PRODUCT MARKETS AND INVESTMENT NEEDS OF UKRAINE

Dr. Volodymyr Vlasyuk

Director, UPECOPrague, 22-24 September 2010

1. Current macroeconomic situation in Ukraine

I. Brief macroeconomic profile

Industrial production in Ukraine have not yet reached pre-crisis level. That’s why Ukraine is still de facto in crisis phase. According to the expert’s estimation, pre-crisis level of it’s industrial production

and GDP Ukraine will reach only in 2013-2014

Source: State Committee of Statistics of Ukraine

Industrial production as compared to pre-crisis level, % 6m 2008 = 100%

100%

69%

78%

0%

20%

40%

60%

80%

100%

120%

6m 2008 6m 2009 6m 2010

2. Expectations for Ukrainian economy in 2010-2015

I. Brief macroeconomic profile

Ukrainian economy is to deliver moderate growth (3,7%) in 2010 bouncing back from distressed level of last year (-15,1%) and accelerating from 2011 onwards due to broader global growth. Banking

crediting activity in Ukraine is still low – total volume of credits showed 1,5% decrease starting from the year

Source: State Committee of Statistics of Ukraine, IMF

5,8%

9,1%

5,2%

9,6%12,1%

2,7%

7,6%

2,1%

-15,1%

7,3%

3,7% 4,5%6,0% 5,4%5,7%

5,5%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

f

20

11

f

20

12

f

20

13

f

20

14

f

20

15

f

%

Ukrainian GDP growth rate, y/y

3. The dynamic of investments in Ukraine

FDI in Ukraine, USD bn.*

* cumulative

Source: State Committee of Statistics of Ukraine, EBRD

II. Ukraine needs investments

FDI in Ukraine, USD mln. (annual figure)

9171323

2253

7843

5737

92189683

4303

1783

0

2000

4000

6000

8000

10000

12000

2002 2003 2004 2005 2006 2007 2008 2009 1H2010

Despite the cumulative investments at USD 40 bn. (2009), annual Ukraine's FDI in 2009-2010 remains insufficient for modernization needs due to economic crisis and political destabilization

5,5 6,89

16,9

21,6

29,5

35,7

40,0343,5

0

5

10

15

20

25

30

35

40

45

2002 2003 2004 2005 2006 2007 2008 2009 2010f

4. Correlation between investment and GDP

Source: State Committee of Statistics of Ukraine, National Statistics, IMF* GDP in 2008 based on purchasing -power parity

II. Ukraine needs investments

($337,3 bn.*) ($2 264 bn.) ($7 966 bn.) ($3 298 bn.)

Ukraine’s FDI per capita figure remains considerably less than in developing and advanced economies. Besides, In comparison with other developing countries, Ukraine has substantially less figure of investment in GDP indicating

insufficient capital recourses to be addressed for modernization needs and low rate of economic renewal.

5. Foreign direct investment in Ukraine by sectors

II. Ukraine needs investments

At the end of 2009, the large average of Ukraine's FDI was in industry and financial services as result of the most investment attractiveness of those sectors in the previous years

Source: State Committee of Statistics of Ukraine

Industry23%

Financial services20%

Real estate16%

Trade10%

Transport and communications

4%

Agriculture2%

Hotel and restaurants

1%

Others24%

6. Investment requirements for some sectors of economy

Source: State Committee of Statistics, National Academy of Science of Ukraine* By expert's estimate that it is the minimum annual investment requirement over the upcoming 10 years

II. Ukraine needs investments

Ukraine will urgently require a huge number of investments in fixed assets in order to modernize capital assets and cope with infrastructure gaps

USD bn.

7. Volume of accumulated steel resources to be replaced

Source: UPE Co.

The replacement of depreciated steel-made facilities requires 328 mln. tonnes of steel. According to estimates of National Academy of Sciences of Ukraine replacement of fixed

assets is needed to spend about USD 80 bn. in the nearest 10 years

II. Ukraine needs investments

*Share of fixed assets with 100% depreciation

69

65

53

30

110

0 20 40 60 80 100 120

housing&municipaleconomy

equipments

structure &buildings

transportinfrastructure

tube&pipeline mln tonnes

(51,7%)

(52,3%)

(59,3)%

(59,5%)

(60,2%)*

8. Preconditions for investment attractiveness of Ukraine

General background 46 millions of inhabitants

Highest (6,4%) in Europe dynamic of GDP growth (except 2009)

High scientific and educational potential

Qualified and competitive labor force

Broadly developed transport and industrial infrastructure

III. What is the attractiveness of Ukraine?

The above-mentioned conditions define the Ukraine’s investment attractiveness. In Ukraine we can find a significant number of successfully realized investment projects of well-known international companies: Kraft Foods (USD 50 mln), Cargill (USD 90 mln), Knauf (USD 30 mln), Telenor (USD 150 mln), ISTIL (600 mln.), Metro Cash@Carry (410 mln.), Eurocar (200 mln.) and others

9. Preconditions for investment attractiveness of Ukraine

The progress achieved over the last 5 years

III. What is the attractiveness of Ukraine?

Ukraine is the member of the WTO (from 2008)

Granted the status of a market economy country in 2005

Resultant privatization (share of state property - 7%)

Advance in joining to EU Free Trade Area

Intensification of cooperation with IMF, World Bank, EBRD and other international financial institutions

10. Improvement of Ukraine’s sovereign ratings

During this year Ukraine demonstrates improvement of it’s sovereign ratings due to political stabilization and renewal cooperation with IMF on Stand-by program

III. What is the attractiveness of Ukraine?

Moody’s B2 (negative) B2 (negative)

S@P CCC+/C B+ (stable)

Fitch B (negative) B (stable)

Political stabilization in Ukraine

A new 2,5 year $15bn stand-by agreement with the IMF

Starting economic recovery

2009 Presently

11. Preconditions for investment attractiveness of Ukraine

Sizeable domestic market and abundant resources

Import volume of some industrial products in Ukraine in 2008, USD mln.

Source: State Committee of Statistics of Ukraine

•taking into consideration the import prices are up to 25-30 times less than market ones , import of light industry products in Ukraine is estimated at USD 8 bn.

Despite economic crisis and correspondent drop in private consumption, Ukraine’s domestic market is still very attractive for further import volume expanding

III. What is the attractiveness of Ukraine?

Rich natural resources:

56% of Ukraine’s land is arable and 1/3 of the world’s black soil

among 10 world countries with the largest reserves of mineral resources(iron, uranium ore, granite etc)

12. Preconditions of investment attractiveness of Ukraine

High level of ROI

High profitability of investment reflects the fact of particular Ukraine's investment attractiveness

III. What is the attractiveness of Ukraine?

Average return of investment (ROI) in Ukraine is 30-40% per annum depending on projects and sectors (contrast to 10-15% in EU and USA)

Building of poultry factory – 35%;payback period – 5 years

Building of grain terminal in Dnieper river port – 51%; payback period – 2 year

ROI of some real sector projects in Ukraine:

Building of steel-rolling mill (1,8 mln. t capacity) – 29%; payback period – 4,5 year

13. Impact of import natural gas price in 2010 for Ukrainian balance of payments

*including process and gas injected to reserves

According to recent natural gas arrangements with Russia, Ukraine in 2010 will get USD 100 price discount per 1000 cubic meters. This discount will lead to substantial reduce (estimating USD 5,5 bn)

the pressure for this year country’s balance of payments to be estimated at 4,3% of GDP

III. What is the attractiveness of Ukraine?

100 USD discount

Saving of USD 5,5 bn

14. Hindrances for FDI in Ukraine and actions of government to improve the situation

IV. Personal view and recommendations

A.

B. In time VAT return to {foreign} companies

C. Doing away with the Red Tape

D.Legal system reform in line with one of the established European systems

Level play for the foreign companies

Despite the existing problems last initiatives and practical steps of government demonstrate the readiness of public elite to raise investment attractiveness of Ukrainian economy

Hindrances Actions

According to new Tax Code of Ukraine, it will be automatic and transparent VAT compensation

Adopted laws aiming at deregulation of doing business in Ukraine, simplify the system of licensing and certificating

Starting legal reform in Ukraine, Particularly In the sphere of courts

Also, in accordance with new Tax Code of Ukraine, shipbuilding, light and aircraft industry are released from income tax over the next 10 years

15. Priority sectors for foreign direct investment in Ukraine

IV. Personal view and recommendations

Shipbuilding, machine building, light, auto production, agricultural machine building as key

investment-attractive sectors for foreign investors

N.B. We have pleasure to announce that we shall share the relevant information regarding the description of most attractive

sectors in Ukraine for all potential investors

tel/fax (+38044) 484-64-83

e-mail expert@expert.kiev.ua

UPECO Research@Consulting