Since gaining independence, Ukraine has faced significant challenges that have been pivotal in determining the country’s future. One such challenge was the full-scale military invasion by the russian federation on February 24, 2022, which continues to be accompanied by ongoing massive shelling, infrastructure damage, and mass killings of civilians. This aggression has caused severe damage to the national economic system, resulting in significant losses and new serious challenges for the state and its citizens. According to the Ministry of Economy, the decline in Ukraine’s GDP for the year 2022 is estimated at around 30%. Undoubtedly, this figure is the worst in Ukraine’s history of independence, but it is better than the predictions of some experts who initially projected a 40–50% decline in GDP at the beginning of the full-scale invasion.
According to recent estimates from the World Bank, the economic recovery of Ukraine will cost approximately $411 billion, which is 2.6 times higher than the pre-war GDP of the country. It is important to note that this figure is not final, as the aggressor country continues to inflict daily damage on Ukraine.
The Importance of Private Foreign Investment in Ukraine’s Economic Recovery
One of the drivers of Ukraine’s economic recovery and development is expected to be private foreign investment. In the National Economic Strategy for the period up to 2030, which was adopted in 2021, attracting foreign direct investments is identified as one of the main objectives. It is specifically mentioned that “the primary stage is the creation of competitive conditions for business and investment, as well as the restoration of trust in state institutions. This will enable Ukraine to compete for capital in the global market and attract investments for the modernization of economic sectors.” Moreover, among the strategic goals, increasing the net inflow of foreign direct investments to no less than $15 billion per year starting in 2025 is highlighted. However, it is essential to understand that the integral indicator of Ukraine’s Investment Attractiveness Index in the first half of 2022 stood at 2.17 out of 5 possible points. This value was the lowest since 2013.
Therefore, Ukraine urgently needs to improve its investment climate and attract external resources for the recovery of its economy and infrastructure, as well as for creating new job opportunities. However, foreign investments carry a deeper impact than just financial contributions. They provide access to advanced foreign technologies, allow the utilization of international management and business organization expertise, and promote the expansion of export opportunities for enterprises, increasing Ukraine’s competitiveness on the international stage.
One of the incentives that can contribute to attracting foreign investments in Ukraine is the establishment of an effective and efficient system of guarantees for the rights and interests of investors. Ensuring stability and protection of the rights of foreign investors can be considered a key condition for attracting their capital.
What guarantees for foreign investors currently exist in Ukraine?
The list of guarantees provided for foreign investors is stipulated in Articles 397–399 of the Commercial Code of Ukraine and Articles 8–12 of the Law of Ukraine “On the Regime of Foreign Investment”, which include:
1. Guarantee of stability of national legislation. If the guarantees for the protection of foreign investments change over time, then for a period of 10 years from the date of such changes, upon the request of the foreign investor, the state will apply the guarantees for the protection of foreign investments that were in effect before the changes. In other words, if changes are made that worsen the investor’s position, they have the right to demand the observance of the guarantees that were in place at the time of their investment.
2. Guarantee against unlawful actions of state authorities and their officials. Interference with the activities of investment entities is prohibited unless allowed by current legislation. This creates conditions to prevent the adoption of unlawful decisions regarding the investor. If the investor incurs losses as a result of such actions, they have the right to seek full compensation for those losses.
3. Guarantee against expropriation. Foreign investments are not subject to nationalization or requisition (except in cases of emergency measures in the event of natural disasters, accidents, epidemics, or epizootics).
Requisition is the forced seizure of property by the state from the owner under extraordinary circumstances, provided that prior and full compensation for its value is made or not made.
4. Guarantee of compensation and reimbursement of losses. Investors have the possibility to receive compensation and reimbursement of losses, including lost profits and moral damages, caused to them due to actions, inaction, or improper performance by state authorities of Ukraine or their officials. The legislator also emphasizes that compensation should be fast, adequate, and efficient, although specific timeframes are not provided.
5. Guarantee in case of termination of investment activity. A foreign investor has the right to receive a return, not later than six months from the date of the termination of their investment activity, of their investments in kind or in the currency of the investment, taking into account any possible reduction of the authorized capital, without payment of customs duties, as well as income from these investments in cash or in goods at real market value.
6. Guarantee for the transfer abroad of income, profits, and other funds. After paying taxes, fees, and other mandatory payments, investors are guaranteed unrestricted and immediate transfer abroad of their income, profits, and other funds in foreign currency obtained on legal grounds as a result of foreign investments.
However, the risks associated with hostilities also require additional methods of ensuring investments that are in line with contemporary conditions. Considering that Ukraine is not the first country to face the need to attract foreign investments and provide security and protection guarantees in times of armed conflict, the international community has experience in addressing similar issues through the insurance of foreign investments, particularly with the assistance of international organizations. One such organization is the Multilateral Investment Guarantee Agency (MIGA), which is part of the World Bank group. MIGA is the largest provider of so-called non-commercial risk insurance, covering risks associated with political instability, wars, state expropriation, inability to transfer income abroad, and more.
In September 2022, an agreement was reached between the Ministry of Economy of Ukraine and MIGA on the implementation of an investment insurance mechanism during times of war. The agreement envisioned the implementation of a pilot project for political risk insurance totaling $30 million USD. The insurance coverage amount was not less than 90% of the invested capital.
The first project to be insured against war risks was the M10 Industrial Park in Lviv, with investments of $9.1 million USD. It was granted to the Cypriot company Ukrainian Industrial Property Holding Limited, with 65% ownership by one of Ukraine’s largest investment companies, Dragon Capital, and 35% by the European Bank for Reconstruction and Development. The insurance covers war risks for a period of 10 years.
Another similar organization is the U.S. International Development Finance Corporation (DFC), an American government agency that provides financial and technical support to businesses operating in low and middle-income countries. The DFC typically supports American investors, but it is currently taking an active stance on the need to support Ukrainian investors.
However, decisions regarding insurance against political and war risks have not been made for any of the projects, but some of these projects are in the final stages of preparation. The Ministry of Economy of Ukraine expects the implementation of seven projects for insuring war risks by the end of 2023: 3 projects from MIGA and 4 from DFC, including insurance for investment risks related to war, such as political risks, currency inconvertibility, and expropriation.
Additionally, the national export credit agencies (ECAs) of Poland, Japan, Germany, France, Italy, Sweden, and the United Kingdom have already expressed their intentions to provide investment risk insurance for their residents. Consequently, investors who are residents of these countries have the option to take advantage of investment risk coverage mechanisms if they wish to invest in Ukraine.
What about investment insurance mechanisms in Ukraine for local investors?
The Export Credit Agency (ECA) is responsible for insuring investments against potential risks, which was established to stimulate the export of goods (works, services) of Ukrainian origin and to support Ukrainian resident business entities exporting goods (works, services) of Ukrainian origin by means of insurance, reinsurance, and guarantees under contracts that ensure the development of exports. Therefore, it can be stated that the ECA has the authority to insure only investments directed from Ukraine to foreign countries. This means that there is no capability to insure investments of Ukrainians against military risks within the country.
Therefore, on February 14, 2023, a draft law №9015, titled “On Amendments to the Law of Ukraine ‘On Financial Mechanisms for Stimulating Export Activities’” regarding the insurance of investments in Ukraine against war risks was registered in the Verkhovna Rada of Ukraine. This draft law aims to create the necessary tool for insuring investments of domestic companies in Ukraine. Currently, it is awaiting a second hearing. The draft law plans to expand the powers of the Export Credit Agency (ECA) to enable it to provide insurance for investments in Ukraine, both for foreign and domestic investors, against risks that may be caused by armed aggression, military actions, and/or terrorism. However, it’s important to note that this insurance will only be applicable when investments are directed towards the creation of objects and infrastructure necessary for the development of the manufacturing industry and the export of goods (works, services) of Ukrainian origin.
Nonetheless, it’s crucial to understand that the ECA may not be able to insure the investments of the majority of potential projects at present. The insurance of investments will be done within the statutory capital of the ECA, which was approximately UAH 2 billion as of August 31, 2023. Additionally, investments will be reinsured with foreign insurance companies. As a result, there will be a need to attract additional sources of funding for the ECA’s activities.
Thus, despite the relatively broad range of state guarantees for foreign investors at the legislative level, they do not fully protect them from all risks, including those associated with armed conflicts. Therefore, Ukraine should focus on creating effective mechanisms that allow both Ukrainian and foreign investors to obtain insurance against war risks. The existence of such mechanisms will further contribute to improving Ukraine’s investment climate.
According to recent estimates from the World Bank, the economic recovery of Ukraine will cost approximately $411 billion, which is 2.6 times higher than the pre-war GDP of the country. It is important to note that this figure is not final, as the aggressor country continues to inflict daily damage on Ukraine.
The Importance of Private Foreign Investment in Ukraine’s Economic Recovery
One of the drivers of Ukraine’s economic recovery and development is expected to be private foreign investment. In the National Economic Strategy for the period up to 2030, which was adopted in 2021, attracting foreign direct investments is identified as one of the main objectives. It is specifically mentioned that “the primary stage is the creation of competitive conditions for business and investment, as well as the restoration of trust in state institutions. This will enable Ukraine to compete for capital in the global market and attract investments for the modernization of economic sectors.” Moreover, among the strategic goals, increasing the net inflow of foreign direct investments to no less than $15 billion per year starting in 2025 is highlighted. However, it is essential to understand that the integral indicator of Ukraine’s Investment Attractiveness Index in the first half of 2022 stood at 2.17 out of 5 possible points. This value was the lowest since 2013.
Therefore, Ukraine urgently needs to improve its investment climate and attract external resources for the recovery of its economy and infrastructure, as well as for creating new job opportunities. However, foreign investments carry a deeper impact than just financial contributions. They provide access to advanced foreign technologies, allow the utilization of international management and business organization expertise, and promote the expansion of export opportunities for enterprises, increasing Ukraine’s competitiveness on the international stage.
One of the incentives that can contribute to attracting foreign investments in Ukraine is the establishment of an effective and efficient system of guarantees for the rights and interests of investors. Ensuring stability and protection of the rights of foreign investors can be considered a key condition for attracting their capital.
What guarantees for foreign investors currently exist in Ukraine?
The list of guarantees provided for foreign investors is stipulated in Articles 397–399 of the Commercial Code of Ukraine and Articles 8–12 of the Law of Ukraine “On the Regime of Foreign Investment”, which include:
1. Guarantee of stability of national legislation. If the guarantees for the protection of foreign investments change over time, then for a period of 10 years from the date of such changes, upon the request of the foreign investor, the state will apply the guarantees for the protection of foreign investments that were in effect before the changes. In other words, if changes are made that worsen the investor’s position, they have the right to demand the observance of the guarantees that were in place at the time of their investment.
2. Guarantee against unlawful actions of state authorities and their officials. Interference with the activities of investment entities is prohibited unless allowed by current legislation. This creates conditions to prevent the adoption of unlawful decisions regarding the investor. If the investor incurs losses as a result of such actions, they have the right to seek full compensation for those losses.
3. Guarantee against expropriation. Foreign investments are not subject to nationalization or requisition (except in cases of emergency measures in the event of natural disasters, accidents, epidemics, or epizootics).
Requisition is the forced seizure of property by the state from the owner under extraordinary circumstances, provided that prior and full compensation for its value is made or not made.
4. Guarantee of compensation and reimbursement of losses. Investors have the possibility to receive compensation and reimbursement of losses, including lost profits and moral damages, caused to them due to actions, inaction, or improper performance by state authorities of Ukraine or their officials. The legislator also emphasizes that compensation should be fast, adequate, and efficient, although specific timeframes are not provided.
5. Guarantee in case of termination of investment activity. A foreign investor has the right to receive a return, not later than six months from the date of the termination of their investment activity, of their investments in kind or in the currency of the investment, taking into account any possible reduction of the authorized capital, without payment of customs duties, as well as income from these investments in cash or in goods at real market value.
6. Guarantee for the transfer abroad of income, profits, and other funds. After paying taxes, fees, and other mandatory payments, investors are guaranteed unrestricted and immediate transfer abroad of their income, profits, and other funds in foreign currency obtained on legal grounds as a result of foreign investments.
However, the risks associated with hostilities also require additional methods of ensuring investments that are in line with contemporary conditions. Considering that Ukraine is not the first country to face the need to attract foreign investments and provide security and protection guarantees in times of armed conflict, the international community has experience in addressing similar issues through the insurance of foreign investments, particularly with the assistance of international organizations. One such organization is the Multilateral Investment Guarantee Agency (MIGA), which is part of the World Bank group. MIGA is the largest provider of so-called non-commercial risk insurance, covering risks associated with political instability, wars, state expropriation, inability to transfer income abroad, and more.
In September 2022, an agreement was reached between the Ministry of Economy of Ukraine and MIGA on the implementation of an investment insurance mechanism during times of war. The agreement envisioned the implementation of a pilot project for political risk insurance totaling $30 million USD. The insurance coverage amount was not less than 90% of the invested capital.
The first project to be insured against war risks was the M10 Industrial Park in Lviv, with investments of $9.1 million USD. It was granted to the Cypriot company Ukrainian Industrial Property Holding Limited, with 65% ownership by one of Ukraine’s largest investment companies, Dragon Capital, and 35% by the European Bank for Reconstruction and Development. The insurance covers war risks for a period of 10 years.
Another similar organization is the U.S. International Development Finance Corporation (DFC), an American government agency that provides financial and technical support to businesses operating in low and middle-income countries. The DFC typically supports American investors, but it is currently taking an active stance on the need to support Ukrainian investors.
However, decisions regarding insurance against political and war risks have not been made for any of the projects, but some of these projects are in the final stages of preparation. The Ministry of Economy of Ukraine expects the implementation of seven projects for insuring war risks by the end of 2023: 3 projects from MIGA and 4 from DFC, including insurance for investment risks related to war, such as political risks, currency inconvertibility, and expropriation.
Additionally, the national export credit agencies (ECAs) of Poland, Japan, Germany, France, Italy, Sweden, and the United Kingdom have already expressed their intentions to provide investment risk insurance for their residents. Consequently, investors who are residents of these countries have the option to take advantage of investment risk coverage mechanisms if they wish to invest in Ukraine.
What about investment insurance mechanisms in Ukraine for local investors?
The Export Credit Agency (ECA) is responsible for insuring investments against potential risks, which was established to stimulate the export of goods (works, services) of Ukrainian origin and to support Ukrainian resident business entities exporting goods (works, services) of Ukrainian origin by means of insurance, reinsurance, and guarantees under contracts that ensure the development of exports. Therefore, it can be stated that the ECA has the authority to insure only investments directed from Ukraine to foreign countries. This means that there is no capability to insure investments of Ukrainians against military risks within the country.
Therefore, on February 14, 2023, a draft law №9015, titled “On Amendments to the Law of Ukraine ‘On Financial Mechanisms for Stimulating Export Activities’” regarding the insurance of investments in Ukraine against war risks was registered in the Verkhovna Rada of Ukraine. This draft law aims to create the necessary tool for insuring investments of domestic companies in Ukraine. Currently, it is awaiting a second hearing. The draft law plans to expand the powers of the Export Credit Agency (ECA) to enable it to provide insurance for investments in Ukraine, both for foreign and domestic investors, against risks that may be caused by armed aggression, military actions, and/or terrorism. However, it’s important to note that this insurance will only be applicable when investments are directed towards the creation of objects and infrastructure necessary for the development of the manufacturing industry and the export of goods (works, services) of Ukrainian origin.
Nonetheless, it’s crucial to understand that the ECA may not be able to insure the investments of the majority of potential projects at present. The insurance of investments will be done within the statutory capital of the ECA, which was approximately UAH 2 billion as of August 31, 2023. Additionally, investments will be reinsured with foreign insurance companies. As a result, there will be a need to attract additional sources of funding for the ECA’s activities.
Thus, despite the relatively broad range of state guarantees for foreign investors at the legislative level, they do not fully protect them from all risks, including those associated with armed conflicts. Therefore, Ukraine should focus on creating effective mechanisms that allow both Ukrainian and foreign investors to obtain insurance against war risks. The existence of such mechanisms will further contribute to improving Ukraine’s investment climate.