The following is the Feb. 6, 2024 edition of our Ukraine Business Roundup weekly newsletter. To get the biggest news in business and tech from Ukraine directly in your inbox, subscribe here.
Life support
Diia.City, the special tax regime set up for local and foreign tech firms in Ukraine practically on the eve of the full-scale invasion, is in trouble.
It was supposed to be the change that finally made the business climate attractive and beneficial for IT companies and startups. Since it was unveiled on Feb. 8, 2022, 800 companies have become “residents” of Diia.City. For the first three quarters of 2023, Diia.City resident companies paid around $159 million in taxes.
That number is still far behind the amount the IT sector as a whole contributed to Ukraine’s budget. In the first two quarters of 2023 alone, IT companies paid around $316 million in taxes, Forbes Ukraine reported. Many IT companies in Ukraine still prefer to save on payroll taxes by paying employees as contract workers, or through what are called FOPs here in Ukraine. Meanwhile, some Ukrainian officials have doubted Diia.City’s effectiveness.
Enter Diia.City United, a new business association announced recently in Ukraine of high-profile Ukrainian tech companies hoping to keep momentum behind the regime.
At an event tonight on Feb. 6 to formally introduce the new union, Nataliya Mykolska, CEO of Datallion and now executive director of Diia.City United, said the number one priority of the new business association, which will work closely with the Digital Transformation Ministry, is to “protect” Diia.City.
The business association already counts the leaders of household-name Ukrainian tech companies among its members, including Ajax Systems, Genesis, MacPaw, Monobank, Netpeak Group, Roosh, and other industry leaders. The group is hoping that through this government-friendly union of sorts, they can communicate and defend the interests of IT companies and grow Diia.City.
“It’s about the survival of Diia.City and keeping it going” one of the event’s guests told me when I asked him what he thought this was all about.
Transparent procurement
This section was brought to you by Kyiv Independent reporter Igor Kossov.
The government on Feb. 1 approved a resolution to buy all the stuff that doesn’t kill people through the country’s transparent bidding platform called Prozorro for the Ukrainian word “transparent.”
It also approved two additional resolutions related to the defense sector, one on the deregulation of ammunition production for drones by "improving the procedure for registering manufacturers."
To explain. There are now two bodies: The lethal and nonlethal defense acquisition agencies. The first buys most of the weapons, vehicles and sensitive technology. The other buys just about everything else, and only through Prozorro.
The ministry’s Procurement Policy Department has authority over both bodies and sets their agenda. They then go out and try to get Ukraine the best possible deals. (The lethal defense acquisition agency was launched last year but never quite took off and is being rebooted. The nonlethal one, briefly known as the State Rear Operator, launched two months ago.)
The need for transparent bidding for government contracts is self-evident — procurement is a source of easy corruption in every state agency, especially in countries with weak rule of law. Prozorro was created during the post-Viktor Yanukovych (Ukraine’s former president) reforms to address that very thing.
Until recently, defense procurements were exempt from having to use this system. But corruption scandal after corruption scandal pushed the Defense Ministry’s reputation to a dangerous edge.
As Ukraine begged for money to survive and the military cut combat bonuses, the state paid for food at inflated prices, bought useless jackets and body armor, and sometimes got nothing at all.
Going full Prozorro will be nothing new to Arsen Zhumadilov, the head of the State Rear Operator. In fact, he used to have almost the same job, but in health. He was in charge of Medical Procurements of Ukraine, which was supposed to get Ukraine the best deals on medications and medical supplies, bypassing entrenched corruption at the Health Ministry.
When I was investigating health procurements during the Covid-19 years and often spoke with Medical Procurements, I got the picture of a competent team trying to keep succeeding at its job and being stonewalled by the Health Ministry at every turn. The state’s rear may be in a good operator’s hands.
But this is just a piece of the major overhaul that will be sweeping through the ministry not just in the weeks but the years to come. At some point, Ukraine will have to pass a NATO inspection of its procurement system.
Ukraine is barely seeing any investments
Despite its economy steadily improving from the first months of the full-scale invasion, very little foreign capital is currently trickling down to Ukraine’s private and public sectors, Kyiv Independent business reporter Dominic Culverwell writes in his latest.
Money from international financial institutions has helped stabilize the economy, bolstering forecasts of 3.2% gross domestic product (GDP) growth this year, according to the World Bank. But private investors are still hesitant in the face of a protracted conflict and war risk insurance programs have failed to persuade most.
“It's impossible to expect investments during the war. The risk of war is so huge,” Serhii Fursa, the deputy managing director at investment firm Dragon Capital, told the Kyiv Independent.
There is practically zero foreign investment outside of large international financial institutions, he added.
The low volume of FDI is largely down to physical risk. If an international company purchases a factory or plant, Russia may deliberately strike it as part of its economic war against Ukraine.
War risk insurance programs have also been slow to take. The programs that are either underway or in progress will only cover exports at first.
Despite these various insurance plans, investors aren’t convinced, according to Fursa. “War risk insurance is so hard to get. And it's very complicated in a bureaucratic way,” he said.
Read the full story here.
Breaking records
Ukraine exported 12 million metric tons of goods in January, hitting a monthly record since the beginning of Russia’s full-scale invasion in February 2022, the Economy Ministry said on Feb. 5.
According to the ministry, in January 2022, just before the start of the full-scale war, Ukraine exported not much more – 14 million metric tons. "We are very close to returning to pre-war levels of physical exports," Economy Minister Yuliia Svyrydenko said.
Around 8.7 million metric tons of the goods exported in January were shipped by sea through Ukraine’s Black Sea grain corridor set up after Russia pulled out of the Black Sea Grain Initiative last July. One of the ships that set sail through the corridor last month was the first to do so with war risk insurance.
The insurance was provided under the $50 million Unity facility, a joint project between the Ukrainian government and the New York-based risk management firm Marsh McLennan and London-based insurance company Ascot to reduce insurance costs of grain exports.
"The normalization of the insurance market in trade is a crucial element in the recovery of exports of value-added products," Svyrydenko said.
With this initial success of the Ukraine facility, Kyiv is hoping similar insurance instruments will be introduced for other types of exports in the future.
Talking business with Oschadbank
In a recent interview for our Talking Business in Ukraine series, we spoke to the CEO of Ukraine’s second-largest state-owned bank Oschadbank, Sergii Naumov. The bank posted record profits in 2023, ending the year with an operating profit of $316 million against $206 million in 2021 before the full-scale invasion.
We spoke to Naumov about how the state-owned bank he runs has managed to navigate the war and still find a way to grow.
The Kyiv Independent: How has Oschadbank navigated nearly two years of full-scale war?
Sergii Naumov: Surprisingly, the full-scale war period has been the most stable time for Oschadbank's digital channels. Recently, the bank introduced new mobile branches to deliver cash for pensions and social benefits and to provide other banking services near the front lines. The bank also provided two old mobile branches and 118 armored cars to the army and continued supporting the military.
The Kyiv Independent: How do you assess the current business climate in Ukraine, especially considering your interactions with entrepreneurs and major companies?
Sergii Naumov: I wouldn't characterize the current business climate as a disaster. I've actually observed improvements even amid the full-scale war. It was encouraging to see that during 2023, we were able to release provisions, which is an indication of a lack of new problematic loans at a net level. Businesses have become more disciplined and responsible in their financial dealings with banks, which is a positive development.
The Kyiv Independent: In your opinion, what expectations do businesses currently have of the government or the state?
Sergii Naumov: Businesses are primarily looking for fair treatment from the government. While we acknowledge that the situation is far from ideal, the fundamental expectation is to be treated fairly and not face undue pressure or corruption. While it cannot be said that everything is perfect, there has been a notable improvement, and the overall trend is positive. The unity within society, driven by a shared goal of achieving victory, has played a crucial role in fostering a more conducive business environment.
Read the full interview here.
What else is happening
EU, IFC to mobilize over $530 million for Ukraine's private sector recovery. The European Commission and the International Finance Corporation (IFC), the investment arm of the World Bank, signed a guarantee agreement worth up to 90 million euros ($97 million) to support private sector investments in Ukraine's reconstruction efforts, the EU Commission's press service reported on Feb. 5. This is part of the IFC's Better Futures Program that aims to mobilize over 500 million euros ($537 million) across sectors, including infrastructure, goods production, decarbonization, and job preservation.
Ukrainian agricultural company receives 1-million-euro loan from Raiffeisen Bank to complete energy-efficient grain elevator. Agrosem, one of the largest distributors of fertilizers, agricultural machinery, and agricultural production equipment in Ukraine, received a 1-million-euro five-year loan from Raiffeisen Bank to complete the construction of a grain elevator on the border with Poland, the bank announced on its website on Feb. 5. The elevator will have a capacity of 22,000 metric tons and will allow Ukrainian farmers to ship 400,000 metric tons of grain per year to the EU, the announcement said. The project is 70% complete and is being constructed with energy-efficient technologies, including energy-saving (LED) lighting and energy-efficient heating and ventilation systems.
Japan to host over 200 businesses at conference promoting Ukraine's economic recovery. Around 100 Japanese and Ukrainian business are slated to attend a Japan-Ukraine economic reconstruction conference in Tokyo later this month, Japanese media outlet Kyodo News reported on Feb. 3. The upcoming conference on Feb. 19 aims to facilitate public-private collaboration in energy, agriculture, and infrastructure to provide support for Kyiv as it continues its economic reconstruction amid Russia's full-scale invasion. Ahead of the conference, Japan is exploring ways to assist Japanese companies in starting business in Ukraine, including easing travel restrictions, according to Kyodo News. Japanese Prime Minister Fumio Kishida is also set to present Tokyo's strategies for aiding in Ukraine's reconstruction at the conference.
Reuters: China cautions Ukraine over inclusion of Chinese companies in 'sponsors of war' list. China warned Ukraine that the inclusion of 14 Chinese companies in Ukraine's "international sponsors of war" list could potentially harm relations between the two countries, Reuters reported on Feb. 1, citing unnamed Ukrainian sources. The "international sponsors of war" list, created by Ukraine's National Agency on Corruption Prevention (NACP), is designed to be "a powerful reputational tool" to encourage the exit of international business from Russia and reduce Moscow's financial ability to continue its war against Ukraine. There are almost 50 international companies on the list, with the largest number coming from China. The warning came during a recent meeting between the Chinese ambassador to Ukraine and senior Ukrainian officials, Reuters said. "The (Chinese) ambassador said that all this (international sponsors of war list) could have a negative impact on our relations," one of the sources told Reuters, adding that no concrete threat had been made.
Supreme Court recognizes state ownership of Ukrainian part of the Samara-Western Direction oil pipeline. Ukraine’s Supreme Court recognized the state’s ownership over what was known as the “Medvedchuk pipe,” for Viktor Medvedchuk, a pro-Russian former Ukrainian politician who was arrested in 2022 and later handed over to Russia in a prisoner exchange, Vitaliy Koval, head of the State Property Fund (SPFU) announced. The pipeline was built during the Soviet Union and was supposed to be transferred to state ownership after Ukraine gained independence but was instead used by the Russian company Transnefteprodukt. A part of the pipeline was then taken over by Prykarpatzakhidtrans, a company associated with Medvedchuk. Ukraine had been trying to return this asset to state ownership since 2011, Koval said. According to him, the state has already started registering its ownership of the pipeline.
