Ukraine’s economy in general will become more attractive to investors in 2004-2005 despite the temporary political risks associated with the forthcoming presidential elections. From a tactical and speculative viewpoint, one can easily buy blue-chip stocks in late summer - early fall of 2004 to be further sold after the elections, for example, in the spring of 2005.
The fastest developing sectors of the economy will be machine building except for those high-tech industries that were not developed in the Soviet period; construction; power engineering, energy conservation, and natural gas technologies except for the highly-monopolized subsectors; all kinds of ventures that maintain Ukraine’s transit potential; services such as tourism, education, health care; individual agricultural sectors.
Among the sectors that will gradually become less attractive to domestic investors are the food industry, wholesale trade, distribution, many retail sectors, banking, and investment in housing construction in Kyiv.
Consider the investment attractiveness of individual sectors of the Ukrainian economy.
MACHINE BUILDING
In the short term its attractiveness will only increase. While in 1999- 2000 the most attractive to investors were the machine-building enterprises working for the mining and metallurgy complex, by the year 2005 high- tech enterprises will take the lead. Very often they are so undervalued on the periphery that they cost even cheaper than their available infrastructure, even if you do not count the remaining technological equipment. Thus, small individual investors can be advised to begin investing in the blue-chip stocks of Ukraine’s machine building. However, despite all the credibility of scientific theses about orientation toward the innovation model of economic development with priority attached to developing high technologies, it is not advisable to invest in new high-tech subsectors of the machine building industry that were not developed under the Soviets. In fact, it is better to determine at the micro-level one’s best place in the system of global distribution of work rather than attempt to compete, for example, with Taiwan in semiconductor technologies or with Switzerland in high-precision mechanics.
CONSTRUCTION
The construction boom is gradually spreading from the capital to the regions. Yet construction remains one of the least transparent and most criminalized sectors. Thus, it is not advisable for a medium investor that does not enjoy a favored treatment from the government to invest in general construction projects. Instead, investment in high-tech kinds of individual construction or finishing services or in new kinds and technologies of manufacturing construction materials promises the shortest payback periods.
POWER ENGINEERING
In the next three to five years those in power, no matter who they are, will have to significantly increase the efficiency of highly monopolized markets by preventing favored treatment of business structures close to those in power. The sectors that attract most investment are cogeneration and other modern technologies of using natural gas, in particular in vehicles; upgrading existing and building new small and medium hydroelectric power plants; new technologies of using renewable energy resources; increasing Ukraine’s fuel and energy transit potential.
CONSUMER SERVICES
Since the Soviet period the consumer services sector has traditionally been underdeveloped. During the crisis of the 1990s, it declined faster than industry. It is time to begin investing in education, health care, and domestic tourism. In this case the benefits result from the increased efficiency of local investment as compared to more sizeable investment on a nationwide or worldwide scale.
FOOD INDUSTRY
It will lose its leading role in terms of investment attractiveness, since the domestic market is almost saturated, while gaining a foothold in foreign markets takes time and entails significant additional costs. Another factor here is the low crop of 2003 and the probability of lower import tariffs along with reduced direct and indirect subsidies to agriculture in the process of Ukraine’s WTO accession. To maintain profitability, major food enterprises are advised to begin creating vertically integrated corporations and holdings that would include the production of agricultural goods, perishable goods included, transportation, storage, and processing, wholesale trade on the domestic market, and export of such goods to foreign markets. With time, this scheme could become as effective as Ukraine’s traditional scheme of vertical integration: coal and coke, and metal and currency. It is important to begin now while agriculture and land in particular are still extremely undervalued.
BANKING
Many kinds of the traditional banking products (offered by banks with Ukrainian capital) are gradually becoming uncompetitive, while banks with foreign capital or non-bank financial institutions are gaining strength. Simultaneously, demand for new banking products is increasing. Above all these are consumer loans and bank investment management and consulting. The long-anticipated influx of foreign bank capital, which will involve acquisitions of a string of Ukraine’s major banks, will most probably begin after the presidential elections. However, even today one can forecast that the maxim level of participation of foreign capital in the Ukrainian banking system will not exceed 65-75% in the next five years. One should not expect interest rates on loans to be reduced significantly either. The average interest rate on loans in hryvnias for the corporate sector will not be lower than 12-15% before or after the elections.
RESEARCH AND DEVELOPMENT
The very possibility of effectively investing in research and development structures is still considered exotic at best. Yet growing competition and narrowing range of potentially profitable projects with a short payback time in the sectors that traditionally attract most investment convince even the most conservative investors and top managers of the need to invest in R&D structures. Soon marketing methods alone will not suffice to counter competitors. Signs of the future growth of this sector’s investment attractiveness are seen in the sharp increase in the demand for design work in many sectors. Soon it will be the turn of research and development. But it is better to begin investing now while these structures are still undervalued and competition weak.
