MOTYL: Mr. Monyak, as Executive Vice President for Eurasia at WorldBusiness Capital, how would you assess existing investment opportunities in Ukraine?
MONYAK: As an emerging market lender, I look for an overlap of two variables in an economy: undercapitalized mid-sized commercial enterprises that have the capacity for sustaining high growth rates, especially through export earnings, and a local financial sector that is well-regulated, but insufficiently funded to serve the needs of those enterprises. This overlap creates the opening for an outside source of funding to make loans and equity investments that have an appropriate balance between risk and return. Since the Orange Revolution in 2004, Ukraine has shown the potential for establishing itself as a prime emerging market opportunity in the context of those two variables. However, domestic politics, global economic shocks, and geopolitical forces have conspired, often in combination, to undermine that potential, which remains far from being realized. Nevertheless, we’ve persevered through Ukraine’s turmoil of the last decade to develop and maintain a performing portfolio of loans, albeit at levels far below what we could have done had there been greater stability.
MOTYL: Are you expecting the Ukrainian economy to get going in 2016?
MONYAK: I think that there will be some economic growth in 2016, in the range of 1.5-2.0 percent. Already in the first few months of the year there have been some signs of recovery in industrial production. This uptick comes after two years of economic contraction: 10 percent in 2015 and almost 7 percent in 2014.
MOTYL: How will this likely improvement affect investors?
MONYAK: For the foreign investor, there isn’t enough visibility either in Ukraine’s politics or economy. Leaving aside the Russia factor, the infighting and squabbles within the Ukrainian government over fundamental issues such as the pace of economic reforms and the measures that need to be undertaken to combat systemic corruption signal to the outside investor community that no strong political consensus has yet emerged to provide a hospitable environment for foreign investment. But I think it’s worth distinguishing among investor classes. The likelihood is low, for example, that American institutional investors—a relatively cautious group when it comes to investing in the former Soviet space for a whole host of reasons—will be active in Ukraine this year. But it’s a different story when we’re talking about investors based in Europe or the Middle East who, due to geographic proximity along with limited high-growth opportunities in their home or regional markets, start out with a higher comfort level than their American counterparts. If Ukraine’s assortment of crises does not worsen and the newly-constituted Hroysman government appears stable and capable of instituting appropriate reform-minded measures, then I would expect an uptick in investor interest in mid-sized projects, especially those involving foreign companies that have been active in Ukraine previously.
MOTYL: Investors also have long memories.
MONYAK: Exactly. The stories of investors who were burned in Ukraine by raiding scandals, the absence of an enforceable property rights regime, and the monopolistic practices of oligarchs are well-known and will not be simply forgotten just because investors can now purchase assets at prices that are at unprecedented lows. The good news is that enough investors are watching and waiting closely for clarity and visibility: for an end to the “one-step-forward, one-step-backward and one-step-to-the-side” sequence with respect to reforms. Once a strong signal is given—say, the new government meets the conditions for the release of the $1.7 billion third installment of IMF assistance which has been delayed since last October and institutes measures to reform the Public Prosecutor’s Office and the courts—I believe that investors will react positively and in a reasonably short time-period. If the Ukrainian politicians move quickly, we could see growth and investment toward the latter portion of 2016.
MOTYL: That refrain—“if the Ukrainian politicians move quickly”—has been heard many times since 1991.
MONYAK: Perhaps I’m being Pollyannaish, but, sooner or later, even Kyiv has to be able to get things right.
MOTYL: How do investors view the new government?
MONYAK: Again, I’m going to refer to distinctions among the investor audiences. Americans, especially, were hoping and expecting the formation of a “technocratic” government in March, and the greatest hope was pinned on Finance Minister Natalie Jaresko becoming the Prime Minister and having a free hand to name her cabinet. When that scenario didn’t materialize, there was not only disappointment, but also the premature conclusion that the appointment of Volodymyr Hroysman, a Poroshenko ally, to the post signified a suspension of the reform process and Ukraine’s return to some form of its crony capitalist past. It’s early still, but this viewpoint has been sufficiently widespread in the mass and specialized media to snuff out any budding interest in Ukraine among US-based investors. But let’s talk about two other significant audiences. First would be the Ukrainians themselves—local investors—who perhaps were a bit more skeptical than foreigners about the likelihood of the technocrat scenario and are driven less by the vicissitudes of corruption measures and transparency indicators. It’s the devil they know, after all. If the Hroysman government demonstrates stability, staying power, and a reasonable adherence to the reform course, then these factors should be sufficient to cause a rise in local investment, whether its hryvnia-denominated capital within the country or hard currency financial flows from family offices in Europe whose beneficiary owners are Ukrainians. In turn, a show of confidence in the new government by local investors will catalyze the investment activity of the second audience, the development financial institutions (International Finance Corporation, European Bank for Reconstruction and Development, etc.) that have always represented a major source of foreign investment in Ukraine and did not suspend their programming at the height of the crises in 2014-2015. By design, development banks can mitigate medium to high levels of political risk, but to unlock the substantial pools of capital available to them, they need to partner with other private-sector investors, both local and foreign. To the extent that the Hroysman government reduces uncertainty and spurs local and some foreign investment, I’d expect to see increased development bank financing as well.
MOTYL: Which sectors of the Ukrainian economy are of greatest interest to investors such as yourself?
MONYAK: With a country that’s the second largest exporter of grains worldwide, you have to start with the agricultural sector. For the foreseeable future, the world demand for basic foods will be on an upward trend and Ukraine will play a major role in meeting that demand, whether it’s for corn, wheat, barley, sunflower oil, soy, or poultry products. In terms of output, Ukrainian agriculture will benefit greatly from additional investments in machinery for cultivation, storage, and transportation of product. I’d also cite the IT sector. Ukraine has an abundance of programming talent. The country is said to have the largest number of software engineers in Central and Eastern Europe. Over 100 global companies already have software R&D facilities in Ukraine. Other promising sectors are energy, both traditional and renewable, health care/pharma, and financial services.
MOTYL: Won’t the ongoing war with Russia deter Western investors?
MONYAK: There’s no question it will, and the Russians are quite aware that this is part of the price that they want Ukraine to pay for not capitulating to their demands for ending the conflict. War makes news. War heightens outsiders’ perceptions of political risk, no matter how effectively those seeking investment can explain that the war is highly unlikely to expand beyond its current borders and that, by all indicators, the military conflict has simmered down to a level that is far below where it was a year ago. “Isn’t there a war going on there?” That’s the most common reaction from a potential investor when approached about an opportunity in Ukraine. This being the case, it’s difficult to see how Western investment will flow into Ukraine in meaningful volumes while the guns are still active in the Donbas. This is not to suggest that there isn’t a unique category of investor who can measure and mitigate the political risk associated with the war, but these are individuals who know the Ukrainian landscape quite well and have most probably invested there previously with some success. At present, the number of investors who fall into this category is relatively small.
MOTYL: What do you expect of Ukraine’s economy in the foreseeable future?
MONYAK: Notwithstanding all the hindrances to Ukraine’s development that we can cite today, I remain optimistic that they will be overcome over the next few years and that the country will be well on the way to becoming a vibrant emerging market with significant economic growth and diversification. The growth will be distributed over a broad range of economic sectors.
MOTYL: Aren’t you making Pollyannaish assumptions in making this prediction?
MONYAK: I hope not. I start with the premise that the conflict with Russia will be resolved one way or another, if for no other reason than that Russia needs to re-engage with European financial institutions and will be eager to reach some lasting agreement with Ukraine on the Donbas in order to have the sanctions removed. And it doesn’t really matter whether that resolution leaves the Donbas as part of Ukraine de facto or de jure. All that’s important is that, with a genuine military disengagement, Ukraine can focus its attention and resources on its other pressing problems. I also assume that that a serious level of reform-minded consensus among political elites supported by a stable parliamentary coalition will emerge soon in Kyiv, though whether that happens in 2016 or 2017, I cannot predict with any degree of certainty. With a resolution of the Russian conflict and a stable government committed to institutionalizing a law-based, reasonably transparent market economy, all of the positive aspects that one can highlight about Ukraine—the highly educated work force, the unlimited capacity of the agricultural sector, the industrial base, the transportation linkages, etc.—will become the basis for a dynamic and growing economy that will attract increasing volumes of foreign direct investment. Even in the best of circumstances, the debt overhang and other legacies of Ukraine’s crises will limit the growth rates to the low single digits in the near term. But looking out over a longer time frame, say from 2020 onwards, we shouldn’t be surprised to see annual growth rates reaching the 5-10 percent range.
MOTYL: Ukraine as an East European tiger?
MONYAK: That reminds me of the Bill Gates quote, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” In Ukraine’s case, if the country can finally catch a break with respect to the external factors, then I’d say that the Slavic tiger could be roaring within 5-7 years. I don’t think that people realize just how far Ukraine has dropped economically since the onset of the crises. Even after adjusting for the loss of the Donbas, the economy could grow at very high rates for several years in a row without reaching the level it was at in 2013. With growth rates reaching 7 percent or 8 percent five years from now, Ukraine has the potential to become a very attractive destination for investment of all kinds. That being said, there’s much to be done in Kyiv before that vision can become a reality.