Imagine a foreign investor who believed in Ukraine and decided to invest in it. How will he do it? In the civilized world, cash in suitcases has not been carried for a long time, without objective reasons they do not put money on the current accounts of third parties. Investors go to stock markets, invest in stocks, diversify portfolios, sometimes even take risks and support startups, but also through exchanges. And this investor discovers that out of the existing six exchanges, two operate on the Ukrainian stock market, and 98.7% of all contracts they conclude are government bond trading. There is simply no opportunity to invest money, not in the government of the conventional Shmygal, but, for example, is a manufacturer of the equipment, vegetable oil, clothing, or food – these companies are not on our exchanges and will not be for a long time. No matter how strong their desire to attract investment is, for them entering any of the Ukrainian stock exchanges is seven circles and long months of bureaucratic hell with high corruption risks and little hope for a positive result. That is why shares of a few public Ukrainian companies cannot be bought in Ukraine; they are traded on the London, Warsaw, and Paris stock exchanges. Without a light, by the way. There are several reasons for this too.
Theoretically, a potential investor can buy something trite in Ukraine, but our “big” privatization is frozen, and the small one offers sheds and canteens in the village. The investor may, of course, be persistent and decide to build a business here, but the country risks are impressive: there is no judicial protection; there are black notaries; allocation of land without a bribe is impossible, and even with it it is not guaranteed; it will take more than a year to connect to the electricity grid even with all the bribes; and then the National Police, the Security Service of Ukraine, firefighters and the tax department will come to you in a row so that they also invest a little money in them. And, realizing all this, investors not only do not want to buy or build anything here but also invest in our companies, albeit through the London Stock Exchange.
As you can see, the main reasons why the investor bypasses us are two: the underdevelopment of the Ukrainian financial system and the vulnerability of the investor as an owner.
The first point is confirmed indicatively. The financial development index (FD index) is one of the key indicators for assessing the effectiveness of the country’s financial system since it reflects the relationship between monetization, the level of development of the financial and monetary systems, and the rate of economic growth. The closer this index is to one, the more efficient this or that financial system. FD index of Ukraine – 0.21, at the level of countries such as Bolivia (0.25), Honduras (0.22), Suriname (0.20), Belize (0.21), Nigeria (0.24) and Cat- d’Ivoire (0.23). At the same time, the level of Ukraine’s GDP is significantly higher than in these countries, and countries comparable to us in terms of GDP have FD indices ranging from 0.30 to 0.44. That is, Ukraine has significant potential for the development of the financial system and, accordingly, the acceleration of economic growth.
The second point is confirmed by the results of a survey of foreign investors conducted by the EBA, who say that the main obstacles to investment in Ukraine are: corruption, mistrust of the judicial system, monopolization of markets, the influence of oligarchs on the economy.
Unfortunately, the Strategy for the Development of the Financial Sector until 2025, developed by the National Bank, does not offer solutions for either the first or the second points. The NBU seems to agree that the activity of non-bank financial institutions and their contribution to economic growth remains low, the volume of transactions in stocks and bonds of enterprises is negligible, and the infrastructure of capital markets and organized commodity markets is undeveloped and ineffective. But at the same time, the National Bank does not offer a single effective mechanism that would make it possible to quickly and efficiently reform the sector.
By 2025, the NBU plans to achieve:
– complete foreign exchange liberalization;
– increasing the assets of public institutions of joint investment from 0.1% of GDP to 5%;
– growth in the level of insurance penetration from 1.4% of GDP to 3%;
– growth in the volume of accumulative pension assets from at least 0.1% of GDP to 2%;
– implementation of the regulation of the crypto-asset market;
– Ukraine entered the top 50 of the IGC World Economic Forum rating in terms of the components “Financial market development”, “Financing through local capital markets” and “Regulation of stock exchanges”.
And to achieve these, you see, modest indicators, the NBU plans to complete regulatory changes, and the development of road maps for reforms only by 2024. The NBU plans to develop only key performance indicators of financial services markets by the end of 2022. That is, real transformations will begin even later. At this rate, we will wait for real investments by 2040, and only if we simultaneously complete the judicial reform, providing these investors with high-quality protection of their investments. And we sincerely hope that all these processes will take place, but shouldn’t we try to introduce some intermediate solutions that allow us to attract high-quality investments in the existing conditions?
At the last Council of Reforms, a proposal was made to create a financial center in Ukraine. There is little specificity, but based on the experience of other countries, we can assume what exactly the reformers had in mind. For example, financial centers operate quite successfully in Kazakhstan, the United Arab Emirates, and Qatar.
In these countries, separate territories were allocated for them, to which British law was applied, which is customary for investors and guaranteeing them high-quality investment protection even in these countries. In addition to high-quality legal protection, investors on the territory of the centers are offered the usual tools for work, creating from scratch an institution of financial regulation, a system for protecting intellectual property, exchanges, fintech, IT, start-up centers and providing investors with all kinds of existing investment tools. These centers were created following international standards (IOSCO, Basel, IAIS, FATF), which is, in addition to the “British” protection, the investor is offered high-quality, legal, and international working conditions.
Also, the organizers of the centers offer potential investors various benefits to more effectively compete with already existing developed exchanges. For example, in Kazakhstan in 2020, investment residence began to operate, which consists in the fact that an investor who buys securities on the financial center exchange is exempt from paying tax on personal income that was received outside Kazakhstan, while the family and the investor himself receive a long-term visa to the country.
That is, the model of a financial center itself is working and successful, but is this experience applicable in Ukraine? To date, there are not many ready-made projects of such financial centers in our country, which version was discussed at the Council of Reforms is not clear, but the general outline, as well as general problems that may arise during the implementation of a similar project, are clear.
Ideally, all regulation in the center is temporarily removed from the Ukrainian jurisdiction making the territory of the center a zone in which a special legal regime in the financial sphere is applied. The main goal of the center is to create a financial ecosystem that provides fair and transparent regulation, protection, tools, and functionality for its members at the level of international standards. Providing at the same time a full range of financial services and instruments, including currency, stock and commodity exchanges, banks, a startup development center, and a fintech hub.
The current law of the center is based on the principles familiar to investors and inspiring trust, legislation, the precedents of the law of England and Wales, as well as on the standards of the world’s leading financial centers. The center has its court and international arbitration, working under English law, with the involvement of foreign judges with an impeccable reputation and extensive experience.
The regulatory framework for the center’s work is created separately, which will allow avoiding the risks associated with the institutional insolvency of the current Ukrainian regulators and not expecting the completion of the transformations they have begun.
Of course, there are risks of implementing such a large-scale project. First, the withdrawal of the center from the Ukrainian legal field and the application of the law of another state on its territory will require amending the Constitution. This is a complex and unpredictable process. But here it is important not to forget that any such centers are a temporary solution that does not cancel transformations within the country, that is, any changes should be limited in time, for example, ten years.
Secondly, in any case, we should talk about a territorially limited space, which may be complicated by a long process of allocating land for the center, this is Ukraine after all.
Thirdly, competent communication with our partners in the EU will be required so that they understand that the center will work on the territory of Ukraine only until the moment of its accession to the European Union, and its creation will not violate our obligations to the EU and will not affect this process.
But all risks are justified and eliminated if we want to win in the competition for investments. Moreover, the presence in Ukraine of other, fundamentally new, rules for working in the financial sector will create healthy competition in the domestic market and can accelerate transformations outside the center, because competition for an investor will become not theoretical, but quite real, close and obvious to all participants. And if the intentions to implement such a project are serious, then a project that is difficult at the first stages of implementation can bring obvious and rather quick results in the form of real investments. The real sector will be able to attract financial resources much easier. The state will solve a whole range of problems, for example, it will receive the necessary set of investment instruments to launch the second tier of the pension system or develop the insurance market. The financial system will finally be able to overcome its “bank-centricity”, and the processes of distributing free money in the economy will accelerate and become easier. And most importantly, investors will finally be able to make sure that they are expected in Ukraine, that there is something to invest in and that it is safe and profitable to invest in Ukraine.