When will investors arrive, and what will they invest in: the “What’s up with the economy?” podcast with Serhii Budkin

About the nationalization of Sens Bank, the concentration of state-owned banks, and the impact on competition.

During wartime, the share of state ownership in the economy always increases, allowing governments to more effectively manage resources and meet the needs of society. However, in Ukraine, this indicator exceeds even the high levels seen during World War II, such as in the United Kingdom. After the nationalization of Sens Bank, the government’s share in the banking sector stands at 53%.

However, there can be a positive aspect to the dominance of state-owned banks, and that is the development of innovation. Under normal circumstances, the banking sector is highly competitive, and when an innovation (such as Monobank) enters the market, it is quickly copied. As a result, small innovative projects often don’t have a chance to grow into profitability. When large banks are state-owned, they tend to be somewhat relaxed, allowing small innovative projects an opportunity to “gain traction” before they are noticed.

Furthermore, if in the lending market, private banks are unlikely to compete with state-owned ones, in the business lending sector, especially for SMEs, they have a competitive advantage.

About the main obstacle to investment

Over the past 20 years, there has been little change in terms of property rights protection in Ukraine. This is the main problem that restricts access to credit resources.

In Ukraine, you can only be creditworthy if you (alone or with your friends) own your business 100%, unlike countries like the Czech Republic, Slovakia, and Poland, where you can have 100 shareholders, a shareholder agreement among them, a board of directors, and so on. In Ukraine, shareholder agreements and corporate governance are mandated by law but not effectively implemented in practice. Therefore, we have a relatively low complexity in the corporate sector and, consequently, limited opportunities for both lending and investments.

The main problem faced by those developing recovery programs for Ukraine is quite simple. It’s not about where to find the money, as there will be plenty of funds available. The question is where to invest them because there simply aren’t enough investment opportunities. In Ukraine, it’s not possible to invest in 5% or 10% of a company. By making such an investment, in practice, you won’t gain anything because minority shareholders are not adequately protected. This lack of investment opportunities and protection for minority shareholders hinders the effective allocation of resources and investment in the country.

About the impact of the tax system on investment

Countries that receive the most investments often do not have the world’s best tax regimes, such as the United States, China, and Brazil. Therefore, high taxes are not necessarily the problem.

The first issue is competition inequality. If everyone is underreporting taxes, then if I pay taxes, I will definitely be non-competitive. The second issue is the risks associated with the state since any enterprise that demonstrates reasonably good financial results is likely to face inspections from tax authorities, the ESBU, or other government agencies. 

About the privatization of banks after the war

For a successful privatization, it’s necessary to address “legacy issues,” meaning the issues inherited by banks from their previous owners. The simplest example is PrivatBank, which constitutes 25% of Ukraine’s banking sector and, by some parameters, even more. The state has declared its intention to privatize this bank. However, as long as issues with Kolomoisky and other former shareholders are unresolved, privatizing it is impossible.

The likelihood of privatizing UkrEximBank is nearly zero because banks like these are extremely difficult to privatize. It has so much state-related risk on its balance sheet (loans to state-owned companies) that it can only be sold to someone with political ambitions for using these assets. From a banking business perspective, these loans do not hold significant value, and consequently, the bank’s value is low.

In the modern banking market, large retail businesses are most highly valued. Following them are small and medium-sized businesses since the risk associated with them is diversified and can be forecasted based on statistics rather than political decisions. Only after considering these options do investors look at large corporate projects. 

About the privatization of state-owned companies

It’s best to actively prepare for privatization after the war ends so that, amidst the general enthusiasm and uplift, auctions can be immediately held. When everyone is talking about the country’s recovery, assets will be worth much more than when the narrative is that everything is bad, nothing is working, there’s corruption, and why invest money there at all. Such assessments significantly influence investors’ willingness.

To facilitate this, a change in the approach of the State Property Fund is necessary. Its primary function should be to maximize the sale of state-owned assets. The SPF should be motivated to sell these assets at the highest possible prices. It should function as a normal state investment bank that sustains itself through the proceeds generated from asset sales rather than relying on budget funds. 

About investors’ attention towards the real sector

There are three major groups of companies closely monitoring Ukraine today.

The first group are construction companies. There are many of these companies, and to put it simply, they want to know when large-scale construction projects funded by the European Union will begin. They are highly interested in knowing in advance what will be done and when so they can plan and seek subcontractors.

The second category comprises manufacturers of construction-related goods, such as cement, plaster, wooden products, and windows (during Ukraine’s reconstruction, there will likely be a demand for at least a million new windows – a significant volume). Most of these products are not transported over long distances. For example, cement, like many basic materials, is produced on-site. Glass can be transported, but it’s often more cost-effective to manufacture it locally. Many of these companies are not yet ready to invest and are waiting for the war to end. However, some are already prepared to come in, and we can expect non-public investments in 2024 (likely not publicly announced to avoid attracting unwanted Russian Shahed attacks).

The third category includes agricultural enterprises and agro-processing businesses. In the last 3-4 years, this has been a relatively high-margin business. For instance, it takes 20-25 kg of wheat to produce 1 kg of chicken meat. Exporting 1 kg of chicken meat is much easier than transporting 20-25 kg of wheat. Plus, from a security standpoint, when we’re talking about hectares of land far from the frontlines, the losses from a potential Shahed attack are generally lower compared to industrial enterprises.