Last year, foreign investments in the Ukrainian economy grew up by 17% and reached $ 4.4 billion. Direct foreign currency investments of companies accounted for about a quarter of this amount.
The remaining part is the amount of capitalization by the parent banks of their Ukrainian subsidiaries. It is curious that a significant part of the real, monetary investment was made up of investments from Ukrainian financial and industrial groups (FIGs) themselves.
This year, the volume of investments will also amount to about a billion dollars. Moreover, it is likely that investors will mainly be Ukrainian holding companies again.
Alexey Pertin, CEO of Smart-Holding, has told us how Ukrainian FIGs are working and what sectors they might invest in in the years to come.
- What happened to the business climate in the country over the past year? Could you point out two or three major positive and negative trends?
Let us start with the negative ones in order to end up in a good mood. Ukraine has not progressed in the fight against corruption. This is evidenced by the recently published E&Y rating.
Our country ranks first in this rating. Almost 90% of interviewed businesspeople believe that corruption is widespread in the business environment of Ukraine. In the field of conditions for doing business we have made just a minor advance. The 80th place in Doing Business rating is not something to be proud of.
Let us analyse if a single major Western investor came to Ukraine in the past three years. The answer is obvious – no. I know about those who left. Let us take the energy sector as an example. Big companies that once promised us to develop deposits, to find shale gas and to ensure full energy independence have left. For some reason, they considered this as having no prospects. The same happened in the banking sector. Many Western banks flee from here. An investor votes with a dollar and hryvnia. They are not here ...
- How about something positive?
The government's efforts to organize public procurement are visible. There is still much to be tuned, and without fighting corruption, it will remain just an instrument, but a lot of work has been done.
I like that skilled specialists are hired on market terms to manage state-owned companies. UkrGasVydobuvannya could be named as an example. There are some wins and something to talk about. However, such companies are very few in number. There are some initiatives and processes. For example, on 14 March the Verkhovna Rada ratified a free trade area agreement with Canada. According to experts’ forecasts, this will increase the investment inflow by $ 36 million per year. Yet, this is a drop in the ocean ...
When reading news, one gets an impression that a lot of work is being done by the government in the external domain, but for some reason the reforms do not reach their logical conclusion.
I can say that not everything is so bad with our commodity markets, as metals, ore and coal are well priced. This all enables us to have additional support to our economy, this means additional budget revenues. In addition, it is the world trends that help us here. If they become negative, we will feel pressure.
In fact, there are very heroic people in our country who got used to overcoming this complex chaos and mess. With all the negative factors and instability, our people are able to cope with it, and this inspires me with optimism.
- Is there a recipe for economic growth?
We do not have investors or only have catastrophically few of them. They feel uncomfortable here. Ukraine lacks enough capital to raise its economy. The only factor that can be a catalyst for growth is foreign investments. That is what should have laid the ground for a number of reforms that would allow us to gain extra funds here.
Until now, the state has not had any strategy for the development of the key industries. They need to become growth drivers and to further help the development of export. With fluctuations in the hryvnia exchange rate, only export could support the economy.
In our business communications, we often receive requests from various foreign investors. They all have some fears. Some background feeling of non-confidence and instability prevail in Ukraine. This is felt in absolutely everything. There is no solid foundation to rely on and make investments.
- Business Ombudsman Algirdas Šemeta recently said that last year pressure on business from tax authorities decreased, but a new trend has emerged – pressure from the prosecution office and the Security Service. How much noticeable is it in your industry?
The prosecution office and the Security Service of Ukraine are now really becoming one of the "key players" in business. We feel their influence every day.
It is difficult to talk about the investment climate in general, when, for example, our group’s enterprises are searched on an annoyingly regular basis, their economic activity is blocked, the infrastructure is collapsing ... We are forced to mobilize our entire legal team to participate in dozens of lawsuits. Reasons, on the one hand, are ridiculous, on the other hand – there is little reason to laugh, when the staff of many thousands is at risk. Business likes silence, craves stability and at least some confidence in the future.
For example, we are developing an industrial park in the territory of Chernomorsky Shipyard (ChSY). We were in negotiations with one large global investor. It was about a few hundred million dollars, but quite unexpectedly we had another search and the negotiations froze. They come to the office, cut off the locks. Then it turned out that the search was under the case of smuggling cigarettes in Sumy region. Where is the shipbuilding, cargo transhipment, and where are cigarettes?!
In the last three weeks only, we had three court rulings on the custody of 82 real estate objects of shipbuilding companies. All for security of a certain single vehicle. We appeal against one ruling and another one arises. This is pressure on business that we feel every day. I hope we will get over that somehow.
- How should one act in such situations?
We have two ways of self-protection in situations like this. The first one is in the legal field. We have invested more than a billion dollars in Ukraine, we believe in the future of this country and we will protect our investments by all available legal means. And the second one is openness. That is, we must show everything that happens. The prosecution office is only afraid of publicity. When their actions are publicized, it is more difficult to take any illegal decisions.
My main request to the state is not to interfere and to fulfil all the declarations voiced on the Western platforms: at international meetings, forums and summits.
- What exactly can be done to change this? Now they say that anti-corruption courts will help punish those at the top who are engaged in raiding. Maybe some more tools are required? External control, for example?
In fact, we are under external control, but no one can do anything instead of us. We must do our homework responsibly. The country must grow by itself.
The number of anti-corruption agencies is overshooting and new ones are being established. Carry out the judicial reform and no special anti-corruption courts will be needed.
The key indicator for me will be when a spirit of separation into "friend-or-foe" is gone. We must all unite and think how to develop the country. We must cherish any investor who brings investments into the economy and operates abiding by all our laws.
The state should have clear projects both for the development of the key industries and for the control of the government procurement. People who go into power must sew up their pockets and work for the good of the country. They are mandated for that by the public.
What is the task of any ruler? To ensure a better life for their citizens. All the efforts should be directed at this. There are so many different mechanisms for that.
It is also necessary to take into account global trends. Smart-Holding is a long-time partner of the World Economic Forum. Within its framework, very interesting analytical information is considered. I can say that Ukraine is absolutely not on the world agenda. Neither the authorities nor business thinks about the global risks, which, like it or not, will have an impact on our economy, on every Ukrainian citizen. We do not hear these issues being discussed at our government’s meetings, in the Verkhovna Rada ...
We were partners and experts of the initiative by the Strategic Forecasting Group of the WEF, Scenarios for Ukraine, which was intended to give a clue about possible future directions of the country's economic development. Our country has several industries that can become growth drivers. This is metallurgy, agriculture and infrastructure. It is necessary to devise a roadmap for their development, to give guarantees to investors and, I repeat, the state should not obstruct.
- Since we have mentioned your shipbuilding assets, in what condition are they now?
Shipbuilding is a global market, which is in big crisis now. Not companies, but rather countries compete in it. The winners are those who are more thoughtful about development and support of this industry.
The potential of shipbuilding is huge. It has a significant multiplicative effect on the economy: one working place in shipbuilding provides for up to 8 jobs in related industries. In 2005, our state stripped the domestic shipbuilding of any benefits, while foreign countries (China and Turkey, in particular), on the contrary, implemented an absolutely opposite policy at the state level.
An important issue for the industry is the possibility of attracting "long-term money" at a reasonable cost. In this regard, establishment of a state export credit agency could play a huge role. The experience of China is quite illustrative in this context. Today, shipbuilding accounts for 8.5% of the total portfolio of Eximbank of China. By the number of orders, the Chinese shipbuilding came to first place in the world, which gives almost 10% of the total Chinese GDP.
How do your shipbuilding companies manage to survive?
Today we are focused on performing ship repair and modernization works. Nevertheless, Smart Maritime Group continues negotiations to attract contracts for full-scale shipbuilding, including contracts with foreign customers.
Now we are looking for new growth points: we are developing the Industrial Park project in the territory of Nikolayev shipyard. In March, as part of a joint project with Metinvest, a service centre for processing of rolled metal was opened. A project on establishment of a specialized line for production of components for wind power plants is being negotiated.
We won a tender for manufacture of large metal structures under a contract with Ukravtodor within a project of completion of bridgework crossings in Zaporozhye. We are engaged in manufacture of specialized equipment for the mining and metallurgical sector.
However, shipbuilding was and is a core business for us. The main thing is that we have managed to retain people, knowledge base and skills over these years. We are able to build a project of any complexity, but for this the environment and investment attractiveness must change.
The state must abandon their selective approach, because quite often the winner in tenders, for example, becomes Leninskaya Kuznya (since February 2017 called Kuznya on Rybalsky, belonging to Petro Poroshenko – NV Business). That means the cornerstone is not the business component, nor the state demand, but rather someone's private interests. The state acts as a banker here deciding whom to give orders and money, and whom not to.
- What about the corvette construction project for the Ukrainian Navy?
The construction is lagging behind the schedule, as the state has halted the financing completely. As of now, the project’s readiness is about 17%, and the hull works under the project are fulfilled by more than 80%. Despite the fact that the Ministry of Defence has money in the budget for 2017, the financing has not resumed yet, and there are talks about the change of the contractor. Although it is difficult for me to think of any other site that could accommodate the project. Time is marching on, we can lose the money that has already been paid to foreign partners as advance payment. And this is the money of the state budget. The Swiss and the Italians arrive here, all waiting if the corvette will be built or not.
Experts say this is a worthy project. If it was carried out, that would give us a possibility to raise the country's export potential. Similar corvettes could be sold to other countries as there are requests for them.
Ukraine needs its own military fleet. We have access to two seas. Statesmen should withdraw a political element from the discussion of the future of our shipbuilding.
- Are there any tools to influence the situation? Courts, the international community, anything else?
The mechanism we engage is transparency and openness of information.
- If to talk about your gas production business – there was the market reform, the prices increased. Naftogaz claimed some kind of demonopolization with regard to gas supplies and transportation. Has it become easier to work or not?
Effectively, only domestic investors have remained on the market. It is very telling.
Of course, the adoption of the new Law of Ukraine On the natural gas market, which came into force in late October 2015, has already brought some positive changes.
A transformation of ownership of Naftogaz of Ukraine and its subsidiaries is on the way. At the end of 2016, a legal provision on formation of a 50% insurance stock of the next month’s delivery volume was abolished. Yet, the reform has not been completed and requires a more system-based approach.
There are still a number of restrictions that discourage foreign investors, and the domestic ones are not given an opportunity to develop. First of all, it is a question of stimulating taxation. Motivating royalty for new wells could stimulate new drilling, but the decision has not been made yet.
The second important point is the deregulation of the licensing system, in particular, issues related to land allocation. An investor needs clear and transparent working conditions and confidence in the return of their investments. Then the Ukrainian natural gas market will be of interest to them.
As for Smart Energy, last year we produced about 209 million cubic meters of gas and 17 thousand tons of condensate. This year we expect a significant increase. In fact, the state should cherish the domestic gas producers. In addition to ensuring energy security, they are the main donors of the budget. For example, in 2016, Smart Energy’s enterprises transferred about UAH 740 million of taxes to the budgets of different levels.
- What other interesting projects of Smart-Holding will we hear about in the near future?
What is now in the centre of attention is the opening of Park Inn Hotel in Kiev, which will be managed by the Rezidor Hotel Group. It will become a complement to the ensemble of Troitskaya Square. In due time we carried out its deep reconstruction, built an underground parking lot. We even received gratitude from the UEFA for help in organizing Euro 2012 matches.
When is the hotel opening planned?
I think the hotel will receive its first visitors in May, and an official opening will be a little later. We hope that the hotel will occupy a worthy place in the capital.
- It is time of crisis now and you are building new facilities.
We had to finish the building. We finish investing in the hotel. Based on the general situation in the country and in the company, we were forced to suspend the construction for the last two years. However, somewhere at the beginning of the year we resumed the project and now see that we will complete everything within the following month.
It is a period of more limited amount of resources now. If you sell something, you sell very cheap, but if you buy something, you buy it also cheap. If you have an opportunity to finish something or to invest additionally, then you understand that today's price will be the most attractive one.
We see that the real estate market is reviving slowly, there is potential in it. We might even think of building a business centre opposite the hotel, we have both a project and a foundation.
- Are there any other areas you find attractive for investing in the near future?
As of now, we will focus on the existing portfolio, because the time is hard. We need to support our business.
- I would like to talk about Metinvest. Recently, an unpleasant situation happened to it – your assets in the occupied territories were expropriated, which was preceded by a certain blockade. How badly did it impact the company? Did you manage to cope with it and how?
First of all, I would like to speak about the blockade. This is clearly a crime of the so-called "activists", who are perpetrators, simply speaking. In many respects, it is the blockade that led to what happened. The so-called "blockade", which is already supported at the state level, had negative effect not only on the economy of Metinvest, but on the economy of the entire country. In autumn, we will see its deplorable results.
The country will lose part of the currency proceeds that come from metallurgical assets. In any case, the count amounts to billions. These companies were the islands of our integration with that territory.
We are forced to look for other solutions that will allow us to efficiently operate our vertically integrated production chain.
- Have you been able to replace the supplies from that territory?
Now we are buying coking coal from our asset in the USA and on the maritime market. We had a reserve that helped us cope with the situation more or less smoothly, without any shocks.
- What about Yenakiieve Iron and Steel Works? After all, it supplied slabs to your enterprises, in Bulgaria, in particular.
We will be buying on the market.
- As far as I understand from your reaction, you have coped with this challenge in general?
We have been facing challenges for several years. We even had such a definition as "military logistics". Additional costs immediately accreted to everything that was heading to the uncontrolled territories. Sometimes it is $ 10-15 dollars per each ton. Nevertheless, we had to work; enterprises and people had to work. These are wages, money to the budget, and contribution to the GDP. All this has effect on the national currency’s exchange rate.
In fact, it is difficult to overestimate the merit of those people in Metinvest who worked in the uncontrolled territories, providing logistics, fully abiding by the Ukrainian legislation. Those are heroic efforts, I dare say.
Now there is little information to talk about the future of assets in the uncontrolled territories. Let us see how the situation will develop. Currently, these enterprises do not work. We will focus on increasing the current efficiency and will try to resolve the problems in all available ways within the legal framework. Nevertheless, in many respects those people who organized the blockade did a disservice to the country.
- And who are they? Are they some convinced individuals or did they work for someone?
I don`t know. There are so many versions. In any case, in the coming year we will reap the fruits of this blockade. Employees of Metinvest worked there, Ukrainians worked there. The companies paid taxes to the budget of Ukraine.
- What about your Crimean assets?
There are no Crimean assets. We withdrew from those businesses.
- It turns out that you lose on both sides.
You know, the Reds have come and they rob. Then the Whites have come and now they rob. Where should a poor peasant go? Such is the reality. We must not grumble, but work, must look for new opportunities. I so much want the authorities to try their best to protect businesses in all possible ways. Be it small, medium or large-size business, domestic business or foreign one working in Ukraine.