What guarantees does Ukraine offer to foreign investors today?
After February 24, 2022, the situation with investing in Ukraine changed significantly, as foreign investors faced new risks in Ukraine related to the military aggression of the Russian Federation in Ukraine.
For potential investors, the war became a deterrent for two reasons. First, the state of active military operations is perceived by foreign investors as a synonym of absolute uncertainty and the risk of losing their assets in Ukraine. Secondly, the lack of an insurance mechanism for war risks of this scale creates an unattractive environment for investors to invest and develop their own business.
In order to overcome these challenges and attract foreign investment to Ukraine, the government has started implementing significant regulatory and economic reforms. One of the main steps was the insurance of investments against military risks in Ukraine, which will allow investors to count on coverage of potential losses caused by military actions in Ukraine.
What guarantees does Ukraine currently offer to foreign investors?
Protection of foreign investments is guaranteed in Ukraine, regardless of the forms of ownership.
In particular, investment protection guarantees include:
- guarantees against changes in legislation;
- guarantees against forced seizures, as well as illegal actions of state bodies and their officials;
- compensation and indemnification of losses to investors;
- guarantees in case of termination of investment activity;
- guarantees of the transfer of income, profits and other amounts in connection with foreign investments.
In addition, from 2024, the law on insurance of investments in Ukraine against war risks (hereinafter referred to as the “Law”) came into force. The Export Credit Agency (ECA) received the right to insure and reinsure military and/or political risks of financial losses of Ukrainian and foreign investors, if they are related to investments in the creation of facilities and infrastructure necessary for the development of the processing industry and the export of goods (works , services) of Ukrainian origin.
Additionally, by the end of March 2024, the Cabinet of Ministers of Ukraine and the National Bank of Ukraine undertake to define a specific extended list of military risks, as well as the procedure and conditions for insurance (reinsurance) of such risks.
Also with the aim of creating favorable conditions for attracting investments to Ukraine and stimulating the economic development of the regions, the Parliament adopted the Law of Ukraine “On State Support of Investment Projects with Significant Investments in Ukraine”, which was amended and adapted to the conditions of martial law in September of this year. The main task of the corresponding Law is to stimulate the attraction of strategic investors in the national economy by providing state support for large investment projects. In particular, support is provided for investment projects in the following areas: processing industry, mining for the purpose of further processing and beneficiation of minerals, transport, warehouses, postal and courier activities, logistics, health care, and others. In order to obtain appropriate state support, the amount of investment in investment objects must be equivalent to 12 million euros, the term of implementation of such projects must not exceed 5 years.
Possibilities of guaranteeing investments from international organizations
Various types of war risk insurance for international private investors are offered by national Export Credit Agencies of various countries and specialized organizations, such as the American Development Finance Corporation (DFC), which is ready to insure investments in Ukraine, or the Multilateral Investment Guarantee Agency (MIGA). which is a division of the World Bank Group.
DFC offers political risk insurance for up to $1 billion with no minimum project size restrictions for a period of three years or more. DFC Corporation is engaged in investment lending, investing and provides insurance, reinsurance of political risks and war risks against such threats as the inability to convert currency, the threat of political violence, expropriation and seizure of investor’s property, violation of terms of agreements on capital markets and others.
DFC insures and provides support to private sector entities that meet the following general requirements:
- the project or business must be located in a country where DFC programs are available (Ukraine is included in this list);
- the project or business must meet the environmental and social standards of the DFC (an environmental and social impact assessment procedure is carried out);
- the project must have a competent management team, which is confirmed by data on success in the same or closely related business and reflected in financial statements;
- projects that could not receive sufficient financing from private lenders are supported.
DFC primarily insures investments in the energy, healthcare, infrastructure, agriculture and financial sectors services In addition, DFC considers both new and existing projects. Support is provided both to American investors and to projects initiated by European and Ukrainian investors.
In general, DFC has already supported a number of projects in Ukraine in the amount of more than 400 million dollars. In particular, 250 million US dollars were allocated to support the efforts of Ukrainian poultry farmers and grain producers to mitigate the consequences of Russia’s war against Ukraine.
The Multilateral Investment Guarantee Agency (MIGA), which is part of the World Bank group, also deals with insurance and reinsurance of political and military risks in Ukraine. MIGA covers the risks associated with political instability, state expropriation and conflicts in countries where private investors do not dare to work. MIGA provides support only for international investors, and this mechanism is not available for Ukrainian companies.
MIGA sets certain requirements for projects in order to provide insurance for such investments. So, for example, MIGA can insure existing investments if the relevant investor seeks to obtain guarantees for existing and new investments, or demonstrates its long-term commitment to an existing project. Also, the project must meet environmental and social efficiency standards. Privatization of state-owned enterprises may also qualify for support from the agency. Risk insurance projects at MIGA provide for mandatory due diligence procedures, availability of audit reporting according to international standards, ESG reporting and analysis of business plans.
MIGA has already insured the first investment project in Ukraine against war risks – the M10 Industrial Park project in Lviv, where the Cypriot company UIPH Ukrainian Industrial Property Holding Limited acted as an investor. The agency provided a guarantee of up to USD 9.2 million for a Cypriot company’s direct investment and equity loan for an industrial park project against war risks and civil unrest for a period of up to 10 years.