. That the tax system works in the same mode for large or small, Ukrainian or foreign companies. So that everyone understands: the system of regulatory management treats everyone the same. Not only the tax system, but also customs, permitting authorities (from issuing licenses, permits for conducting activities) and other controlling bodies must operate on one standard. Then the investor understands: if he violated the law, did something insufficiently — he will not get the result. At the same time, if everything is done according to the law, he can calmly work in Ukraine. So, we need to improve this standard.

There are often complaints about certain problematic cases with investors. However, from our experience, it’s not always the state’s problem. Sometimes an investor can fail to do something, submit documentation incompletely, not do everything according to procedure or somehow else violate the investment algorithm. And then Ukraine, of course, must respond.

There are still manifestations of bureaucracy that the state of Ukraine should avoid. We should not allow bureaucracy, especially now, as we need to rebuild the country, transform the economy. And these manifestations of bureaucracy (whether due to unprofessionalism or for other reasons) must be completely destroyed. However, the ball is often in both courts, meaning criticism from the business side towards the state is not always fair.

LDaily: Which sectors are currently most interesting for investors? Which are they overlooking but, in your opinion, should they pay attention to?

S. Tsivkach: We now see activity in several sectors. The key ones are the production of construction materials, agro-processing and logistics. These are the most active in terms of specific investment projects. We also see a Ukrainian investor who continues to work in the chemical industry, metallurgy, and pharmaceuticals. So it’s happening the same way as in the food industry.

As for those sectors that are extremely important, but underestimated. IT and fintech are very actively working, there is even growth: during the full-scale war of 2022 compared to 2021, there was an intensification of the sector’s work. However, this is again because:

a) they trust the Ukrainian business;

b) business is not fully tied to physical assets, meaning it’s mobile.

What is very important for Ukraine from the point of view of investment development is machine building and vehicle production. There are very significant investment opportunities here. Before the start of full-scale aggression, we had a large investment project of 1 billion euros. It was a global brand that planned to build an electric transport plant in Ukraine, specifically electric cars. Unfortunately, this project will be implemented in Slovakia… But the change of the project location is not connected with the regulatory system, not with the rule of law in Ukraine, not with some issues of inefficiency. It was associated with the start of a full-scale aggression.

We believe that the production of electric cars, other electric vehicles, batteries, the implementation of all the latest technologies – this is a great future for Ukraine.

Also agrotech – technological opportunities for the development of agriculture. Both processing and cultivation and handling of agricultural lands, fields, with the production. And the pharmaceutical sector – there is a great perspective to transfer it to a more technological level, because we mainly produce generics. But we are capable of creating conditions for more capital-intensive drugs to be produced here and higher technologies to be attracted.

A significant and very attractive sector for investment will be the tourism and rehabilitation sector, especially in the post-war period. Tourism because almost every person in the world will want to come to Ukraine, visit the places of tragic events, find out how it happened, how we defended the country, will want to become a part of our free spirit and immerse themselves in the glorious history of the people. And rehabilitation will be very important for our citizens – both civilians and military – because the post-war syndrome will be significant, it already is. And we need to think today about how to ensure the development of this sector. In this direction, we are actively working with the State Agency for Tourism. Now – over analytics, we are developing appropriate investment plans. For example, we signed a memorandum with PSA International on cooperation in the development of analytical materials on the need to build dry ports or logistics centers between Poland and Ukraine. Why is this important? Because we need to bring in investments that will be sustainable. Even when the Black and Azov seas are unblocked, so that these dry ports still work and, accordingly, investments return.

Next, we have a collaboration with UNDP, specifically, a Memorandum has been signed for the development of an analytical material on the creation of investment innovation mechanisms. The result of such work should be the creation of an import-investment fund, that is, investments of social impact. This is when donor, state, and private capitals are mixed for investment support of small and medium-sized businesses. Because we have 99% of such companies from all registered legal entities, and they experience financial investment hunger. Accordingly, now we need to create such mechanisms.

We are also working with partners in the United States, in particular, with top analytical agencies. For example, with ones like CSIS. Now we will assist them in holding events in the US in July and September, aimed at attracting private capital to Ukraine and forming proposals for creating an investment pool for financing and development of investment projects. That is, there is a state or private project, but to receive investment, you need to have a technical and economic justification or preliminary technical and economic justification. So, we are working to make such finances available, and businesses could use such programs.

We are also working with the International Chamber of Commerce – with the head office in Paris. They have over (if I am not mistaken) 45 million companies. Among the Chamber members, we constantly popularize Ukraine and its investment opportunities. We have initiated a system of measures called Fit for Ukraine. These are online events where we present deep analytical materials for investors so that they understand not only how much is damaged and where, but also what positive opportunities for the investor are. That is, how many materials will specifically need to be produced in Ukraine, what will be in demand. From cement – to the food industry, industrial parks, logistics centers. And now such an event, which will be focused on the furniture cluster, we are organizing in Rivne. Then we will do it in Chernivtsi, Kharkiv, to show each region from a special angle, to prove that each has investment attractiveness and should effectively use it.

We work very fruitfully with the regions, and we need to do so that we are assistants to Ukrainian regions and businesses in attracting investments. Because factories are built in the regions, people work in the regions, and the main investing takes place in the regions of Ukraine.

LDaily: Ambitious projects, very interesting.

S. Tsivkach: They are all real. Not in the future. It’s what is happening now. Over the past three months, seven thousand people from 65 countries have attended our events. And after each event, we receive at least 1-2 investment inquiries. From factories to the creation of investment funds, to the search for partners.

 LDaily: Investors who are already in Ukraine do not really want to invest money now, mostly they are freezing projects. And you, on the contrary, say there are new ones interested, there is demand.

S. Tsivkach: There really is demand. However, there are companies that are freezing investments. We work with them, conduct consultations. I named specific companies that work in Ukraine and start new investment projects while working in Ukraine. This means that such companies believe in profit. And that’s key for a private investor.

But, of course, we would like to see hundreds of such examples. So far, they can probably be counted on the fingers of two or three hands… But it’s very good that they exist because they create a precedent and advertise. The best advertisement for Ukraine is not the promotion of incentives, but when a specific company announces an investment project. Then we get many more requests.

 LDaily: You talked about new projects. From which countries is there the most activity?

S. Tsivkach: Of the projects I mentioned, it’s Ireland. Also Switzerland, Poland, Sweden, Germany. These are now our key ones, i.e., those who have announced investments and are already implementing them.

LDaily: I don’t see the USA on the list… But, maybe in the future.

S. Tsivkach: We also work with the Americans, in partnership with CSIS and our embassy in the United States, and other partners. We actively promote Ukraine to the American investor. I wrote an article for The Hill (a political publication in Washington), why American industry should invest in Ukraine. There I detailed the cost of production, Ukraine’s strategic position, partnership between our countries. Also listed free trade agreements. It is very different in our country and the United States. That is, the creation of enterprises here, additional for the American industry, is about their global development and additional profits.

LDaily: What is needed now for a radical improvement of the investment climate in Ukraine?

S. Tsivkach: Ending the war.

LDaily: Is that the only thing?

S. Tsivkach: It’s key. If we were to win today, we would receive 500 investment inquiries tomorrow. I guarantee it! Some would be realized, some not, but there would be hundreds of inquiries within a week. However, when 500 inquiries come in, we will only be able to realize 100 of them. If this is connected to the complex system of land allocation, abuses by local power companies when connecting to communications, the licensing and building permit procedure of government structures, then this can be one of the key restrictions for implementing investment projects. I know that colleagues are currently working on this at the President’s office, the government, and parliament. It is very important to solve all issues before the investment boom, which will be associated with our victory. This is the homework that should have been done yesterday.

LDaily: What are the possibilities and prospects for the development of the investment sector in Ukraine after the end of the war? Are there any forecasts for increasing investment activity? Which industry will attract the most investment?

S. Tsivkach: Key sectors: agro-processing, construction materials, metalworking, metallurgy. A lot has been destroyed in the field of metallurgy – if I’m not mistaken, Russian attacks have destroyed 49% of metallurgy… And the restoration will be large-scale, because we have raw materials, and the finished product will be needed for the reconstruction of Ukraine.

Green energy, decarbonization, green investments – this is also a very large investment market. There are many international programs supporting this activity. This is from green metallurgy – to green industry and the construction of energy sources, generation of renewable energy.

This is a distributed generation system, electricity and heat supply. It’s a very important direction because our generation system, power grids are damaged, accordingly, they need to be rebuilt. If it is rebuilt, then the distributed system can be an answer to this. And this also means significant investments. And chemistry, pharmaceuticals and those industries that I mentioned – tourism, rehabilitation… IT, fintech, of course, will also develop very quickly.