Investment strategies for Ukraine

Last week, I have written about the general policy landscape for the reconstruction of Ukraine. This week’s article will focus on investment strategies for investment funds and companies looking to start or expand operations in Ukraine. Luckily, there is substantial interest across Europe to support the Ukrainian reconstruction.

Why Ukraine is an interesting country to consider?

Regional proximity

I am living in Vienna and Ukraine always feels close for historical and geographical reasons.

Parts of modern Ukraine used to be part of the Habsburg Empire and starting in the 19th century representatives from Galicia, Bukovina and Transcarpathia were deputies in the Imperial Council.

The border is less than a 600 km drive from Vienna or some 800 km from Berlin. You only need to cross Slovakia or Hungary to get to Ukraine.

That makes it an interesting location for European companies.

Changes in Rule of Law

Ukraine is an EU candidate country since 2022, and it seems likely that the close relationship to the European Union will continue for the foreseeable future. The EU is the largest investor, the largest trading block and the largest provider of financial assistance.

The candidate status also implies that there will be significant improvements regarding Rule of Law, accountability and anti-corruption measures tackling the concerns investors might have about investments in Ukraine.

Low wage-level

According to numbers from Eurostat, the average full time adjusted salary per employee is €55,000 in Austria, €51,000 in Germany, €18,000 in Poland, €17,000 in Hungary or €21,000 in Croatia to report a few numbers. The lowest average full time adjusted salary per employee is €14,000 in Bulgaria.

This compares to a monthly average of UAH 21,809 (roughly €500 or €6,000 on an annual basis) which would be significantly lower than for all other European countries with an average of €37,000.? Of course, the population shrunk over the last years and there might be a shortage of qualified workers, but it is still a large country with a high quality of education.

Going forward, we can expect a certain convergence of wages which might open up new opportunities for companies.

Procurement programs

The reconstruction efforts with the aim of “building back better” will require billions of investments in services and products which need to be sourced from companies inside and outside of Ukraine. That might mean an attractive market for European companies.

One example is the roughly €20 million in investment grants and technical assistance to rebuilt the water supply and sewage infrastructure in a city in southwestern Ukraine:

Municipal Infrastructure Development Programme – to support water and sanitation investments, rehabilitation of water supply and sewage infrastructure in the City of Chernivtsi. EU provides €17.75 million in investment grants and €2 million in technical assistance via the KfW.

Investment support?

Companies might benefit from loans and grants provided as part of the reconstruction efforts. This article will outline the different programs which might be available for companies and include grants, loans and other investments below.

General funding needs: Set-Up and Investment Costs

The first category is the costs of setting up the business in a new country. In its most basic form, it entails the costs for the registration of a new company, the costs for the office space and the costs for recruiting employees. This would be the case for IT services or trading companies.

A new production facility would need a large plot of land, the construction of the factory and its regulatory approvals and the purchase of the necessary equipment. It would also need a longer period of negative cash flows as the revenues will only increase over time.

The EBRD outlines its requirements for project funding in the following way:

• have good prospects of being profitable
• have significant equity contributions in cash or in kind from the project sponsor
• would benefit the local economy
• satisfy the EBRD's environmental standards as well as those of the host country

That means that anyone interested in accessing these funds needs some kind of equity contribution which can be in cash or even in some of equipment or other in-kind contributions.

The EBRD is also outlining the project structure in the following way:

• The EBRD funds up to 35% of the total project cost for a greenfield project or 35% of the long-term capitalisation of an established company
• Additional funding by sponsors and other co-financiers is required. The EBRD may identify additional resources through its syndications programme
• Typical private sector projects are based on at least one-third equity investment
• Significant equity contributions are required from the sponsors. Sponsors should have a majority shareholding or adequate operational control. In-kind equity contributions are accepted

That seems like an interesting funding structure for companies considering investing in Ukraine given that other grants might also be available.

Another example is the Green for Growth Fund that has a mandate to support the construction of renewable energy and energy efficiency measures in Ukraine (and other countries as well). So far, they have enabled 455 loans for energy efficiency and renewable energy.

Obviously, the list is not exhaustive and will continue to grow in the next months but shows the different mechanisms which are implemented.

General funding needs: Working capital

Beyond the cost of setting up a new factory or new legal entity, companies have long-term financing needs. Very few companies have no bank loans, and the refinancing of these bank loans can be difficult in certain circumstances .

A typical financing instrument is outlined in the Ukraine Investment Franework as one example of the round of investments:

Financial Inclusion Recovery Programme – to enhance access to finance for small and mediumsized enterprises and invest in their production capacity. EU provides €140 million in guarantees, €30 million in investment grants and €7 million in technical assistance via the European Bank for Reconstruction and Development (EBRD).

The Council of Europe Development Bank (CEB) supports microfinance schemes in Ukraine. These microfinance schemes are typically capped at €50,000 in a European context which might be enough for a large part of ongoing SME funding needs.

The European Fund for Southeast Europe (EFSE) is also active in Ukraine and provides funds for SMEs, rural areas and housing finance. It does not provide funds directly but works with tese financial institutions: (1) Agroprosperis Bank, (2) Boguslav, (3) Bank Lviv, (4) Credit Agricole Bank, (5) Novus, (6) OTP Leasing, (7) Piraeus Bank UA, (8) ProCredit Bank UA and (9) Syvash. So far, they have enabled €360 million for a current number of almost 1,300 active end-borrowers. We would be dividing total volumes by current borrowers but it seems safe to assume that the average volumes are in the range of above €200,000.

Other instruments

Export guarantees

This financial instrument will provide guarantees on exports to Ukraine. It targets SMEs and small mid-caps in most European countries that are exporting goods and services to Ukraine. Export credit agencies will enable these guarantees.

The Ukraine Export Credit Pilot was announced in the summer of 2024 and will have a total volume of €300 million.

Investment grants and research support

The EU has a range of programs to support research, development and commercial activities. In a more scientific setting, it is Horizon Europe. For regional development, it would be Interreg Europe, while digital project would be interested in Digital Europe.

For example, I am also involved in an exchange program for Ukrainian entrepreneurs who want to work with host entrepreneurs in EU countries.

It seems likely that Ukrainian companies as well as civil society organizations will have access to many of these programs rather soon.