After 3 Years of Hostility, Hysteria & Tears Russia Still #1 Investor in Ukraine

Three years after anti-Russian politicians took power in Kiev, Russian money continues to help support Ukraine's economy. According to figures compiled by the Ukrainian State Statistics Service, Russian investment in Ukraine reached $1.67 billion US in 2016; that is 38% of all foreign investment in Ukraine, and more than that of any other country.

Over three years ago, amid the euphoria that followed the Maidan coup d'etat, Ukraine's new authorities promised that billions of dollars' worth of investment would soon flood into the country from Kiev's new allies in the EU and the US. Three years on, statistics confirm that these hopes have failed to materialize. 

According to the latest foreign trade figures from Ukraine's State Statistics Service, Russian businesses invested $1.67 billion into the Ukrainian economy in 2016, which is 38% of total investment. Taken together, EU countries invested slightly more — $1.9 billion. Individually, however, none of them managed to come anywhere Russia's total. 

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Cyprus businessmen, for example, invested $427.7 million into Ukraine; investors from the UK provided $403.9 million; Dutch business contributed $255 million, and Austrian investors provided $249.9 million. 

These figures are negligible, economists say, when accounting for the fact that many of these countries – the UK for example, have trillions of dollars-worth of investments in countries around the world.

Furthermore, the tiny island nation of Cyprus is known as a major offshore tax haven for Ukrainian and Russian capital. The Netherlands, the UK and Austria are also known for having favorable tax conditions, making it likely that at least some of the funds listed as coming from Cyprus or Europe are actually Ukrainian oligarchs' capital being pumped back into Ukraine.

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According to the State Statistics Service, Ukraine got a total of $4.4 billion of foreign direct investment in 2016, which is $642 million more than the year before. 

A significant portion of the funds — $2.8 billion, went to companies connected to the financial services and insurance industries. Foreign businesses also invested about $525 million into the wholesale and retail trade sectors. $475 million went to Ukraine's industry, which, unfortunately, is a drop in the bucket for the former industrial mega power.

Russian businesses, for their part, remain particularly active in Ukraine's banking sector, telecommunications, and, by some accounts, the electricity market. Part of the difficulty in accounting for these companies' presence is the fact that since the 2014 Maidan coup, Russian businesses have had to minimize their associations with Russia to avoid problems with the government, or from groups of nationalist raiders known to attack businesses they suspect of having Russian ties. 

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Sberbank of Russia branch in Kiev surrounded by Ukrainian police following vandalism by unidentified radicals. File photo.

In addition to investment power, Russia has also remained one of Ukraine's most important trading partners, accounting for $3.6 billion-worth of exports and $5.1 billion in imports in 2016. Trade continues in spite of three years of confrontation with Moscow, and Kiev politicians' repeated promises to abandon trade with Russia in favor of the EU.

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Following the Maidan coup, Kiev expected to gain access to European markets for its agricultural goods, semi-finished goods and industrial output. Unfortunately, over a year after the EU-Ukraine free trade area came into effect, producers have discovered that European governments aren't very eager to lift quotas on Ukrainian food items, and have little use for Kiev's industrial goods.

Asked to comment on Russia's surprising position in the latest investment and trade figures, Ukrainian economist Alexander Koltunovich pointed out that unfortunately, they are more an indication of Ukraine's overall economic decline than of any enduring Russian-Ukrainian economic ties. 

Speaking to the Russian online newspaper Vzglyad, Koltunovich explained that while Ukraine continues to have close economic and cooperation ties with Russia, the trade and investment figures are still far below the level of whose which existed before 2014.

"Of course, Kiev's policy aimed at the disintegration [of ties] with Russia has affected the outflow of foreign capital from Ukraine," the economist noted. "Economic sanctions, the transit blockade, the food embargo – all of these measures certainly haven't served to benefit Ukrainian-Russian bilateral relations." Accordingly, Koltunovich emphasized that "the figures we have today are really remnants, a reminder of the once-powerful economic ties between the two nations."

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In this light, Russia's share of total investment is more an indication of the depressed state of the Ukrainian economy, and its failure to reorient its economy toward Europe, than it is of the strength of Russian-Ukrainian economic ties.

As far as European foreign direct investment is concerned, Koltunovich emphasized that Ukraine had never been an investment for European businesses. Furthermore, "the 2014 Association Agreement and the creation of a free trade zone made investing in the Ukrainian economy simply impractical," the expert said. "What sense is there in investing in Ukrainian [industries'] modernization, or in creating new production capacity, when these will compete with European producers?" he asked.

Ultimately, the economist noted that while Kiev will now happily boast about the $642 million overall growth in FDI, the economic reality remains very grim. "What is a total foreign direct investment of $4.4 billion against a background of a public debt of $70.1 billion, or losses from exports totaling $27 billion in losses over three years?" 

Kiev's sponsors from the International Monetary Fund aren't particularly optimistic about the country's foreign investment potential, either. A recent IMF forecast up to 2021 noted that FDI will not exceed $5-6 billion in these years under their most optimistic scenario. Foreign trade will remain scarce too, the agency says, with the country having to find several billion dollars a year just to cover its trade deficits.