Despite difficult circumstances, Ukraine – here the capital Kiev – offers a wide range of opportunities
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German companies are showing great interest in Ukraine, but tend to act cautiously in view of the uncertain security situation and unclear short- to medium-term developments. The German Chamber of Commerce and Industry (DIHK) identifies the opportunities and challenges of engagement in the Eastern European country in an impulse paper.
After almost three years of full-scale Russian invasion of Ukraine, the country and its economy are in a certain equilibrium, despite the existing war risks and all other difficulties. The economy is growing year on year, and the functioning export logistics via the Black Sea are supporting Ukraine's foreign trade. We also see a growing volume of trade between Germany and Ukraine. Ukraine is now one of the top three partners of the German investment insurance scheme with more than 50 covered projects. Other instruments, such as the Export Credit Facility or the Impact Connect instrument, support companies in maintaining trade and engagement in Ukraine. At the same time, the volume of covered investment projects does not belong to the top ten of the German investment insurance scheme and we could not observe any large-scale investment developments by German companies in the last twelve months.
Looking at Ukraine, we see two developments. A still high general interest of German companies in the country, combined with a certain reluctance due to the current security situation and the inability to predict the short and medium-term future. Throughout the year, the German Chamber network organises several smaller and larger Ukraine-related events to discuss the current economic situation and possible opportunities for engagement. Ukraine is fighting a military struggle against invasion and is facing an economic battle to keep the national economy alive and to attract foreign trade partners and investment. In many cases, working with a Ukrainian partner has proven to be a competitive advantage in terms of supporting Ukraine economically.
Nevertheless, the country faces several challenges caused by the Russian attacks and the ongoing martial law. First and foremost is the destruction of the energy and electricity supplies. Experts are constantly working to repair and maintain the destroyed capacity, which is vital for families to heat their homes and for businesses to maintain production. Recent increases in electricity import capacity have stabilised the system.
The military and private companies rely on the same target group for military service or employment in companies. At the same time, many women are outside Ukraine. This leads to a shortage of labour. Last but not least, the general security situation and restrictions on foreign exchange are making financial institutions and companies reluctant to develop and implement projects. These circumstances are currently making it difficult to expand business activities, for example in the area of just-in-time products.
Despite the challenges, we see opportunities and the right time to address some sectors and issues. Companies can take advantage of these opportunities today. At the same time, public and multinational institutions can provide even more support and develop projects with their Ukrainian partners. Even if now is not the time for big investments, we should prepare together.
One of the most important economic challenges is to strengthen Ukraine's energy security. Faster integration into the European electricity grid and the expansion of infrastructure can make a significant contribution to stabilising the electricity supply. German companies and suppliers can also use their expertise to support the development of decentralised energy generation and innovative solutions, and stand by Ukraine as technology partners. In addition to technological cooperation, investment in power and heat generation will be needed in the coming years to bring war-damaged capacity up to modern standards. This offers opportunities for closer cooperation in the medium term.
In addition to the destroyed buildings that need to be repaired, the country's building stock and production technology also offer scope for renewal. About 80 per cent of residential buildings were built before 1991 and need to be more efficient. Switching to energy-efficient technologies now is an opportunity for consumers to save energy and money. It is also a strategic opportunity for manufacturers and suppliers to enter new markets. The less energy used, the more resilient the country, society and economy will be. Adopting the relevant regulation into Ukrainian law is therefore a necessary step.
Ukraine is a resource-rich country when it comes to the agricultural sector. In addition, climate change is leading experts to conclude that Ukraine will become a country of "southern products". This means that the country has the opportunity to expand its production portfolio in the agricultural sector. This is another opportunity to update the sector with technology for higher-yielding crops, to deepen and develop value chains in the processing of agricultural raw materials, and to add value to Ukrainian-made products. New investment, manufacturing and technology partnerships are the obvious choice here.
Full harmonisation of Ukrainian legislation with the provisions of the Deep and Comprehensive Free Trade Agreement (DCFTA) would also have a positive impact on trade with Ukraine, particularly in the agri-food sector. This includes the permanent and reliable removal of non-tariff barriers. Activities to develop border infrastructure with neighbouring countries to the west and south need to be continued and intensified. To this end, Ukraine and the EU should work together to ensure that political obstacles to trade are reduced or prevented through reliable conflict resolution mechanisms.
Common norms and standards are the basis for joint trade. Functioning and trustworthy quality infrastructure institutions are at the heart of this cooperation. Certification in this context, which makes products tradable and purchasable for internationally oriented companies, would make an important contribution to the integration of Ukrainian products into international supply chains.
Ukraine is, and will continue to be, dependent on technology to maintain its defence capabilities. With this in mind, many Ukrainian companies have developed in recent years around UAVs, artificial intelligence and security and defence technology. The country is providing long-term support for this sector of the economy through the Ministry of Strategic Industries. Intensive technology and innovation partnerships have developed between German and Ukrainian companies, particularly in the areas of UAVs, de-mining and cyber security applications. These developing partnerships should be further supported and promoted. German companies are not only potential technology suppliers. Conversely, the German security and defence industry can also benefit from real-time developments in Ukraine, further develop its own business models and also contribute to Germany's resilience.
Ukraine's goal is to strengthen its ties with the West and integrate itself and its companies more closely into international value chains. Western partners structure their processes according to internationally recognised standards, be it in purchasing, business planning or financial and accounting processes. There is great potential in this area to introduce and implement these standards on a large scale as part of education and training processes in Ukraine. Qualified personnel will lay the foundation for joint project and business development.
The country has experienced a great deal of solidarity in recent years. Regarding German companies, projects and, in some cases, investments by companies already active in the country are often being continued. There has been no major wave of "business emigration". This attitude, driven by solidarity and confidence in the location, also requires further development of key location factors. Companies must act primarily according to economic criteria even in a difficult environment.
We are aware that the defence of Ukraine ties up a lot of resources and that decisions are made from a different perspective than in peacetime. Nevertheless, economic decisions would be easier to make if political processes were as predictable as possible and decisions were reliably valid. Predictability and reliability are important factors in securing business engagement and successfully encouraging new engagement.
As a business location, Ukraine continues to compete internationally with countries in its immediate neighbourhood as well as globally. The investment promotion tools developed and adapted at the beginning of the full-scale invasion were designed to help attract investors to Ukraine even during the period of martial law. We have to admit that this has not happened on a large scale so far. This leads to the conclusion that the existing instruments have not sufficiently achieved the stated goal of attracting significant foreign direct investment. These instruments need to be updated in dialogue with international partners in order to provide targeted incentives. We are available for this exchange.
It is currently difficult, if not impossible, to obtain project finance for Ukrainian projects on the commercial financial market. Investments and projects that do take place are usually fully secured by government guarantees, financed directly from government programs or provided through international development banks as part of tenders. The reasons for this are high-risk premiums, high financing costs and negative consequences for the financing banks in their refinancing. The risk is not only due to the war itself (security issues) or political risks. There are also risks on the commercial side that are difficult to assess and evaluate and that work against the financing of projects. The international community could intervene positively by providing guarantees or funds to cushion the high costs of Ukrainian projects and also limit commercial risks. Such an instrument, limited to the period of martial law, could help mobilise private capital and reduce financing and insurance costs.
We are convinced that German-Ukrainian economic relations offer many opportunities for direct engagement and the expansion of supply relations, even under the current difficult conditions. In some areas, now is not the time to expand business. Here it is important to secure business. In other areas, however, now is the time to build and consolidate relationships with Ukrainian partners or to lay the foundations for a medium-term commitment. But companies need to be supported in this task with good analysis, advice and support programmes tailored their needs. The situation is too complex to be left to business alone.
Ukraine has set its sights firmly on membership of the European Union. Even if political accession will take some time, steps towards economic integration and the adaptation of the regulatory framework in Ukraine should now be supported and pursued with all possible vigour. The acquis communautaire must be well implemented in the interest of both sides. Rapprochement with the European Union has the potential to reform many processes and standards in Ukraine relatively quickly. We should use this leverage together.
