Issues & Insights

Ukraine Should Make Good On Promises To Foreign Investors

Solar array in Ukraine. Source: Wikimedia Commons

Competition for international investment in the midst of the Covid 19 induced, global recession, will be fierce.  The countries that coherently and clearly offer the best terms and are the most reliable, will be the countries that emerge on the path to economic recovery the fastest.  However recent moves by the Ukrainian government to cut tariffs on green energy production almost appear aimed at discouraging investors from considering Ukraine.

While the U.S. has strongly supported Ukraine in its efforts to fight Russian military aggression with the sale of javelin anti-tank weapons, as well as enforced sanctions on Putin and his close surrounding.  In addition, the U.S. and EU have pushed hard for anti-corruption reforms to clean up Ukraine’s reputation as an unreliable place for Western companies. 

The West also persuaded Ukraine to begin strategic development of green energy resources including the sun and wind, to both improve their ecological situation as well as reduce reliance on Russian electricity imports.  Subsequently the Ukrainian government offered an attractive green tariff to overcome investors’ fears due to Russian aggression in eastern Ukraine and Crimea.

The strategy worked and succeeded in bringing billions of foreign direct investment to Ukraine, including $4.5 billion last year alone. Then in September last year, the government began talks with investors to try to persuade them to accept “voluntary reductions” in tariffs and after nine months the issue is coming to a head.

At the same time the negotiations were stalling in March, the government began withholding payments to green energy producers.  By not paying producers, the government is trying to force investors to accept the “voluntary reductions”.

This all comes after a string of disastrous defaults on Ukraine’s corporate debt and outright fraud in the agricultural sector, where the owners of Mriya made off with millions of dollars of investors’ money. Today we see the risk of investors being harmed when authorities take heavy-handed approaches to solve personal vendettas.

That seems to be the case between Ukraine’s Anticorruption Chief Artem Sytnyk and the owner of one of Ukraine’s largest agro holdings, Ukrainian Land Farming, Oleg Bakhmatyuk.

Despite pleas from investors for Ukraine’s government to take into  account the billions of dollars that international investors have at risk in the company, the authorities refuse to include investors in this resolution process and have used questionable tactics to that could leave investors empty handed.

So the question is how many bridges with international investors is Ukraine willing to burn for short term or internal political gain?

Days ago it was announced that the International Monetary Fund approved a $5 billion loan to the government of Ukraine.  Starting this month, the country will receive $2.1 billion for coronavirus relief, with other installments over the next 18 months.  Now the question becomes – when will Ukraine pay its arrears to foreign investors who believed in Ukraine even in the midst of war?

Prime Minister Shmygal and Energy Minister Olga Buslavets announced this week that a memorandum had been agreed with DTEK owned by oligarch Rinat Akhmetov and the wind industry.  However, solar producers, particularly the foreign ones, are being left in the lurch.

They are given a “take it or leave it” offer with only verbal promises of payments of electricity arrears sometime over the next year.  If Ukraine wanted to discourage foreign investment, it has certainly succeeded. 

Governments stopped operating on the gold standard over half a century ago and replaced it with the trust standard.  If President Zelensky stays his current course, that trust will be destroyed for Ukraine. Offers of “investment nannies” to help foreign companies will fall on the deaf ears of investors, as they flee Ukrainian instability in search of reliable European markets. 

In the post-Covid 19 economic environment, countries should be honoring incentives for investors instead of punishing them for trusting in government promises. The billions invested into Ukraine came from debt financing based on state guarantees. Sudden revocation of those agreements leaves current investors in the lurch and makes Zelensky’s talk of “investment nannies” seem comical.

Green investors who don’t agree to the government’s terms will likely default on bank loans. This can cause a ripple effect of bankruptcy in the financial sector, which has provided many of the investment guarantees.  Meanwhile renewable energy producers are preparing international trade disputes against Ukraine which will further ruin future investors’ willingness to take a chance on Ukraine.    

If President Zelensky wants to avoid permanent damage to Ukraine’s international image, his direct involvement in negotiations is needed.  To stave off international trade disputes with European and North American companies, Zelensky should use a portion of the $2.19 billion IMF tranche to pay electricity arrears to the producers.  This good faith gesture will reassure investors that an amicable solution is still desired. and that Ukraine still wants foreign investment.  Without urgent intervention, this situation will continue to worsen for Ukraine and Zelensky.

U.S. Army Colonel (Ret.) Wes Martin has served in law enforcement positions around the world. He holds an MBA in international politics and business. 

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1 comment

  • .
    Ukraine can’t afford the expensive “alternate” energy crony scams started by Obama eco-fascists. And now they realize it.

    Their only energy policy should be cheap energy,
    such as cheap US LNG that is readily available, non-Russian.
    .

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