Who the largest foreign investors actually are, sector by sector

Aggregate foreign direct investment figures for Ukraine are misleading for a specific reason: a large share of recorded inflows are round-tripped domestic capital returning through Cyprus, and a large share of the rest is retained earnings rather than new money.

The sector composition is more informative, and it is remarkably consistent over two decades.

Where the money went

Banking was the largest single category through the 2000s. Raiffeisen, UniCredit, OTP, BNP Paribas, Swedbank, Erste and others acquired Ukrainian banks at high multiples between 2005 and 2008 on the assumption that credit growth would continue. Most subsequently reduced or exited after 2008 and again after 2014, and the foreign ownership share of the banking system fell substantially from its peak.

Retail and consumer goods followed. International grocery, DIY and fashion chains entered through the 2000s, along with the consumer goods manufacturers supplying them — food, beverages, household products, tobacco.

Agriculture and food processing attracted investment into crushing, storage, poultry and dairy, generally by regional rather than global players.

Telecommunications consolidated around a small number of foreign-owned operators.

And industrial investment concentrated in the automotive component cluster in the west, which is discussed separately, and in scattered manufacturing for the domestic market.

What the pattern shows

Two things stand out.

Foreign capital went overwhelmingly into sectors where the asset is either physically immovable, politically visible, or both. A bank branch network, a supermarket chain, a mobile network — these are hard to expropriate quietly and their difficulties are public. That is a revealed preference about how investors assessed legal risk, and it is a more honest indicator than any survey.

And it went almost nowhere into sectors requiring long-horizon capital with contractual protection — infrastructure concessions, upstream energy, large-scale property development outside the capital. Those are the sectors where a functioning court system is the precondition, and they stayed empty.

The holding structure question

Most foreign investment into Ukraine is held through Cyprus, the Netherlands, Austria or, more recently, other EU jurisdictions.

The tax treaty position is part of the explanation and the smaller part. The larger part is that those jurisdictions provide enforceable shareholder agreements, reliable corporate governance and access to arbitration — the things Ukrainian corporate law did not reliably provide.

For a new entrant this is not a loophole to be embarrassed about; it is standard practice and it is what any competent adviser will recommend. What matters is choosing a jurisdiction with a genuine treaty, real substance requirements you can meet, and a legal system whose corporate law you would be content to litigate under.

What has changed

Three things since 2016.

The banking system is cleaner and better supervised, which changes the risk profile of financial sector investment substantially.

Public procurement is open, which makes a whole category of state-facing business accessible to foreign suppliers for the first time.

And the accession process is aligning corporate, competition and state aid law with EU norms, which over time reduces the reason for the holding structure in the first place.

None of that is complete. But an investor assessing the sector map now is looking at a genuinely wider set of viable options than the one this entry originally described.

Related in this archive

• Turkey and Ukraine: the shape of a Black Sea trade relationship
• Ukraine and Hungary: transit, energy and a minority question
• Competing for the same buyer: how mid-sized European exporters position in this market
• Ukraine Annual Review 2012: stagnation with one door opened

Which country an investment comes from is what the figure says; where it actually comes from is hidden in the holding structure. Setting up my own companies I have seen those choices closely: the jurisdiction is usually picked for dispute resolution and shareholder agreements rather than for tax. Read the statistics without knowing that and you end up building a relationship with the wrong country.