Foreign Investment in Ukraine Is a Proven Idea

Financial aid to Ukraine is the subject of heated discussion in the U.S. Congress, which makes the timing and amount of future funding uncertain. National security advisers warn that such delay can lead to Russia winning the war soon. Even though there is high bipartisan agreement to help Ukraine, some members of Congress express doubts as the deal linking the provision of wartime aid with southern U.S. border security stalls.

Some of the concerns raised by aid doubters in the U.S. government have to do with the state of the Ukrainian economy. Ukraine’s use of Western-supplied funds to help stabilize the country's economy over the past two years, which has helped it confront Russia more effectively, should assuage doubters' concerns.

The State of Ukraine’s Economy 

The outbreak of war devastated the country's economy. In 2022, Ukraine suffered a staggering loss of up to 33 percent of GDP, resulting in the worst recession in its history. This led to a drastic increase in poverty from 5.5 percent to 24.2 percent of the population, forcing 7.1 million people into impoverishment. The war-related loss of breadwinners further worsened this state: between February 2022 and September 2023, 9,701 civilians lost their lives and 17,748 were injured.

With the displacement of 9.1 million people and the start of a second wave of conscription, aiming to recruit up to 500,000 more soldiers, the labor market was left understaffed and unprovided for. According to a recent World Bank report, some 15 percent of firms “had to cancel sales as a result of worker displacement, battlefield casualties, and conscription.” 

The total amount of direct documented infrastructure damage caused by war as of April 2023 was $147.5 billion (replacement cost), with 1.5 million homes destroyed. Such devastation affects the personal finances of Ukrainians. According to a Rating Group survey conducted in September 2023, 60 percent of Ukrainians felt a deterioration in their economic situation, for 35 percent it hadn’t changed, and only 5 percent felt an improvement.

Given the circumstances, the World Bank's forecasts for 2023 were quite grim, predicting a growth of not more than 0.5 percent for that year.

But in 2023, Ukraine’s real GDP grew by over 5 percent, and the Ministry of Economy forecasts a 4.6 percent GDP growth in 2024. The unanticipated economic resilience can be attributed solely to foreign financial assistance.

How Foreign Investments Have Helped Ukraine

Foreign investments have helped Ukraine in a couple of major ways.

First, investments and loans have played a crucial role in sustaining the economy by mitigating inflation, thereby bolstering the labor market and reducing unemployment.

With major damage inflicted on businesses, amounting to a total of U.S. $3.6 billion by March 2023 and affecting 84 percent of firms, businesses’ income was halved compared to 2021. To help the enterprises recover, Ukraine provided major financial assistance through monetary financing (through excessive hryvnia issuance) of the budget, which led to staggering inflation.

Such a dire situation would have left the economy shattered for decades if unparalleled financial support in that year ($42.5 billion in 2023 versus $31.1 billion in 2022) had not been received. This influx of money reduced inflation to 5.1 percent from 20.1 percent in 2022 and increased Ukraine's foreign exchange reserves to an all-time high in 2023.

As a result, according to the World Bank’s survey (2023), most firms proved resilient and continued operating, with 59 percent of prewar firms fully open and 21 percent closed (only 3 percent closed permanently), which helped Ukraine decrease the unemployment rate to 16.1 percent as of December 2023, compared to 29.5 percent in January 2022.

Second, support has helped secure the Ukrainian sea corridor, since agricultural exports are the most reliable source of its GDP. 

Before the war, Ukraine was one of the world’s biggest exporters of crops, with arable farmland constituting 55 percent of Ukraine's landmass and with 14 percent of the population engaged in agricultural activities. Agriculture made up 45 percent ($22.2 billion) of its export earnings, according to the International Trade Administration. However, the Russian blockade of the Black Sea ports and destruction of critical infrastructure drastically cut supplies. Damage to the agricultural sector alone is estimated to be around $80 billion, making Ukraine one of the most food-insecure countries in the world. 

By the close of 2023, however, exports of grains and oilseeds through the Ukrainian Black Sea corridor had attained the highest levels outlined in the Grain Agreement, with a 9.0 percent growth in the value of goods and services exports projected for 2024. Hence, in 2024, the corridor must continue to operate to facilitate the return to prewar indicators, when 80 percent of the industry's output was exported, a level unattainable through domestic consumption alone.

Ukraine's economic recovery depends on foreign investments and loans. A UN-backed study estimates the reconstruction and recovery costs for war-torn Ukraine at $486 billion over the next decade. Immediate funding is crucial to sustain businesses, compensate for war damages, and stabilize employment. Without such support, another wave of migration is inevitable, exacerbating military understaffing and labor shortages. The construction sector is already facing a 50 percent increase in the shortage of skilled labor.

Ukraine Offers a Conducive Environment for Investments

The recent adoption of draft law No. 9015 on the insurance of investments in Ukraine against war risks and a significant decrease in corruption, as indicatedby Transparency International’s Corruption Perceptions Index, provides a secure environment for both international and Ukrainian companies to invest. 

Historically, Ukraine's economy relied heavily on such sectors as mining, energy, steel production, mechanical engineering, and chemicals. The investment landscape remains promising across these sectors. With Ukraine's strategic positioning at the intersection of major transportation routes and its pivotal role as a primary grain exporter, agro-enterprises offer compelling prospects. 

Additionally, steel production presents notable opportunities, given Ukraine's resurgence among the top twenty global manufacturers of iron and steel. Furthermore, the mining sector presents favorable investment avenues, as was showcased by the Turkish Onur Group's $50 million investment in a graphite deposit in the northern region of Khmelnytsky, and BGV Group Management intensified mining endeavors, with plans for sand mining in Zhytomyr and uranium exploration in Mykolaiv, culminating in investments exceeding $100 million. 

Ukraine’s recent improvements in its investment environment and economic conditions should encourage the United States and other Western allies to continue supporting Ukraine, including through foreign investments, and should quell any hesitation of the part of the U.S. Congress in this regard.

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute