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Cablegate: Ukraine's Approach to Investment Promotion: "Why Do We Need

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DE RUEHKV #2821/01 3181304
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R 141304Z NOV 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 4321
INFO RUEATRS/DEPT OF TREASURY WASHDC
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USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYCK

E.O. 12958: N/A
TAGS: EINV ETRD EAID UP
SUBJECT: UKRAINE'S APPROACH TO INVESTMENT PROMOTION: "WHY DO WE NEED
YOU GUYS?"

REFS: A) 2005 KIEV 1828

B) 2005 KIEV 1765

Treat as Sensitive but Unclassified. Not for Internet.

1. (SBU) Summary: Ukraine continues to trail behind most of its
neighbors in attracting Foreign Direct Investment (FDI). The GOU
was slow to recognize its role in this sphere, although it finally
created a lead investment promotion agency, called InvestUkraine, in
2005. InvestUkraine, with USAID assistance, has since worked to
build up its capabilities. It remains a small agency with little
ability to affect government policy, however, and is still far from
a model investment promotion agency. Some GOU officials, especially
at the local levels, continue to question why they need to encourage
foreign investment. While enhanced investment promotion efforts
have helped attract more FDI to Ukraine, really significant
increases will come only when the GOU tackles the institutional
problems that create a poor investment/business climate. End
Summary.

Ukraine Slow to Welcome FDI
---------------------------

2. (U) Ukraine has consistently trailed behind its Central and
Eastern European neighbors in terms of attracting Foreign Direct
Investment (FDI). Despite the 2005 sale of the Kryvorizhstal steel
mill to international giant Mittal Steel for USD 4.8 billion, the
single largest foreign investment in Ukraine to date, FDI levels
remain relatively low. The total stock of FDI stood at about USD 24
billion as of July, according to official statistics. According to
an early 2007 study by the Vienna Institute for International
Economic Studies, FDI per capita was a paltry USD 500, only about
12% of the average figure for the 10 new EU members of Central and
Eastern Europe, and about 32% of the figure for Russia.

3. (SBU) The GOU was slow in recognizing the government's role in
attracting investment, for years doing so only on an ad-hoc basis,
with no institution taking the lead. The case of computer giant
Dell, which in 2005 considered opening major production facilities
in Ukraine (refs A-B), was a low point. Dell reps outlined to the
GOU the kind of incentives the company would need to open in
Ukraine, yet the GOU failed to respond, or even designate someone to
serve as Dell's primary point of contact. Dell decided to open a
plant in Poland instead, and so Ukraine missed a golden opportunity.


Investment Promotion Agency Finally Born...
-------------------------------------------

4. (SBU) In August 2005, the GOU established the Ukrainian Center
for Foreign Investment Promotion -- recently re-branded as
InvestUkraine -- to serve as the country's lead investment promotion
agency. InvestUkraine is a quasi-independent agency falling under
the State Agency of Ukraine for Investments and Innovations. (Note:
The State Agency for Investments and Innovations itself has very
limited contact with potential investors. Its primary area of
activity appears to be managing a state fund that provides
low-interest loans (about USD 30 million worth this year) to select,
domestic firms. Many observers in Kyiv also believe that it
primarily serves to promote the interests of its politically
well-connected director, Viktor Ivchenko, who is reportedly close to
President Yushchenko and whose spouse is governor of Kyiv Oblast.
End Note.)

5. (U) InvestUkraine has expanded its capabilities over the last two
years, in part thanks to training provided by USAID's Local Economic
Development Program, creating a corps of English-speaking investment
promotion professionals and using the Czech agency CzechInvest as
its model. InvestUkraine has developed relationships with key
oblast and city officials so that it can point potential investors
to the right people in the regions. Graduates from the
USAID-sponsored training have themselves formed ProInvest, a
nationwide network of investment promotion professionals. Ruslan
Fedorov, a bright InvestUkraine Investment Manager, told Econoff on
November 8 that he saw a major improvement in the work of local
officials that had participated in the training. The State Agency
for Investments and Innovations plans to provide InvestUkraine with
space at its regional innovation centers, now under development, in
order to expand InvestUkraine's regional presence.

...But Still Has a Lot of Growing Up to Do
------------------------------------------

6. (SBU) InvestUkraine remains a small agency and does not have much
influence within the government. Igor Nikolaiko, a long-time


government official, took over as Director of InvestUkraine in May.
During a introductory meeting with Econ Counselor, Nikolaiko
appeared focused more on obtaining additional resources for his
organization -- his priorities are a new building and up to 10
foreign offices -- than on developing the country's investment
strategy. Ivchenko has said that he had installed Nikolaiko in
order to "bolster the leadership" of the organization. Ivchenko
has, on several occasions, publicly criticized InvestUkraine for its
lack of effectiveness.

7. (U) Recruiting and keeping capable staff is also difficult.
Energetic, business-minded, and English-speaking candidates -- the
ideal investment promotion professionals -- can draw much larger
salaries in Ukraine's booming private sector, making it hard for
InvestUkraine and local state bodies to compete. For example, one
promising young InvestUkraine employee recently left the agency
after less than a year for Germany-based East West Capital.

8. (SBU) Petr Adamek, a consultant from the Czech Republic-based
BermanGroup who has worked closely with the GOU, previously told
Econoff that InvestUkraine suffered from a lack of "strategic
vision" in terms of how it pursued potential investors, often just
sitting back and waiting for official inquiries. USAID's Local
Economic Development Program has since helped InvestUkraine to
develop an official strategy, although it remains to be seen how
well the agency's leadership will implement it. Large portions of
InvestUkraine's website remain "Under Construction." Another
weakness is that the agency has never been given a clear mandate to
take over all investor-related functions, as the government
maintains a plethora of bodies -- state agencies, consultative
bodies, interagency councils, etc. -- that still interface with
potential investors.

Lingering Resistance to Foreign Investment
------------------------------------------

9. (SBU) Some officials within the GOU and oblast/city governments
remain suspicious of foreign investment. During a July training
session with a Tyco Electronics representative, an official from the
eastern Ukrainian city of Dnipropetrovsk commented, "We've talked a
lot about what information we [city officials] should provide to the
investor, but the investor must also show why we need him. The
investor should prove that he will bring only the newest
technologies." The comment reflected a residual mentality among
some Ukrainians that the state needs to defend against certain kinds
of foreign investors.

10. (SBU) Ukrainian government officials often appear obsessed with
promoting high-tech industries in Ukraine, at the expense of all
others. For these officials foreign investment is valuable only for
its potential to bring "new technologies," never clearly defined, to
the country. Many Ukrainians of all stripes are resistant to the
idea of Ukraine serving as a source of cheap labor. With an
educated workforce, relatively low wages (average monthly wages are
currently about USD 240 per month according to official statistics),
high unemployment in some regions, and proximity to European
markets, Ukraine could be a very attractive destination for foreign
manufacturers. As Andres Aslund, the well-respected economist and
Eastern Europe political analyst, recently put it, "You really have
to try hard to deter foreign investment from Ukraine."

Comment: If You Don't Build It, They Won't Come
--------------------------------------------- --

11. (SBU) What, then, is holding Ukraine back? Foreigners have
increased investment in Ukraine, but this has been largely
concentrated on discrete sectoral opportunities, like getting into
the booming banking sector, oil and gas exploration, or the growing
consumer sector (e.g., Pepsi's recent purchase of juice producer
Sandora), rather than any overall investment attractiveness of
Ukraine. Despite enhanced investment promotion efforts, a cheap,
highly educated workforce and a location on the doorstep to Europe,
Ukraine's business climate remains lousy. Corrupt courts, a
dismally-administered tax system, and over-regulation of business
activities are just some of the institutional problems that make
operating in Ukraine a daunting task for even the most intrepid
foreign businessman. Privatization, a potential catalyst for major
foreign investment, has slowed almost to a halt, with the
privatizations that have gone forward being conducted under less
than fully transparent conditions (septel). Ukraine was ranked
139th out of 178 countries in terms of the ease of doing business in
the World Bank's most recent survey, putting it behind countries
like Iran and Uzbekistan, and not even close to less-than-model
neighbors Russia (106th) and Belarus (110th). Until Ukraine fixes
its business climate, foreign companies will remain reluctant to

jump into the country with both feet. End comment.

TAYLOR

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