Ukraine is of growing interest to many investors. Its foreign trade grew 12% to US$104 billion in 2018, according to the country’s State Fiscal Service, and the country’s recent parliamentary elections are likely to increase economic growth further.
The country’s raw materials are cheap, workforce skilled, and its agricultural land (more than 70% of the country’s territory), remains a strong mid- to long-term investment opportunity. Foreign players directly invested US$2.3 billion in the agribusiness sector in 2018, up 6-7% from 2017. Such land cannot currently be bought and sold, but this may change — and soon.
On July 21, 2019, President Volodymyr Zelenskyi’s party (Servant of the People) scored the country’s first ever parliamentary majority, giving it full control over the cabinet of ministers, the office of the president, and parliament. The new political leadership is set to pursue a liberal, market-oriented reform agenda.
Zelenskyi has ordered legislation to be drafted by October, overturning the ban on the sale of the country’s farmland. The deadline for the removal of the agricultural land sale moratorium is scheduled for December 1, 2019. Agricultural reform would open up 32 million hectares of arable land to foreign investment. This is likely to please western backers — such as the International Monetary Fund, and the World Bank — who have long urged Ukraine to establish a competitive and open land market, believing it could add billions of dollars to foreign direct investment inflows and increase annual economic growth by 1-2%.
President Zelenskyi also plans to kick-start large-scale privatization of state enterprises by April 2020, which should attract additional funds and boost investment in businesses such as electricity generator Centerenergo, and Odessa Portside chemical plant. New investment law protections and a revised new labor code are further reforms targeted for implementation in January 2020.
Despite these positive changes, external and domestic investments remain low compared with other western neighbors. Questions also remain over the availability of insurance for foreign investors.
Challenges
The country’s instability traditionally created a relative lack of insurance capacity, which has not helped foreign investment in Ukraine. In recent years, the country has seen a large number of insurance claim pay-outs — in excess of £200 million — with many relating to political violence.
The major risks generally insured in Ukraine have been either sovereign or larger corporates. Some large, privately owned, and well-operated corporates — mainly in the commodity sector (including agribusiness and metals) — have been assessed as acceptable credit insurance counter-party risks. This was largely due to their ability to adapt during these challenging times as well as their international operations, which provided them with better access to hard currency and meant creditors had recourse to them outside of Ukraine. The fact that the companies were themselves users of the credit insurance product and market also helped.
With respect to pure political risk (that is, confiscation/expropriation/political violence), there has been some appetite for short-term exposure in western Ukraine, for key sectors.
Be a good risk
Subject to the political and economic situation remaining stable, or improving in the short term, the number of insurance requests is likely to increase as foreign investors increase their interest in Ukraine.
The insurance market is likely to become more willing to consider insuring Ukraine investments; however, the overall capacity available for Ukrainian risk is likely to remain limited and not increase at the same pace as investor interest. Insurers will likely have to manage their internal limits closely, so scarcity of capacity may be the primary cause of market declinatures, rather than poor appetite.
Companies with experience in the region and a strong track record will have an advantage in unlocking market capacity. However, with capacity scarce and competition increasing, the timing of a company’s approach to the insurance market is equally important. It is advisable for investors to continuously engage with insurers in order to explore their expectations for Ukraine-based risks — thereby ensuring they are well positioned if or when insurer appetite increases.
