Investors slow to follow H&M and Ikea into Ukraine

When Swedish clothing giant H&M opened its first store in Ukraine earlier this month, thousands of high-street fashion lovers rushed in to buy jeggings, flares and jersey dresses.

But the excitement wasn't just about the affordable, colourful clothes. The store's arrival was also a sign that better things may finally be coming to the country's economy -- long battered by political instability, a conflict in the east, and corruption.

Also in September, Irish no-frills airline Ryanair began flying to Ukraine, in a move widely seen as a boon for the battered tourism sector.

And Swedish furniture behemoth Ikea this week announced plans to open a store there in 2019.

For many Ukrainians, the greater consumer choice presented by international chains such as Ikea is very welcome.

"I am about to start renovations at my place, so I was waiting for Ikea to come, I'm going to buy lots of stuff there," said Nadya Vatulyova, a PR manager in Kiev.

"It's great that the big brands are coming, it's a sign that we're part of a global world."

- Corruption, lack of trust -

But Ukraine is still far from being a top destination for global investors.

They cite corruption and a lack of trust in the justice system as obstacles to pouring more capital into the country of 40 million, according to a survey released earlier this month by the Centre for Economic Strategy think tank.

Ukraine, which in 2013-2014 saw a pro-EU revolt, is still struggling to end a deadly conflict with Russian-backed separatists.

And Kiev faces frequent accusations that its anti-corruption policies are failing to root out graft.

Ukraine ranked 130th out of 180 on Transparency International's corruption perception index in 2017 -- a long way behind some ex-Soviet countries such as Belarus (ranked 68) and Moldova (122), though ahead of Russia.

And with uncertainty rising ahead of presidential and parliamentary elections next year, foreign direct investment remains low.

- 'The right moment' -

According to Anna Derevyanko, executive director of the European Business Association (EBA) in Ukraine, the decision by firms like Ikea, Ryanair and H&M to invest is more the result of years of targeted efforts by the Ukraine authorities than a general trend.

During talks in Kiev this week with Ukrainian President Petro Poroshenko, Ikea's chief executive in southeastern Europe Stefan Vanoverbeke said: "It's the right moment for Ikea to be here, when we look at the business climate and the opportunities."

Ryanair -- Europe's busiest carrier -- also took the plunge earlier this month, launching flights linking Kiev and Berlin. Since last year, Ukrainians have been able to travel visa-free within the 26-member Schengen zone.

Like H&M, Ryanair and Ikea had previously abandoned attempts to start operating in Ukraine.

In 2009, Ikea said it would open an outlet there and went on to buy a plot of land near the southwestern port city of Odessa, but it later ditched those plans, saying the market was not strong enough.

Ukrainian and Swedish media reports had at the time suggested the real reason it pulled out was that Ukrainian officials were demanding kickbacks.

Fast-forward to 2018, and although Ukraine is run by a pro-Western government, corruption and the rumbling conflict remain troublesome.

The Minsk agreements, signed in 2015, have reduced violence and narrowed down the size of the conflict zone.

- 'Slow pace' of reform -

The economy may be gradually recovering, but the volume of foreign direct investment remains very low: between 2016 and 2017 it fell from $3.3 billion to $2.6 billion.

In the first half of 2018, it reached just $1.2 billion.

"Investor confidence has improved but is held back by concerns about the slow pace of key reforms... and uncertainty surrounding the 2019 elections," the World Bank said in April.

Pro-Western Poroshenko is expected to run for a second term, but former prime minister Yulia Tymoshenko is leading in the polls.

Her relations with Russian leadership are opaque and her economic policies have been condemned as populist by critics.

For example, she has campaigned against a recent steep hike in utility bills that the International Monetary Fund pushed the government to approve.

And with a legislative election looming in October, pro-Russian parties could yet make a serious comeback into parliament.

However, a Ukrainian analyst at Raiffeisen Bank Aval, Mykhaylo Rebryk, believes it is high time Western investors start changing their view of Ukraine.

Rebryk said that while sporadic clashes continue, investors understand the country is unlikely to see a return to all-out conflict.

Ukraine for years was dominated by Moscow -- but that has now changed.

"Now they (foreign investors) see we are getting closer to the West and, strategically, the situation will improve," he said.