The following is an interview with Ukraine investor, Ian Hague.
MOTYL: As a Founding Partner of Firebird Management LLC, a fund management company focusing on the capital markets of the former Soviet Union, you’ve pursued investment opportunities in Ukraine since 1994. Whence this long-standing interest?
HAGUE: Ukraine has fundamental appeal as an investment destination. The list of its attractive features is pretty well known by now: a large, generally urbanized, well-educated population, proximity to Europe and excellent transport links to world markets, an important industrial base combined with what was and could again be one of the most productive agricultural sectors on the planet. The mandate of our fund is to identify and make long-term equity investments in promising companies that have the potential to be global leaders in their field of business. At the moment, Firebird has investments in a large Ukrainian poultry producer that is a public company listed in London. In the course of our investing in the country, a number of opportunities did not work out for us due to poor corporate governance and weak enforcement of property rights, but this is a situation we have encountered in many other countries of the former Soviet Union and we are confident that, as long as there is consistent progress in reforming the ways the government operates and enforces laws, more opportunities will emerge for us.
MOTYL: What do you expect of Ukraine this year?
HAGUE: We are very confident in the Ukrainian economy’s prospects for 2016. First, the output decline and currency devaluation of 2015 have now abated. There is the phenomenon of “snap-back” growth that occurs whenever there is a steep devaluation of the currency and the current account is brought into balance. Now that an IMF program is in place with strict conditionality, investors have more confidence in the macroeconomic outlook for the country. But the key to attracting investment is the micro-economic outlook. Progress in reducing corruption and deep reform of all of Ukraine’s legal and judicial institutions is urgently required to attract international investment. The legacy of a Russian-style “mafia-state” approach to private property and entrepreneurship must be destroyed. I am hopeful that significant progress can be made in this area this year, once a more effective government is in place. Investors were generally excited to see Western economists and business people join the government last year, but now that the usual political obstacles are reemerging, a little of the bloom is off the rose with regard to investor expectations. The hope is that the will of the Ukrainian people as expressed at Maidan for a broad-based battle against corruption and oligarchic interference in government will be heeded.
MOTYL: Which sectors of the Ukrainian economy are of greatest interest to investors?
HAGUE: Given the re-establishment of macro-economic equilibrium and the deep devaluation of the hryvnia, the first place to look would normally be in the financial sector, as returns on equity and loan margins should be very attractive. Beyond that, we are considering additional investments in the agri-business sector, particularly those companies that are exporters of agricultural products. The decline in hryvnia-based costs as a result of devaluation have automatically made these companies more globally competitive and profitable. As Ukraine’s economic recovery continues, we will also be looking to invest in companies that serve the local market, such as retail businesses and possibly real estate. I say “possibly” because the rule of law issues that create risks in those sectors have not yet been addressed to the satisfaction of foreign investors. Back in the boom years of 2005-2007, which was the last period of significant inflows of foreign capital into Ukraine, investors were not sufficiently alert to these risks and it cost them dearly. Investors learned a lesson. And, now the government really must make progress in creating more transparent trading markets in land and real estate. I understand the political sensitivity of foreign ownership of agricultural land, but since this sector probably has the greatest potential for rapid growth, I think Kyiv would be wise to establish clear and consistent rules and treat investors in an even-handed manner in the enforcement of rules.
MOTYL: How does the ongoing war with Russia affect your calculations?
HAGUE: The war in Donbas has now calmed down enough so that it no longer represents an insurmountable obstacle to attracting foreign investment into Ukraine, as long as other conditions are in place. I think the current government too often uses the war as an excuse for not doing the difficult political work to combat and defeat corruption. There seems to be a view in officialdom in Ukraine that the good will of the outside world in supporting Ukrainian aspirations depends on continually being at war. This is not true. Realizing Ukrainian aspirations for deeper integration with the EU and NATO depends much more on progress in creating a modern, effective, and accountable state system than on the status of Donbas.
MOTYL: Corruption and weak of rule of law are generally considered to be the main obstacles to foreign direct investment in Ukraine. Does Ukraine differ in this respect from other post-Soviet states?
HAGUE: I think that, compared to other countries in the former Soviet Union with broad and deep corruption problems, Ukraine is unique in having a government whose principal claim to legitimacy is that it has credibly committed to do something about it. Given that Ukraine has a strong civil society with a track record of compelling accountability from its leaders, I have confidence that progress can be made on the corruption and rule of law issues, but it will be hard work. As in Russia, the administration of justice is still more a profit-oriented business than a function of government. This is intolerable and greatly undermines the authority and legitimacy of the state. For entrepreneurs it makes setting up and operating new businesses unthinkable without the right “connections.” Foreign investors do not have the time or the inclination to seek out such connections and no confidence that, once they have found partners, their partners won’t use those same corrupt law-enforcers and judges to prey on them. It’s simply too difficult and too costly to formulate contracts that are completely self-enforcing all the time. Law matters. And, where there is no rule of law there is no security, and the serious investors of the world will simply invest elsewhere.
MOTYL: Odessa Governor Mikheil Saakashvili is considered to be a corruption-fighting savior by some and an authoritarian leader prone to corruption by others. You’ve met Saakashvili. What’s your view of him?
HAGUE: I have known Saakashvili since he first became President of Georgia back in 2003. We made a series of very successful investments there and I had the chance to watch him closely. I don’t approve of everything he did in the area of party politics, and he seems to have overestimated the degree to which his supporters outside Georgia would endorse his actions, especially in the later period of his presidency. But I consider Misha Saakashvili’s record in implementing economic reform and combating corruption to be unimpeachable. In his time in power Saakashvili truly transformed the relationship between state and citizen in Georgia. He moved Georgia out of the swamp of mafia-state-style governance by dramatically reducing the scope of government in such a way that the economy responded almost immediately. Georgia was helped significantly by the absence of natural-resource rents for corrupt operators to exploit and by the presence of effective, Western-trained professionals who came back to Georgia to participate in government and business. By eliminating regulation in a broad array of areas, and reforming and re-training virtually everyone in the government involved with public administration, law enforcement, and criminal and civil justice, whole new areas were opened up for economic activity and investment. In Georgia it’s now dead simple to start a business, to pay your taxes, to use the courts to resolve disputes, and to wind up your business if needed. At every point, the degree of government interference is minimal. It’s really a great place to do business, as a lot of the official “corruption tracking” indices like the World Bank Ease of Doing Business survey and the Transparency International Corruption Perceptions Index attest. What is more, these changes were all enormously popular, so much so that they have been preserved since he has been out of government. When the stars align in Ukraine’s political constellation, similar reforms will be adopted in Ukraine, and like in Georgia, the reforms will stimulate investment, entrepreneurialism, and the growth in Ukraine too. But, frankly, time is short. There is a growing feeling of “compassion fatigue” in Europe and the United States and multilateral economic help for Ukraine is losing political support in the absence of dynamic political leadership promoting anti-corruption efforts and reform in Kiev.
MOTYL: How does Ukraine’s younger business elite compare and contrast with businesspeople in Russia and the West?
HAGUE: Ukraine’s younger entrepreneurial class is every bit as talented and capable as entrepreneurs I have met in Georgia, Russia, Kazakhstan, or Estonia. I have met a variety of professionals at work in software startups, outsourced programming shops, and innovative retail businesses. In the finance field, you have a number of thirty-ish investment bankers who now have several years of experience working with Western investors and are very capable in structuring corporate finance deals. The problem is that, at the moment, the entrepreneurs would rather domicile their businesses outside of Ukraine because the business environment remains too unpredictable and risky as a result of corruption. For their part, the investment bankers have little to do, because large Ukrainian corporates are either still owned by the state or controlled by oligarchs, or sometimes by both. On the local capital market, the shares traded are such a small
percentage of the capital of the listed companies that they are the objects of manipulation and unsuitable as indications of the value of firms. With more privatization and the development of a domestic bond market, Ukrainian corporates could be raising capital from domestic investors, including private pension funds. But a vast overhaul of all the institutions of the capital market will be necessary before this can happen.
MOTYL: Where do you expect Ukraine to be economically in the next few years?
HAGUE: Assuming a new momentum is imparted to the reform process, I could see economic growth in the 4-5 percent range in the next few years. There is strong investor interest in Ukraine and, once there is confidence in the investment environment, it would not take much to start an investment boom there. I think the recovery will be felt first in the area of agricultural exports, followed by renewed foreign capital inflows into real estate and banks.
