KYIV

Russia’s troop build-up on Ukraine’s border and the threat of a broad full-scale incursion sent alarmed chancelleries scurrying to make calls for Moscow to step back from the brink.

But foreign investors in Ukraine, now inured to periodic skirmishes and talk in Moscow of “defending the country’s Russian-speakers” – Russia describes the conflict as a civil war – were unfazed.

After all, they’d heard it all before. Ukraine has been chaotic, riven by two “revolutions” since independence in 1991, and has developed a reputation for corruption outsized by even post-Soviet standards.

Far more important to investors – foreign and local alike – than a conflict 750 km to the east of Kyiv in a region that always seemed distant to many here, analysts say, is consistent legislation, fair treatment and a good rate of return.

“The problem of a constant threat of invasion does, of course, exist. And as we are right next to Russia, this problem will continue to exist for quite a long time,” independent analyst Borys Kushniruk told The Tribune.

“But given the small levels of investment we have in Ukraine, the main issue does not lie with external threats, but rather in the absence of well-considered economic policies. And this is not even about corruption…More often than not the problem is the absence of predictability and the absence of policies to stimulate investment in the country.”

Recent positive signs tend to bear out his thoughts.

A French trade mission last week came away with deals worth $1.3 billion euros ($1.57 billion). Such large economic deals are things Ukrainians can potentially feel in their everyday lives.

These include an agreement for French rolling stock manufacturer Alsthom to supply 130 electric locomotives to Ukrazliznytsia, the national rail network, and a deal for firefighting equipment firm Desautel to sell 370 trucks with long ladders to fight blazes in the country’s ubiquitous high-rise blocks. Two further deals will provide infrastructure for drinking water in Kyiv and in eastern Ukraine.

To prove further that the constant tensions with Moscow are hardly a deterrent to many investors, a $1.25 billion, eight-year Ukraine sovereign Eurobond – issued on April 26 – was so in demand that it was oversubscribed by almost triple.

Western governments last month estimated that Moscow had assembled more than 100,000 troops on the border with eastern Ukraine and in Crimea – seized and annexed by Moscow in 2014 after mass protests forced Moscow-friendly President Viktor Yanukovich to flee the country.

After saying the deployment amounted to a drill to counter NATO’s “aggressive” moves, Moscow said the troops were returning to base – though most experts say about 75,000 remain in place. Even if they were not, their normal bases are in most cases close to the Ukrainian border anyway, which would make any “invasion” relatively quick in logistical terms. Russia, while also announcing the troop “reduction”, stepped up its naval presence in the Black Sea near Ukraine.

President Volodymyr Zelensky initially said after his election in 2019 that he could clinch a deal with Kremlin leader Vladimir Putin – now he says NATO membership for Ukraine is the only way to solve the issue.

WHAT FROZEN CONFLICT?

Anyone strolling down Kyiv’s elegant central avenues – lined with flowering chestnut trees – could be forgiven for forgetting that separatists beholden to Moscow remain in control of two so-called “people’s republics” – large swathes of the seemingly far-off regions of Donetsk and Luhansk.

“When a conflict is in a frozen state, with no escalation, it has practically no effect on the investment climate. And the situation in Donetsk will in no way hold back investment in Vinnytsya,” said analyst Serhiy Fursa, referring to a medium-sized city in southern Ukraine.

“But at the same time, Putin’s saber-rattling can frighten people.”

INVESTMENT FOCUS ON OTHER FACTORS

Investors may keep a close watch on other factors unrelated to the conflict – like Ukraine’s long-running attempt to meet the requirements of the International Monetary Fund to secure further disbursements of a $5 billion standby loan arrangement clinched a year ago.  And undue influence from “oligarchs” on the government and on specific sectors of the economy.

The IMF initially disbursed $2.1 billion but has withheld further tranches and sought commitments to reforms to the judicial system, guarantees of central bank independence and an end to all artificial price-setting for energy. U.S. Secretary of State Antony Blinken said slow-moving reforms meant Ukraine was “facing aggression from outside, coming from Russia, and in effect aggression from within”.

LONG-TERM POLICIES

Analyst Kushniruk drives home his point that what investors want are consistent policies that outlast the mandate of a president – Zelensky is Ukraine’s sixth president since Ukraine secured independence from Soviet rule in 1991.

“The absence of a predictable, long-term policy that will not change as a function of who might next become president and who might head the government – that is the main problem, he said. “And that is the main reason why investment in Ukraine is not as great as it might be.”

In nuts-and-bolts terms, that means investors will probably overlook an acceptable degree of risk if they are offered a better rate of return than in what is bound to be an inherently more stable Western country.

“That is the main reason for capital flowing to a given country. It is not a question or risk or corruption,” Kushniruk said.

“There are examples of large companies that work in African countries that are in a permanent state of war, but they engage in the extraction of oil and diamonds. No matter what the risks are, the income makes up for all those risks. And the same thing applies to Ukraine – corruption is not the determining factor, but rather potential rates of return being higher than in countries with a stable economy.”

Creating the right conditions, he said, meant lowering direct taxes and income taxes and pursuing policies to enable investors to foresee what their income will be over the next five to seven years.

And building a Ukraine better able to withstand all threats meant harnessing all sections of the economy to work towards an industrial sector less reliant on natural resources – the source of wealth of many oligarchs.

“If you want to identify a problem in Ukraine, it is not Russian aggression or the threat of aggression, but the level of the elite. And this extends to the oligarchs,” Kushnirok said. “This is not a question of patriotism … You should not be fighting each other, but rather trying to make the economy more effective. And creating laws that will help develop products with added value.”