Since the beginning of the full-scale invasion of the Russian Federation, the International Finance Corporation (IFC) from the World Bank group has invested over $400 million in the Ukrainian private sector and has taken on the function of a strategic adviser to the Ukrainian government on attracting the private sector. IFC has significantly increased its presence in trade finance, agribusiness, and high technology sectors. Also exploring other potential investments in the agribusiness sector, which IFC believes will be critical to the recovery of the Ukrainian economy. The corporation also helps the banking sector provide more financial services to Ukrainian SMEs. In particular, as IFC Vice President for Europe, Latin America and the Caribbean Alfonso Garcia Mora assured in an interview , the duration of the war in Ukraine will not affect IFC’s obligations and will not have a negative impact on investment volumes.
The head of the International Finance Corporation in Ukraine, Elena Voloshina, asked about further plans for investment in Ukraine and the most interesting projects, about investment instruments in war conditions and cooperation with the public sector, as well as about the current difficulties with the influx of investment into the domestic economy.
About IFC’s work in Ukraine during the war years and investment dynamics
– IFC was created to ensure a stable flow of private investment into developing countries. What investments did you manage to attract to Ukraine in 2022–2023 , despite the martial law?
– Since the full-scale Russian invasion of Ukraine, IFC has not stopped working and continued to primarily support existing clients. We understood that there was a need for critical imports, so we continued to finance these purchases both directly to existing customers (for example, Galnaftogaz) and through banks and our Trade Finance Program. The same applies to critical exports — after all, Ukraine is an export-dependent country. In December 2022, the Board of Directors of the IFC and the World Bank approved the ERA program, under which the IFC can finance up to $2 billion in investments over the next few years. These are investments not only by IFC, but also by donor countries, which partially help us remove risks. And today we have already financed more than $1 billion of this amount.
If we talk about landmark investments by sector, a little more than $300 million went to the financing program through Ukrainian banks. One of the largest investments in recent years is our project together with the EBRD and DFC (US International Development Finance Corporation) to support Myronivskyi Bread Products for $480 million (IFC — $130 million; EBRD — $100 million; DFC — $250 million). Before this, IFC announced a large investment in the Horizon Capital Growth Fund VI — $60 million, and together with it we are further investing in small Ukrainian companies, such as the IT service company Miratech ($5 million) and Preply (EdTech company): IFC – $5 million, EBRD – $5 million, Horizon – $60 million. And now several more similar projects are in work.
Also, all this time we continued to support agricultural producers, agricultural traders and banks. This is important because now everyone is talking about the need to support small and medium-sized businesses. IFC supports SMEs through work with financial institutions: we have made several investments — in a partial loan guarantee with OTP Bank, OTP Leasing and Credit Agricole Bank. This is a risk sharing program for all three banks. That is, IFC takes on half the risk (50% of the potential damage from funds provided by banks to SMEs) from each bank’s portfolio. The portfolio size of each bank is 40 million euros, which means that IFC covers 20 million euros for each (and what is important, it does this in hryvnia equivalent).
– Why through such a tool?
– Because banks have enough liquidity — they have no need for money. They needed to free up some capacity so they could fund even more SMEs. These IFC agreements with banks stipulate that a certain part of the financing will be directed to small farmers (the Ukrainian government asked us to do this), as well as to businesses that are organized or managed by women. I would also like to note that we have a pipeline (a method for tracking potential clients) for all sectors of the economy in the amount of $1.7 billion.
– Can you name three new significant investors that IFC brought into Ukraine during the two years of war?
– I can’t say that in 2022–2023 IFC brought new investors to Ukraine. As I already noted, we supported existing. There are new investors, but they are waiting — they are not yet ready to enter and make serious investments in Ukraine in the context of military operations.
However, they understand that after the war there will be huge opportunities for the construction materials sector, logistics, energy, etc.. d. It is for this purpose that several months ago IFC presented a study on the possibilities for private sector participation in the restoration of the Ukrainian economy. It identifies industries, the potential amount of funding that the private sector can bring. And now we are in dialogue with several potential investors. But I would not like to name their names: for now everything is in the working process. When we reach the final line, we will officially announce the results.
– If we start from the fact that IFC in 2022-2023 only supported existing investors, but did not bring a single new foreign player to Ukraine, can the last two years be characterized as failures in terms of investment inflow? Figuratively speaking, is this “zrada” or “peremoga”?
– Lately in Ukraine everyone has been painting in two colors – “peremoga” or “zrada”… In the conditions of what Ukraine, its economy and business are going through now, the fact that investors (Ukrainian and foreign) who are already working here , continue to invest money in new projects — of course, this is a “victory”.
And the fact that foreign investors who have not yet come here, but are already looking at how they can participate in the restoration of the Ukrainian economy (through direct investment, PPP, participation in privatization, and some are already preparing feasibility studies and business plans) is also actually «victory». Naturally, we want more. But you can also understand the investor. After all, entering a new market in a situation with such risks as in Ukraine today (military) is not so easy.
About the specifics of IFC cooperation with banks
– You mentioned that you work with OTP and Credit Agricole banks. What other projects in the Ukrainian financial sector does IFC support?
– We continue the Trade Finance Program, which goes through the state-owned Ukreximbank, Ukrgasbank and Alliance Bank. And we're going to increase it. IFC has been working with Ukrgasbank for many years, and we had a strategic goal — to reach privatization. We are not giving up on it: we are still in active dialogue with the owner, the Ministry of Finance and the NBU on the issue of how we will bring Ukrgasbank to privatization.
– Why does this dialogue take so long?
– Military actions in Ukraine interfered. Before the invasion, the process was proceeding according to the agreed plan, and we had already reached the stage of hiring advisers for privatization. Negotiations have now been resumed and are very active.
In general, you need to understand that this is a non-standard case for IFC, since we usually do not work with state-owned companies. And the only reason why we are doing this is the clear desire of the owner and a coordinated position on the issue of privatization.
In addition to Ukrgasbank, there is another project that we launched after February 2022 — this is work with the state company Danube Shipping Company.. She needs help with the purchase of a new fleet to resume navigation on the Danube. We have already started working with them on certain internal processes and building corporate governance. But our main goal is to attract private investment. We cannot talk about this project in more detail yet.
About projects and scope of IFC activities in Ukraine for the current year
– Tell us about IFC projects for 2024: how will they differ from previous ones, what are the priority areas of activity?
– If we talk about projects in the near future, IFC has begun working in the renewable energy sector. This is partly an investment in MHP — $30 million for the construction of a biogas plant, which will produce gas from agricultural waste. We are now considering another major investment by a foreign investor in renewable energy — we hope to close it by the end of this year. We are also looking at the possibility of launching a project in Ukraine to supply mobile solar panels (IFC implemented a similar project in Africa). It is clear that Ukraine is not Africa and there are different approaches here, but the idea has the right to life. We want to establish the process on an ongoing basis, because we are confident that in war conditions it can become a significant help for business, namely, support for its existence.
IFC understands the need to support agriculture. Therefore, we continue to be in contact with existing players on the Ukrainian market — we are trying to help primarily with short-term instruments, as well as capital investment programs.
Unfortunately, some of our programs have come to an end.. For example, the irrigation program we launched several years ago. A large-scale reform was needed, but the Russian invasion prevented it. Now the World Bank is working in this area, not IFC. However, we are looking at what can be done in the field of processing agricultural products with higher added value.
We understand that Ukraine has traditionally exported mainly primary agricultural products. But today that will change a little. IFC will continue to participate in the global food security program and supply grains and oilseeds to the market (especially since the “grain corridor” has started working). But now there is a lot of talk about the transition to deeper processing of agricultural products.
Therefore, together with donors, IFC launched a new consulting program, Agri Resilience Project (usually these are given for a period of 2-3 years and should lead to investments not only from IFC). One of its directions is to monitor where and what products Ukraine can produce from its agricultural products, where to then supply them, where they will be in demand, how to establish logistics and how to solve the problem with exports to Europe.
IFC is also interested in the field of construction materials: before the full-scale invasion of the Russian Federation, we did not have much investment in it, but today the need for construction materials will be huge — so we are looking strategically. In addition, we will support the IT and telecommunications sector, which are also strategically important for Ukrainian infrastructure.
As for the differences between new projects and previous ones, now many IFC projects are carried out in partnership. Because in the current situation of increased risks, everyone is trying to share them. There are different mechanisms for this. We partner with other international organizations: for example, a large case of MHP is the joint participation of IFC, EBRD and DFC. We also work in partnership with donor states (EU, UK, Switzerland, the Netherlands), which support us and give us the opportunity to increase funding.
– What investment instruments will IFC use to work in Ukraine this year (direct/syndicated loans, equity participation, convertible loans, guarantees)?
– The tools will be different, depending on the specific project and the needs of a specific business.. For example, direct investment — like with Horizon Capital, where we entered into capital. There may be a direct loan, as was the case with MHP. This could also be Risk Sharing (Risk sharing program for banks to provide financial support — mainly to SMEs), as is the case with OTP and Credit Agricole banks, as well as OTP Leasing. There may be something like guarantees because our Trade Finance Program is essentially a liquid-free instrument that works with several banks.
If we talk about direct loans or through banks, this is often related to the size of the business. And IFC usually finances fairly large projects. We finance small and medium-sized businesses through local financial institutions (banks, leasing companies) due to the fact that we do not have the ability to assess the creditworthiness of SMEs. But by supporting banks, IFC is making SME financing more sustainable.
— How?
– We can come up with different tools for banks. For example, before the full-scale invasion of the Russian Federation, IFC was closely involved in the issue of agricultural receipts. We put this toolkit into use several years ago: we trained farmers, notaries, created a register and brought it to a state where the turnover of these receipts was measured in billions of dollars. And now we see that such agricultural receipts are still in demand.
We want to take them to a new level — make them electronic, thereby reducing the cost of registration. We also want to involve banks as much as possible in this tool (not only suppliers of plant protection products, seeds and fuel).
About IFC's losses in Ukraine due to martial law in the country
– Does IFC have problems with returning funds invested in Ukraine, including given the martial law?
– Of course, the military situation in the country makes adjustments to business life. It is clear that in such conditions a business cannot always make a certain payment on time. And these are different circumstances — from the destruction of the plant to the occupation and mining of fields. But I’m not ready to discuss specific names, cases. At the same time, I would like to emphasize that all our clients behave in a civilized manner.
– So IFC has no problems with returning money, despite the war?
– If we have any problems in connection with the war, we sit down at the negotiating table and find a mutually beneficial solution acceptable to everyone. IFC, as a development institution, will not “sink” business, but will help it. A civilized dialogue is important to us, in which business and creditor/investor are partners, and not enemies who are trying to destroy each other as much as possible.
– With whom has IFC already held similar negotiations?
– I can’t be more specific, because in the current conditions business is moving away from publicity. But it is clear that primarily agricultural producers suffered (fields were mined), as well as businesses that were or remain in the territory occupied by the Russian Federation (we have several such examples, but I have no right to voice them). We are also talking about businesses whose factories/enterprises were destroyed.
– What percentage is IFC’s losses on invested funds (I mean those businesses that are now under the protectorate of the Russian Federation or are partially/completely broken)?
– We don’t have any completely destroyed businesses due to hostilities.. But we didn’t count losses. The task of IFC as a development institution is not to count losses, but to understand whether we can help the affected business and how exactly (additional financing, expertise, assistance in relocation, finding new partners, etc.). d.).
About the PPP program in times of war
– Before the war, IFC actively developed the Public-Private Partnership Program. Does it function now, in military realities?
– PPP is a very complex instrument, but it will be in great demand during the recovery of the Ukrainian economy. Before the full-scale Russian invasion of Ukraine, we made the first two port concessions (Kherson and Olvia): they were successful, and if not for the Russian invasion, there would already be investments today. Still we don't stop. Moreover, at the request of the Ukrainian government, work began on two more concessions in the port of Chernomorsk (terminals). There is already interest from strategic foreign investors (for example, the shipping company Moller-Maersk, Denmark). But this is a long-term job, because such projects require careful preparation — we are now at the feasibility study stage and hope that this year we will reach a tender to select a concessionaire.
We are also looking at how to apply the PPP mechanism not only in the port infrastructure niche, but also in the healthcare sector (where the share of the private sector is very small). There are good examples of such a mechanism, for example, in Turkey. Today, we are having a productive dialogue on this issue with the Ministry of Health and municipalities, because many hospitals are under their jurisdiction. Perhaps we will soon begin cooperation with municipalities.
At the same time, we are trying to simplify the use of the PPP mechanism a little, since we understand that Ukraine does not have the 18 months that are needed to properly structure the PPP.
– And if we talk about IFC’s cooperation with state-owned companies — besides the Danube Shipping Company and state-owned banks, who else do you work with?
– Together with other donors and international financial institutions, IFC is actively involved in the process of corporate governance reform in the public sector. She's not going easy. Nevertheless, we participate in the Nomination Committee as observers for the selection of directors to the boards of directors of state-owned companies.
Although this is not our function, since the vector of IFC’s work is the private sector. But, taking into account the specifics of Ukraine and the current state of the country, we want the share of the public sector to be as small as possible. At the same time, we understand that there is a certain transitional stage, and therefore we are trying to help the Ukrainian government do this as correctly as possible and in accordance with the best world practices.
About the economic situation in the country and the gaps in the domestic business environment
– How does IFC assess the current economic situation in Ukraine and the state of the financial sector?
– The economic situation could have been worse… No one expected that the Ukrainian banking sector and the private sector in general would survive. There are a lot of subjective and objective factors that contributed to this. Nevertheless, today in Ukraine, in conditions of war, it is possible to carry out all banking operations (including digital), all domestic banks operate despite permanent hacker attacks — that is, our banking system has survived and is even making money.
And in general, the economy is also working — even better than expected. In particular, GDP growth is expected to be 4.5%. Naturally, with a very low base, because the state has too many losses. But the business continues to operate, including thanks to the functioning of the “5-7-9 Program” through Ukrainian banks, which keeps the business afloat. Almost 80,000 SMEs have already been supported by this program, and UAH 7 billion in funding has been allocated.
That is, in general, the private sector turned out to be much more resilient than expected. Although even before the invasion it generated 70% of the economy. Therefore, the private sector will play a huge role in restoring the Ukrainian economy, since public finances will not be enough.
– What does the private sector need to maximize its potential?
– Private sector participation could be measured at $73 billion, which is 18% of the $411 billion needed to rebuild Ukraine (according to a 2023 World Bank study). Moreover, there are sectors in which the private sector can take over almost everything: agriculture, trade, etc.. d. And if Ukraine implements all the necessary reforms, the private sector will be able to finance twice as much – $132 billion (this is 32% of the required funds).
And reforms should be primarily in sectors where we are lagging behind — energy, transport (that is, where there is state regulation and tariff policy, which should be aligned). Moreover, Ukraine has the prospect of joining the European Union, so we need to harmonize as much as possible all our approaches and regulations with the EU.
– At the end of the conversation, I can’t help but ask: what are the key risks of the Ukrainian business climate through the eyes of foreign investors (except for the military factor)? Before the war, in your interviews, you emphasized that business was not satisfied with tax administration in Ukraine and the constantly changing “rules of the game”. Has anything changed for the better?
– Foreign investors, as before, are not satisfied with corruption, unequal “rules of the game” in the market, excessive regulation, and monopolization of certain sectors of the Ukrainian economy. Also, the problem of tax administration has not gone away: VAT is sometimes returned to investors, sometimes not… And, despite the war, all businesses (foreign and domestic) would like to see further reforms in the country plus mechanisms for insuring war risks, based on the current situation.