Financial stability, international aid and risk insurance – how to improve the investment climate in wartime
Almost 80% of CEOs noted the deterioration of the investment climate in Ukraine over the past six months, as demonstrated by the latest study by the European Business Association. It is quite obvious that the full-scale war became the determining factor. Despite the unfavorable climate, 91% of the EBA member companies plan to stay in Ukraine, and 55% are going to invest in the country even in wartime. So on August 8, during an expert discussion, we asked business leaders whether a country at war can be attractive for investment. We also compared the results of our study with the opinions of experts – what we found out:
Tiberiu Dima
Managing Director BASF Ukraine
“Amid the fog of war, it is difficult to predict the future but also to understand the current reality. Yet, I think that the Index results are accurate in reflecting the current investment sentiments. We at BASF Ukraine continue operations at full scale; our employees visit and meet customers, regularly check the crop fields, perform trials, and support the local farmers, as well as local customers from other industries. For next year, we plan optimistically and will continue investing in regular activities, such as knowledge transfer, field trials, and customer support events. We also plan to resume our employee trainings, as part of our employee development programs. In recent months, we observed that our customers are gradually recovering and rebuilding their operations, despite the hardship caused by the war. Businesses have no choice but to adapt to this new reality. While the war factor is beyond our control, I believe that the Ukrainian authorities should continue to tackle the problems outlined within the Investment Attractiveness Index survey, such as corruption, a weak judiciary, and the shadow economy, which remain major obstacles for investors.”
Kateryna Rozhkova
First Deputy Head of the National Bank of Ukraine
“Destruction of infrastructure and industrial capacities, logistical blockade, change in population demand, decrease in purchasing power of citizens, as well as uncertainty regarding the course of military operations – all these prevent businesses from proceeding confidently with their investment plans.
However, the economy continues to work: priorities are changing, and many companies are switching to state orders, which provide today’s strategic needs of our country. This is possible thanks to the banking system, which has not stopped working for a single minute since the full-scale invasion.
Since the beginning of hostilities, the National Bank fixed the exchange rate of the hryvnia against the dollar and introduced a number of restrictions on the movement of capital. Such restrictions today make it possible to reduce the rate of reduction of international reserves, which are needed for critical expenses.
Currently, we see pressure on international reserves due to a significant drop in exports against the background of a rapid recovery of imports, as well as significant expenses of our citizens who are forced migrants abroad. During the full-scale war, the National Bank and the Ministry of Finance sold 14.7 billion US dollars in the interbank foreign exchange market, and since the beginning of the year, this amount exceeds 16 billion US dollars. At the same time, the financial assistance received from international partners amounts to 13.7 billion US dollars.
From this point of view, additional taxation of imports would have a positive effect due to its reduction and, accordingly, a decrease in the demand of importers for currency. Besides, it would become an additional source of income for the budget.
In the conditions of a large-scale war, falling GDP, and rising inflation, emission financing of the budget deficit carries very significant risks for the economy, business, and citizens. An increase in revenues to the budget, the activation of internal market borrowing, together with the financial assistance we receive from international partners, will make it possible to minimize the volume of emissions and maintain relative macro-financial stability, which is a necessary prerequisite for the economy in the conditions of war and the reconstruction of the country after the Victory.”
Olena Voloshyna
Head of the Activity of International Finance Corporation (IFC) in Ukraine
“Since the war began, IFC has been providing working-capital financing to our clients, enabling continued access to fuel and other staples. We are also keeping our trade lines open to support the import of critical supplies. At the present moment, IFC is preparing a broader response to the regional and global impacts of the war, including financing to bolster global food security. We also aim to support financing for essential goods, including energy and agricultural inputs, such as seeds, fertilizers, and land tools. In addition, we will help smaller businesses and forcibly displaced individuals get better access to financial services, and eventually help rebuild the country’s infrastructure, including transport and logistics, energy, municipal, and housing infrastructure.”
Oleksandr Pysaruk
Chairman of the Board, Raiffeisen Bank Aval
“The investment opportunities are quite limited in a country where there is a war. Investment projects are moving closer to the borders and there are not very many of them. We can see that entrepreneurs ask banks for funding not to invest in new projects, but to replenish their working capital. With high inflation, this demand will only increase. At the same time, credit discipline remains at an appropriate level, better than usual during crisis periods. The same can be said about the banking system, which is surviving this crisis better than previous ones. If the war ends before the end of this year, the banks will be able to cope even without external support. We understand the need to preserve the state balance of payments and the appropriate measures of the regulator in this regard. The country must exist on its own funds, especially now as it receives assistance from international partners. That is why, in times of war, the best guarantor for small businesses is the state, which can take part of the risks and has the opportunity to provide soft loans under the program 5-7-9%.”
Oleksii Grinchenko
CEO AON Ukraine
“Before February 24, we offered our clients war risk insurance. We are currently collecting applications for compensating war losses, including objects of critical infrastructure, energy, and agriculture. We develop an action algorithm, collect evidence of damage, and contact reinsurers for compensation.
To continue the existing coverage of war risks, it is necessary to transfer the next amount of the premium to the reinsurers, which is impossible now according to NBU Resolution №18, therefore we are contacting the relevant Ministries and the NBU regarding the possibility of purchasing currency and transferring payment based on an individual license. We are also working on extending bonds for insurance companies, for which we also need to urgently resolve the issue of buying currency and paying premiums to reinsurers.
Companies that did not have time to insure themselves against war risks before the start of a full-scale war will find it difficult to obtain insurance now. This is impossible to do for a property. On the eve of the war, the prices for war risk insurance rose significantly. Thus, in the pre-war period, such a package could cost from 0.25% to 0.5%, but now these rates are unavailable.
As for maritime shipments, which were unlocked the other day, their insurance is currently at a rate of approximately 5%. Therefore, if the ship carries cargo worth 5 million dollars, then the insurance package for it will cost 250 thousand. This is expensive, but it shows that there are already insurers willing to cover the risks of war. At the same time, without affordable insurance, it will be very difficult to attract new investments. The state and supranational structures (IFC, EBRD, MIGA) must agree on the creation of a Guarantee Fund in the amount of at least 5 billion dollars. Also, Ukraine receives a lot of international grants and loans, some part of these can be used to fund the war risk insurance program for business.”
We thank the speakers for the meaningful discussion! We hope that this crisis in the investment climate will pass soon, and after the end of the war, the mood of investors will improve, and the economy will move in the direction of further growth. We observed such a trend immediately after the Revolution of Dignity, so we hope for similar dynamics this time.
