Ukraine needs investment, which is one of the key aspects of reconstruction. Kyiv Post spoke to Bogdan Zawadewicz, head of geopolitical risk analysis at BGK (Polish National Development Bank), about the role of integration with the European Union, Poland’s role, de-oligarchization and other issues.
Michał Kujawski: Ukraine needs investment, but many companies are hesitant to invest. One reason is war. What are the other reasons?
join us on telegram
Follow our coverage of the war at @Kyivpost_official.
Bogdan Zawadevics: The challenges they face are related to several aspects. The first group concerns risks associated with investing in Ukraine. The ability to partially mitigate these risks depends on the decisions of external authorities. The main risk is war risk, which prevents the construction and opening of new factories and large-scale greenfield and brownfield investments. The risk of destruction of such infrastructure is real. There are insurance products like the one offered by Poland’s KUKE, but they are very expensive. The second group of risks involves the political situation. The democratic process has been suspended, which is understandable given that the war continues. Although the problem of corruption still exists, it should be noted that Ukraine has already made significant progress towards reducing this phenomenon. It will take some time to see the full results. This is not a short-term problem. Important risks also include economic aspects. Currently, Ukraine’s state and economy are managed primarily by the inflow of external funds. The continued functioning of the state, excluding military expenditures, requires approximately 35-40 billion euros per year. These funds not only cover current needs, but also help maintain the exchange rate of the Ukrainian currency. The Central Bank of Ukraine allocates about 2 billion to 3 billion euros every month to support the hryvnia exchange rate. The deficit in the fiscal sector has reached nearly 30%, which is also covered by external funds. This dependency makes Ukraine dependent on external capital. This involves certain risks. Disruption of these financial flows could affect the country’s macroeconomic situation and economic stability. These resources also help maintain current levels of consumption and demand. I sometimes hear that Polish companies are increasing their exports to Ukraine. These purchases are funded by these funds. If funding were to be cut off, the purchasing power of Ukrainians would be dramatically reduced.
Other interesting topics
Air defense towers and other security equipment appear on Crimean bridges
As fears of an impending attack on Ukraine grow in the minds of the Russian government, defensive measures deployed to protect Russia’s illegally established links to Crimea continue to be strengthened.
Michał Kujawski: Foreign institutions can influence these issues. Are there any that have limited room for maneuver?
Bogdan Zawadevics: We are working on challenges of a structural nature. The risks mentioned above are certainly a matter of political and economic will and decision-making, and here we find ourselves with our hands tied. This includes issues related to labor shortages and demographic trends. The war brought immigration, resulting in a labor shortage. Many men are being drafted into the military, resulting in an interesting phenomenon in which women are increasingly taking on manual labor normally reserved for men. For men, companies cannot guarantee that trained employees will not be drafted into the military. Demographic trends will have a major impact on the Ukrainian economy and labor market in the coming decades. Another difficulty is the situation in the energy sector, which has been destroyed by Russia. Power shortages can have a negative impact on business operations, resulting in difficulty in meeting financial obligations (loans). Restructuring the energy sector will be a process that will take several years and will be extremely important from the perspective of both the banking sector (particularly European development agencies) and prospective foreign investors. Although Ukraine’s economy is supported by external funds, it is currently not a competitive economy due to its problems. That stability is not driven by market factors.
Michał Kujavski: What industries are considered safe from an investor’s point of view?
Bogdan Zawadević: So-called light assets. Fields that do not require large investments, such as building factories. Some of the most attractive sectors include transportation, logistics, education, consulting, and medical services. The risk here is relatively low and the need is considerable
Michał Kujawski: BGK (Polish National Development Bank) is also active in Ukraine.
Bogdan Zawadevich: In 2023, BGK, through Credbank, will implement measures based on the European Commission’s guarantee support for the micro, small and medium-sized enterprises sector in Ukraine, which will allow Credbank to continue providing loans to customers during the war. I was able to continue my work. The total cost of this program is 20 million euros. Financial support is mainly directed to companies operating in difficult areas close to areas of active conflict (so-called red and yellow zones), and the main beneficiaries are entrepreneurs in the agricultural sector, industry and agricultural producers. is. From January 2023 to April 2024, support worth approximately 14 million euros was provided to 83 companies, creating approximately 4,000 jobs. Currently, BGK plans to extend its support to Ukrainian SMEs through additional guarantees from the European Commission under Pillar 2 of the Ukraine Investment Framework (UIF). BGK requested EUR 20 million from the European Commission for continued support to Credobank (EUR 10 million) and to include additional Ukrainian banks in the guarantee program (EUR 10 million). Additionally, BGK is preparing to apply to the European Commission for guarantees under Pillar 2 of the Ukraine Facility. At this stage, BGK is looking for investment projects that can be implemented by Polish and Ukrainian companies to support the economic development of Ukraine. Investments must have a developmental and modernizing character.
Michał Kujawski: So you’re talking about boosting investment once hostilities end.
Bogdan Zawadevich: The creators of this mechanism (Ukrainian facility) assumed that it could operate even in wartime. Unfortunately, the reality is somewhat different. Companies that are fighting for survival are not investing because they need money to sustain their current operations. These are supported by working capital loans or refinances. The proportion of investment loans is relatively low. This is well illustrated in the structure of the 5-7-9% concessional loan program. Furthermore, there is a risk that investment funds will be concentrated in areas where liquidity and employee retention are guaranteed, primarily in state-owned enterprises and large private enterprises. Initially, these entities were not intended to be the main beneficiaries of EU financial instruments. Of course, we still hope that it is small businesses or local authorities that most often apply for these funds.
Michał Kujavski: The end of the war could accelerate this.
Bogdan Zawadewicz: That’s right. It’s going to happen sooner or later, so it’s worth acting now. The EU plan is for a four-year outlook and these funds have already been activated. The European Commission and EU member states see Ukraine as a kind of long-term investment project aimed at the thorough reconstruction of the state and economy, thereby deeply integrating it into Western structures.
Michał Kujawski: If the war ends within a year, will the funds allocated by the EU be enough?
Bogdan Zawadevich: The problem will not be financing, but rather the absorptive capacity of both the private and public sectors of Ukraine. Obstacles can arise due to the lack of qualified workers and professionals who can carry out these projects, as well as the availability of organizations that can carry them out. The private sector suffers from a lack of capacity. The Ukraine Facility sets implementation conditions that are difficult to meet even in moderately developing countries. Ukraine is embroiled in a war and outside the EU framework, and expectations are extremely high for Ukraine.
Michał Kujawski: Should this be treated as a reference point, a high benchmark?
Bogdan Zawadevic: There will certainly be a lot of compromises and concessions. The targets set by the European Commission are very ambitious, perhaps even too ambitious. When prepared for spring 2023, not all wartime situations and dynamics were taken into account.
Michał Kujavsky: This has to do with Ukraine’s integration into the European Union. We often hear that membership is a matter of political decision, not of meeting strict conditions, as was the case with Poland and the Baltic states 20 years ago.
Bogdan Zawadevic: There are concerns about whether such a political decision can be made at the moment. For example, you can see what kind of politics Hungary pursues. Politicians may emerge to block this process.
Michał Kujavsky: In some ways, high hurdles can be beneficial for Ukraine in the political arena.
Bogdan Zawadevich: Ukraine must prove itself to be in the forefront and thereby eliminate the claims of politicians who want to block EU aid to the country. One example is the delays associated with the establishment and implementation of the Ukrainian facility. Prime Minister Viktor Orbán blocked the revision of the EU budget outlook, claiming that the funds would go to Ukraine’s oligarchies and large state-owned enterprises, thereby blocking the allocation of funds to the Ukraine Facility. . Ironically, these are the very entities that have sufficient capacity to absorb these funds. Ideally, these resources should reach local governments, but local governments currently suffer from significant legal and financial challenges, as well as issues related to the professional management of municipal enterprises. Transformation in these areas will take years, which is also confirmed by our Polish experience.
Michał Kujawski: There was no oligarchic process in Poland.
Bogdan Zawadewicz: Within the framework of privatization and economic opening, foreign capital entered Poland very rapidly. Comparing these two situations, we are faced with the dilemma of whether to hold strong domestic capital, which risks creating an oligarchic group, or to hold foreign capital at the expense of weak domestic capital. The most optimal scenario would be to maintain a balance between domestic and foreign capital.
Michał Kujawski: Will Ukraine become de-oligarchy?
Bogdan Zawadević: I believe that after the war, the oligarchies will withdraw from some regions in a negotiated and controlled way. Certain assets will be retained, but those assets will be significantly reduced. Gradually foreign capital will also flow into Ukraine. Ukraine is becoming a big laboratory, a testing ground. The European Commission believes that this is a project that cannot fail. Ukraine will face a whole range of challenges and dilemmas. However, the fundamental question for Ukraine’s elite will be about the sources of the country’s future economic growth, and therefore the desired economic model. This is crucial for further modernization and the creation of our own financial resources.
