Assessing barriers and incentives affecting foreign investment with a focus on export credit agencies’ activities in Ukraine.

War has simultaneously complicated the attraction of foreign capital to Ukraine and made it critically necessary for stability and recovery. Only a consistent flow of investors’ funds can weaken the state’s dependence on external aid. At the same time, military risks added to the structural barriers that existed before 2022, making large-scale investments in Ukraine unreasonably expensive.

Most influential factors:

◼︎ The ongoing war is undoubtedly the main deterrent, especially when combined with limited insurance coverage for military and political risks.

◼︎ Complex regulations, a weak judicial system, concerns about corruption, and uneven enforcement of laws.

Changes in tax policy, currency transfer rules and investment regulations add uncertainty;

◼︎ Much of Ukraine’s energy, transport and industrial infrastructure has been damaged or destroyed;

◼︎ Staff shortages in sectors critical to recovery and growth, exacerbated by migration and mobilisation;

◼︎ Most investment projects are not attractive enough for financial institutions and have limited access to long-term financing.

Ukraine cannot fully attract private capital until effective mechanisms are in place to mitigate these risks and stabilise the security situation. Equally important are reforms that will make business conditions more transparent and predictable. A comprehensive approach to improving the investment climate is needed to make Ukraine an attractive and reliable destination in the long term.

In addition, export credit agencies (ECAs) and political risk insurance can significantly improve the situation by increasing the attractiveness of Ukrainian investment projects for banks and reducing the risks of losses due to war and other factors. However, the wider presence of ECAs in Ukraine is also limited by a number of conditions. Among the key ones are:

High insurance premiums due to Ukraine’s classification in the highest risk category according to the OECD rating;

Incomplete coverage and numerous exclusions;

Strict requirements for loan recipients;

Low business awareness — many Ukrainian exporters and banks don’t know how to apply for ECA guarantees or insure themselves against political risks — and banks’ caution on the other hand.

Changes that will allow ECAs to engage more actively with businesses:

Reduction in the cost of insurance coverage (through rating review or subsidies);

Expanding coverage and removing excessive restrictions;

Easing requirements for SMEs;

Expanding mixed financing instruments;

Strengthening ECA coordination at the EU level;

Educating local financial institutions and SMEs.

These measures will allow Ukraine to attract more foreign capital and accelerate economic recovery. More detailed analysis and recommendations are available in the KSE Institute’s policy brief “Barriers and enablers to FDI in Ukraine Focused on Export Credit Agencies’ (ECAs) instruments”.

The analysis was conducted by the KSE Institute’s Centre for Development of Finance and Investment under the Ukraine Economic Recovery Programme, implemented with the support of the UK Government.