What’s happening in Ukraine and should you invest?


What’s happening in Ukraine and should you invest?

Ukraine was upgraded by Moody’s last week from Caa3 to Caa2 with outlook also being upgraded from stable to positive.  Many positive developments have occurred that suggest that Ukraine is on the right track, including foreign reserves increasing from $5bn to $17bn and debt-to-GDP becoming a more manageable 81%.  We think it is worth looking at what is going in Ukraine and what are some of the ground-level realities for Ukrainians today.

We last covered Ukraine in this piece and prior to that provided an overview of how to invest in Ukraine here.  Since then, the market has doubled.  The financial sector has resumed a semblance of normalcy and within Kiev at least, Ukraine strikes you as a growing, vibrant Frontier Market.  Its challenges are not particularly different than those facing countries such as Morocco (Western Sahara issue), Pakistan (Kashmir), Palestine, or a whole host of other countries which remain attractive despite conflict or political instability.

With the loss of Crimea and Sevastopol, Ukraine loss about 15% of its population (from 49mm to 42mm) but also became a more homogenous country.  Ethnic Russian pre-conflict constituted about 17% of the population compared to approximately 8% today.   The regions of Donetsk and Luhansk remain unstable with rebels controlling significant areas which depending on your perspective may or may not be Russian military forces.  This region, with a population of 6.7mm, if lost would reduce the population of Ukraine to 35mm.  Ukraine would then be almost entirely an ethnically Ukrainian country making the Ukrainian nation and country one and the same.  This risk is material that these regions are lost.  It is for this reason that bonds remain in “junk” status and a cloud of uncertainty surrounds the country.

With nominal GDP at $93bn and GDP per capita of $2,194, the country has a long way to go before it achieves the objectives of its rather ambitious government.  Authorities in Ukraine remain unwilling to cede the territory taken over by Russia, though this is largely inconsequential given that Russia has firm control over the area and international participants are unwilling to involve themselves further.   A key point to note is that Ukraine’s GDP per capita and average income are less than a quarter of that of Russia.  Despite being perceived as inferior to Western Europe from the perspective of economic development, Russia can materially improve the lives of those in Ukraine and wields as much authority to successfully do this relative NATO.

The IMF stabilization program that was instituted after the country’s default in 2013 has been adhered to surprisingly well, which has resulted in persistently strong growth for the country.  2016 growth was revised upward in June from 1.0% to 2.3%[1] and now the World Bank expects 3.5% growth in 2018 and 4.0% in 2019.  This is much needed for a country whose economy shrank -20% between 2013 and 2015 after losing its largest trade partners.   Inflation is trending down and is expected to completely normalize under 6% by 2019.

Structurally, Ukraine has had to reinvent itself in many ways.  Ukraine relies heavily on coal for heating, but most of these reserves are in regions that are unstable or within Russian control.  Ukraine signed a trade deal with the US for thermal coal to offset this loss[2], but Ukraine will be paying more for this coal than domestically produced coal.  Those regions continued to supply Ukraine throughout the conflict, but it clearly was not a sensible arrangement for either group.  Similarly, Ukraine relies on Russia for 90% of its gas imports for its large industrial complex, this continues to weaken Ukraine’s ability to be aggressive against Russia. To make matters worse, the EU has made several moves which are harming Ukraine and bypassing Ukraine for the transport of Russian gas to Europe[3].  A surprising fact for many is that Ukraine is a magnet for tourism, with more visitors than Morocco, Czech Republic or Singapore[4].  Developing this sector would help Ukraine’s battered reputation as well as its finances.

The Kiev Stock Exchange has rebounded well from the economic crises that have enveloped the country since 2013.  The market today has a total market cap of $6.5bn, but more importantly for foreign investors, there are approximately 16 companies with a market cap over $100mm and 25 companies with a market cap over $50mm.  The market is also reasonably liquid with daily value traded of approximately $265mm.   The clear majority of these companies have operations that are centered in and around regions that are firmly in Ukraine’s control.  This, in addition to the economic growth within the country, suggests that investing in Ukraine is reasonably attractive in a diversified portfolio.  The currency has stabilized and turnover is returning to the market, alongside the sharp uptick in returns over the past year.

Day-to-day life in Ukraine has varied depending on where in the country you are.  In Donetsk, many people continue to live in shelters, hoping for the fighting to cease while others in smaller villages have been able to continue, as they always have[5][6].  Fighting continues to be quite intense, as evidenced by the most recent reports of the region which you can see here.

If you are considering investing in a non-public equity way, then the list of potential issues with doing business in Ukraine is a must-read.  The list compiled by the TMF Group can be accessed here.  Some of the standout issues are that registering property can take 70 days and involves 10 procedures.   Along the same lines, it takes on average, 283 days to get electricity unless you pave the way through bribes.

Things to watch out for that would be strong signs that Ukraine is doing well, is hitting its target for 3.5% GDP growth in 2018, persistent declines in inflation, an increase in the retirement age (average Ukrainian retires at 59), and a stop to the strong population declines and net migration that the country has suffered.  If Ukraine is unable to keep its citizens in the country, the brain drain of the country will continue to persist.

We think Ukraine merits attention due to its unique position geographically, its large population base, its significantly developed industrial base and the degree to which markets and valuation in the country fell post-2013.

As always, if you have any questions, please let us know.


[1] http://cucc.ca/2017/06/13/world-bank-improves-forecast-for-ukraines-economic-growth-in-2018/

[2] https://www.reuters.com/article/us-ukraine-usa-coal-idUSKBN1AG208

[3] https://www.forbes.com/sites/kenrapoza/2017/08/04/on-russian-gas-front-germany-does-ukraine-no-favors/#41dad4be326e

[4] https://www.indexmundi.com/facts/indicators/ST.INT.ARVL/rankings

[5] http://www.newstatesman.com/culture/2016/02/letter-donetsk-ice-cream-bustling-bars-and-missiles-eastern-ukraine

[6] http://www.npr.org/sections/parallels/2017/07/24/539099158/in-eastern-ukraine-a-struggle-for-survival-in-the-crossfire-of-a-little-seen-war


  1. I am in the process of gathering information about Ukraine. What is the current dividend tax rate in Ukraine, 9%? Any forecast for Hryvnia devaluation/appreciation in 2018? Thanks!

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