MEDIA ABOUT US

Andriy Gorokhov’s column for the Liga.net resource: International Ratings and Ukraine: Opportunity or Verdict

The ratings of investment attractiveness are not the country’s success index, but they play a significant role in shaping the international image

07.02.2020

Competition is a determining factor in all areas of life and business. It exists both at the individual and corporate levels. However, in the discourse on the reforms and development of Ukraine, many forget that competition also determines the country’s success on a global level.

Ukraine does not implement reforms “in a vacuum”, it competes with dozens of countries that need capital for development. How can we overtake competitors and offer more favorable conditions for investors to attract their capital, experts discussed at the World Economic Forum in Davos.

Discussions of investment attractiveness often focused on international ratings, such as the World Bank’s Doing Business, or the Venture Capital and Private Equity Country Attractiveness Index 2018 (IESE Business School).

Unfortunately, in Ukraine their results are often misinterpreted: ratings are considered in isolation from the global context, and the results are simplified in search of high-profile headlines. Often negative. For example, according to the country’s Venture Capital and Private Equity Country Attractiveness Index, Ukraine has confidently improved its performance since 2015, but at the same time, it has fallen by five points. It’s all about competition.

During this time, five countries overtook Ukraine: Kenya, Nigeria, Botswana, Armenia, and Serbia.

Does this mean that Ukraine is developing more slowly than African countries or offers investors worse conditions than Armenia? Not at all! Of course, it is worth considering Kenya as a great success story in Africa. The country has risen by as many as 27 points in three years. On the other hand, according to the IMF, the net inflow of foreign investment in Ukraine in 2018 was 54.8% more than in Kenya. In addition, in 2019, Kenya’s GDP growth continued to slow down, while our economy continued to accelerate.

You need to understand that investment attractiveness ratings are not a measure of success. Ukraine has been already successfully developing and reforming, and can offer investors even more. However, international ratings play a significant role in shaping the international image of Ukraine. And our negative image, created over the years of chaotic communications with investors, is keeping back major players from entering the country’s economy.

The issue of corruption in this case is probably one of the most striking examples. As a prominent American businessman and investor David Rubenstein smartly noted at the Ukrainian Breakfast in Davos, corruption is not as important for international capital as its perception. International business is interested in investing in countries such as Ukraine, due to increased profitability.

However, it is also important for investors to avoid perceiving their business as corrupt due to their presence in the market, which is associated with corruption. “People are sure that you are doing something wrong, even if you do not actually… Ukraine should work on both the image and the real state of things,” summed up Mr. Rubenstein.

Ukraine should ask itself: why is Kenya, much more corrupt than Ukraine, considered more attractive to foreign capital? And is it fair for Ukraine to be ranked close to Kenya in the Corruption Perception Index (Transparency International, 2019) – 126 and 137 positions, respectively?

How to fix the situation?

The answer is simple: Ukraine urgently needs big projects or initiatives that will adjust our international perception. And the same ratings that now stigmatize us can be the most effective tool.

Finally, it is not so difficult to analyze, what factors was the main contributors to the seemingly unexpected success of our competitors in the main international ratings. Their methods are publicly available. The key areas that allowed our “competitors” to rise are well known in Ukraine: tax administration, diversification of the economy, business opening and closing procedures. Just a few large-scale reforms aimed at improving our position in the ratings would allow us to demonstrate the same sensational results.

In addition, one can borrow the experience of Armenia in creating free economic zones. Income tax, value added tax, excise and customs duties for high-tech industries in such areas have been abolished. This not only allowed Armenia to attract new investors, but also to direct its economy towards the development of industries with high added value. It is expected that only one free economic zone in Meghri would attract 50-70 companies with $ 100-130 million investment.

I am sure that decisive steps will allow Ukraine not only catch up, but also surpass some of the competitors for the international capital. Qualified and hardworking personnel, lower level of labor remuneration in comparison with European countries, natural resources and a good geographical location, reinforced by a high-quality development strategy of the country and the necessary capital, would allow Ukraine to find its own path to an economic miracle.