British Investment in Ukraine: London Channels Capital to Ukraine

Even though the United Kingdom is only the fifth-largest source of foreign direct investment (FDI) into Ukraine, an increasing amount of capital inflow is being channeled through London.

That’s no surprise since London is Europe's financial capital.

“When we’re talking about British investment in Ukraine we should not forget the role London plays in channeling global investment into the country,” says Renaissance Capital’s Geoffrey Smith. “London offers the largest pool of capital.”

Ukrainian companies have in recent years stepped up efforts to raise money and list stock on international markets. Despite a slowdown linked to the global credit crunch, the expectation is that Ukrainian companies will raise record amounts of capital in the near term, and a long list of domestic companies will eventually list their stock via initial public offerings (IPOs) on the London Stock Exchange. So expect more investment with a London flavor spreading to Kyiv in the future.

Since the beginning of 2007, more than $1.6 billion was raised by Ukrainian companies on the London exchange through IPOs, according to Kyiv-based investment bank Dragon Capital. Billions more will be raised in the coming years.

For comparison, state figures suggest that some $2 billion in FDI from the UK has poured into Ukraine since independence, less than the nearly $7 billion that came from Cyprus and Germany, and the roughly $2.5 billion attributed to The Netherlands and Austria. These top five investing countries account for about half of all foreign direct investment in Ukraine, with inflows 40 percent up in the first half of this year.

True, much of the money flowing into Ukraine via London, be it syndicated bank loans or cash raised through IPOs, is not British in origin. Nor is the lion’s share of FDI from Cyprus, an offshore tax haven, Cypriot.

Yet investment from London has also brought priceless returns and experience to Ukrainian businesses. The more Ukrainian companies list in London, or borrow from top banks there, the more they find themselves playing to the highest global financial standards, regulations and rules of business.

Smith said the increased presence of Ukrainian companies on the London exchange, and borrowing from London banks, is also “an important indicator of Ukraine’s attractiveness.”

It shows that London-listed Ukrainian companies such as ore producer Ferrexpo and real estate developer KDD “can compete for capital in a truly global context,” Smith said.

“The money that is invested in them can just as easily be invested in companies with mines in Latin America or Africa, or real estate projects in the Middle East or Central Asia. London offers the world’s largest pool of capital, and thus the broadest circle of potential shareholders or lenders. As a result companies should be able to get the best possible price for their stock or bonds from that market.”

But succeeding in this worthwhile venture has proven to be a challenge for many Ukrainian companies.

“The vital condition is that they show the levels of transparency and corporate governance that the London market demands. This is something that a lot of Ukrainian companies have shied away from in the past, but it is a discipline they will have to submit to in future if they want to attract capital to finance their growth,” Smith said.

Slowly, but surely, Ukrainian companies are succeeding in this challenge. And as they do, more British direct investment into Ukraine will follow.



British punters

Direct foreign investment by British companies into Ukraine, be it through Greenfield projects or mergers and acquisitions, is gradually rising.

There is no single leading British investor in Ukraine that stands out as having invested the largest amount, or made the biggest difference. There is, however, the London­based European Bank for Reconstruction and Development, founded by developed countries of the world for the purpose of supporting economic development in transition countries. While not British per se, the EBRD claims to be the largest investor in Ukraine with some $5 billion invested through loans and acquisitions. Last year was a particularly strong year for the EBRD, with annual business volume reaching $1 billion.

And this is just the tip of the iceberg. Many companies active in Ukraine, but backed by domestic or Russian businessmen, are registered in UK tax havens. Mapping them out and their would­be British roots would entail writing a book.

Who are the real British investors in Ukraine? According to the British Embassy in Kyiv, there are more than 60 companies with UK ties operating in virtually all sectors of Ukraine’s economy. Like with all investment, regardless of origin, the most attractive sectors for British investment are financial services, wholesale trade, real estate, leasing, construction, and metals.

Embassy figures show that British firms invested more than $1.2 billion into Ukrainian financial institutions, heavy industry followed with more than $400 million while construction and real estate received $250 million apiece.

And Ukraine, a country of 46 million, has not gone unnoticed by British exporters.

Over the last three years, British exports to Ukraine have shown steady growth, between 20 and 30 percent annually, reaching a record high of $858 million in 2007, embassy figures show.

British exports to Ukraine are expected to increase strongly now that Ukraine has joined the World Trade Organization (WTO).

But British expats who have been doing business in Ukraine since the early 1990s are cautious.

Like all investors, British firms universally complain about Ukraine’s tedious and corrupt customs procedures and say it harms the nation’s image. “Ukraine must immediately computerize every transaction to make it transparent and adopt European Union customs procedures,” said Martin Nunn, chief executive at Whites Communication.

And longtime Brits active in Ukraine’s real estate market, such as Terry Pickard, chairman of NAI Pickard, look back and say doing business in Ukraine is still tough. Referring to the notorious bureaucracy of development approval in Ukraine, and getting 120 signatures for it, Pickard said: “The bureaucracy in general is very old­fashioned and everything is very slow and complicated.”

And it doesn’t help to be British, according to Pickard. All foreign companies doing business in Ukraine complain that the justice system is very poor and non­reliable, he added.

Hope has not yet died, particularly in light of success in joining the WTO. But longtime British expats such as Nunn don’t hesitate to provide some honest British advice for Ukraine: “If Ukraine carries on down its current path it will be the first country that will be asked the leave the WTO.”