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November 14, 2007

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Reference ID Created Released Classification Origin
07KYIV2821 2007-11-14 13:04 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv


DE RUEHKV #2821/01 3181304
R 141304Z NOV 07

E.O. 12958: N/A 
REFS: A) 2005 KIEV 1828 
      B) 2005 KIEV 1765 
Treat as Sensitive but Unclassified.  Not for Internet. 
1. (SBU) Summary: Ukraine continues to trail behind most of its 
neighbors in attracting Foreign Direct Investment (FDI).  The GOU 
was slow to recognize its role in this sphere, although it finally 
created a lead investment promotion agency, called InvestUkraine, in 
2005.  InvestUkraine, with USAID assistance, has since worked to 
build up its capabilities.  It remains a small agency with little 
ability to affect government policy, however, and is still far from 
a model investment promotion agency.  Some GOU officials, especially 
at the local levels, continue to question why they need to encourage 
foreign investment.  While enhanced investment promotion efforts 
have helped attract more FDI to Ukraine, really significant 
increases will come only when the GOU tackles the institutional 
problems that create a poor investment/business climate.  End 
Ukraine Slow to Welcome FDI 
2. (U) Ukraine has consistently trailed behind its Central and 
Eastern European neighbors in terms of attracting Foreign Direct 
Investment (FDI).  Despite the 2005 sale of the Kryvorizhstal steel 
mill to international giant Mittal Steel for USD 4.8 billion, the 
single largest foreign investment in Ukraine to date, FDI levels 
remain relatively low.  The total stock of FDI stood at about USD 24 
billion as of July, according to official statistics.  According to 
an early 2007 study by the Vienna Institute for International 
Economic Studies, FDI per capita was a paltry USD 500, only about 
12% of the average figure for the 10 new EU members of Central and 
Eastern Europe, and about 32% of the figure for Russia. 
3. (SBU) The GOU was slow in recognizing the government's role in 
attracting investment, for years doing so only on an ad-hoc basis, 
with no institution taking the lead.  The case of computer giant 
Dell, which in 2005 considered opening major production facilities 
in Ukraine (refs A-B), was a low point.  Dell reps outlined to the 
GOU the kind of incentives the company would need to open in 
Ukraine, yet the GOU failed to respond, or even designate someone to 
serve as Dell's primary point of contact.  Dell decided to open a 
plant in Poland instead, and so Ukraine missed a golden opportunity. 
Investment Promotion Agency Finally Born... 
4. (SBU) In August 2005, the GOU established the Ukrainian Center 
for Foreign Investment Promotion -- recently re-branded as 
InvestUkraine -- to serve as the country's lead investment promotion 
agency.  InvestUkraine is a quasi-independent agency falling under 
the State Agency of Ukraine for Investments and Innovations.  (Note: 
The State Agency for Investments and Innovations itself has very 
limited contact with potential investors.  Its primary area of 
activity appears to be managing a state fund that provides 
low-interest loans (about USD 30 million worth this year) to select, 
domestic firms.  Many observers in Kyiv also believe that it 
primarily serves to promote the interests of its politically 
well-connected director, Viktor Ivchenko, who is reportedly close to 
President Yushchenko and whose spouse is governor of Kyiv Oblast. 
End Note.) 
5. (U) InvestUkraine has expanded its capabilities over the last two 
years, in part thanks to training provided by USAID's Local Economic 
Development Program, creating a corps of English-speaking investment 
promotion professionals and using the Czech agency CzechInvest as 
its model.  InvestUkraine has developed relationships with key 
oblast and city officials so that it can point potential investors 
to the right people in the regions.  Graduates from the 
USAID-sponsored training have themselves formed ProInvest, a 
nationwide network of investment promotion professionals.  Ruslan 
Fedorov, a bright InvestUkraine Investment Manager, told Econoff on 
November 8 that he saw a major improvement in the work of local 
officials that had participated in the training.  The State Agency 
for Investments and Innovations plans to provide InvestUkraine with 
space at its regional innovation centers, now under development, in 
order to expand InvestUkraine's regional presence. 
...But Still Has a Lot of Growing Up to Do 
6. (SBU) InvestUkraine remains a small agency and does not have much 
influence within the government.  Igor Nikolaiko, a long-time 
government official, took over as Director of InvestUkraine in May. 
During a introductory meeting with Econ Counselor, Nikolaiko 
appeared focused more on obtaining additional resources for his 
organization -- his priorities are a new building and up to 10 
foreign offices -- than on developing the country's investment 
egy.  Ivchenko has said that he had installed Nikolaiko in 
order to "bolster the leadership" of the organization.  Ivchenko 
has, on several occasions, publicly criticized InvestUkraine for its 
lack of effectiveness. 
7. (U) Recruiting and keeping capable staff is also difficult. 
Energetic, business-minded, and English-speaking candidates -- the 
ideal investment promotion professionals -- can draw much larger 
salaries in Ukraine's booming private sector, making it hard for 
InvestUkraine and local state bodies to compete.  For example, one 
promising young InvestUkraine employee recently left the agency 
after less than a year for Germany-based East West Capital. 
8. (SBU) Petr Adamek, a consultant from the Czech Republic-based 
BermanGroup who has worked closely with the GOU, previously told 
Econoff that InvestUkraine suffered from a lack of "strategic 
vision" in terms of how it pursued potential investors, often just 
sitting back and waiting for official inquiries.  USAID's Local 
Economic Development Program has since helped InvestUkraine to 
develop an official strategy, although it remains to be seen how 
well the agency's leadership will implement it.  Large portions of 
InvestUkraine's website remain "Under Construction."  Another 
weakness is that the agency has never been given a clear mandate to 
take over all investor-related functions, as the government 
maintains a plethora of bodies -- state agencies, consultative 
bodies, interagency councils, etc. -- that still interface with 
potential investors. 
Lingering Resistance to Foreign Investment 
9. (SBU) Some officials within the GOU and oblast/city governments 
remain suspicious of foreign investment.  During a July training 
session with a Tyco Electronics representative, an official from the 
eastern Ukrainian city of Dnipropetrovsk commented, "We've talked a 
lot about what information we [city officials] should provide to the 
investor, but the investor must also show why we need him.  The 
investor should prove that he will bring only the newest 
technologies."  The comment reflected a residual mentality among 
some Ukrainians that the state needs to defend against certain kinds 
of foreign investors. 
10. (SBU) Ukrainian government officials often appear obsessed with 
promoting high-tech industries in Ukraine, at the expense of all 
others.  For these officials foreign investment is valuable only for 
its potential to bring "new technologies," never clearly defined, to 
the country.  Many Ukrainians of all stripes are resistant to the 
idea of Ukraine serving as a source of cheap labor.  With an 
educated workforce, relatively low wages (average monthly wages are 
currently about USD 240 per month according to official statistics), 
high unemployment in some regions, and proximity to European 
markets, Ukraine could be a very attractive destination for foreign 
manufacturers.  As Andres Aslund, the well-respected economist and 
Eastern Europe political analyst, recently put it, "You really have 
to try hard to deter foreign investment from Ukraine." 
Comment: If You Don't Build It, They Won't Come 
--------------------------------------------- -- 
11. (SBU) What, then, is holding Ukraine back?  Foreigners have 
increased investment in Ukraine, but this has been largely 
concentrated on discrete sectoral opportunities, like getting into 
the booming banking sector, oil and gas exploration, or the growing 
consumer sector (e.g., Pepsi's recent purchase of juice producer 
Sandora), rather than any overall investment attractiveness of 
Ukraine.  Despite enhanced investment promotion efforts, a cheap, 
highly educated workforce and a location on the doorstep to Europe, 
Ukraine's business climate remains lousy.  Corrupt courts, a 
dismally-administered tax system, and over-regulation of business 
activities are just some of the institutional problems that make 
operating in Ukraine a daunting task for even the most intrepid 
foreign businessman.  Privatization, a potential catalyst for major 
foreign investment, has slowed almost to a halt, with the 
privatizations that have gone forward being conducted under less 
than fully transparent conditions (septel).  Ukraine was ranked 
139th out of 178 countries in terms of the ease of doing business in 
the World Bank's most recent survey, putting it behind countries 
like Iran and Uzbekistan, and not even close to less-than-model 
neighbors Russia (106th) and Belarus (110th).  Until Ukraine fixes 
its business climate, foreign companies will remain reluctant to 
jump into the country with both feet.  End comment. 


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