People dressed in traditional Ukrainian embroidered shirts take part in an embroidered shirt parade in central Kyiv, Ukraine, May 28, 2016. Practically nowhere else in Europe can an investor find as good and qualified workers for such low wages. REUTERS/Gleb Garanich

Those who have invested in Ukraine so far have not been very happy with their return.

At present, Ukraine’s gross domestic product is about $85 billion, approximately one-eighth of Poland’s GDP. The return on investment has been in proportion to that.

Will things change?

You can never be sure, but like before, Ukraine holds great promise. After all, this country is located in the middle of Europe. It has a well-educated and underemployed labor force. And whatever else you call the Ukrainian economy, it’s still a market economy.



While that sounds good, what incentive is there for foreign or Ukrainian investors to pour money into the country at this time? What has changed?

The answer is that a great deal has changed. Let us focus on ten major positive changes, although we won’t fail to note the problems as well.

To begin with, Ukraine now has a deep and comprehensive free trade agreement with the European Union, which means that the country has considerable access to the vast European market. At present, the EU market is actually twenty times larger than the Russian market, so it is hardly real competition. The focus should instead be on making sure that the EU market is truly open, and that Ukrainian companies focus on it. In its association agreement with the EU, Ukraine has sensibly committed to adopting hundreds of good laws that the country needs to generate a good business environment. The EU will relentlessly push for their adoption and implementation. The question, however, is whether Ukraine is being offered sufficient incentives by the EU to put these laws on the books. In 2015, Ukraine managed to stabilize its financial system. Ukraine’s annualized inflation has fallen sharply—from 61 percent in April 2015 to 9.8 percent in April 2016. Central bank interest rates are set to fall accordingly. From the third quarter of 2016, commercial lending rates should fall to 20 percent. With that, new credit issues can start, fueling investment in the real sector. Practically nowhere else in Europe can an investor find as good and qualified workers for such low wages. Incredibly, Ukrainian wages are officially only one-eighth of Polish wages. The real difference might be somewhat less because of the Ukrainian habit of paying additional unofficial wages, but production in Ukraine is frankly as cheap as it gets. This will not last for long, hopefully, but this remains an incentive for manufacturing and services to move to Ukraine. For a long time Ukraine maintained absurdly high taxation of labor, with a payroll tax of no less than 45 percent, close to the highest in Europe. Thanks to the new tax laws promoted by the former Ukrainian government, the rate has now been halved to 22 percent. This is vital for honest foreign investors who are not prepared to pay additional under-the-table wages in cash. This should lead to a substantial legalization of wage payments. Ukraine has adopted a realistic floating exchange rate. As a consequence, the country no longer has a cumbersome current account deficit, and Ukraine should soon be able to liberalize its draconian foreign exchange regulations, which harm foreign and domestic businessmen alike. Ukraine has introduced the electronic public procurement system ProZorro. This should allow all kinds of enterprises to participate in public procurement—previously a market open only to those with the right connections to state officials. The greatest concern for foreign investors who export from the country has been the refunding of the value-added tax. Officially, an automatic system has been introduced, and conversations with foreign businessmen suggest that the situation really has improved, even if there are still some flaws that need to be fixed. Substantial deregulation has taken place. Much more needs to be done, but many regulations and inspection agencies have been eliminated. The greatest positive change of all is Ukraine’s extraordinary openness. No country is at the same time as corrupt and as open as Ukraine. Presumably this will help the nation to control corruption ever more. This openness offers foreign investors multiple opportunities to complain if something goes wrong—opportunities that rarely exist to the same extent in other countries.

Needless to say, Ukraine also has some serious drawbacks for investors—mostly involving the poor judicial system.

Property rights are not secure in Ukraine, because neither prosecutors nor the courts work adequately in the least. As a consequence, big businessmen make sure the contracts they sign in Ukraine stipulate that any conflicts that arise are resolved in private arbitration courts abroad, usually in Stockholm or London. Ukraine has to establish an elementary domestic judicial system that can be used by small and medium-sized enterprises. Contract enforcement does not work. Some big businesspeople in Ukraine still consider that they are above such trivial matters as paying for what they have bought. Ukraine desperately needs a judicial system that can impose real liabilities on those who do not pay. The great underutilized resource in Ukraine is fertile agricultural land. If private sales of agricultural land were legalized, the price of land would presumably rise several times. Farms would be able to borrow substantial credits from banks using their land as collateral. Both agriculture and banking would take off in a fortuitous cycle.



Hope without illusions



Ukraine has never undertaken as great and substantial reforms as in 2015. This is the big difference. But it now appears that the reform tide is ebbing. Fewer reforms can be expected in the near future.

The reforms that are coming now are to a considerable extent being pushed for by the international community, rather than demanded by the Ukrainian government.

So far, these reforms are all going ahead, but progress appears less secure than a year ago. Let’s hope for the best, but without illusions.

Anders Åslund is a senior fellow at the Atlantic Council in Washington and author of “Ukraine: What Went Wrong and How to Fix It.” This article was originally published by the Kyiv Post and is reposted with permission.