Domestic policy crisis, Crimea’s loss, war in the south-east of Ukraine, and Russia’s aggression amid the lack of any thorough economic reforms and a single decision making unit built-up in Kyiv have triggered Ukraine’s loss of direct foreign investment in the first nine months of 2014. Over this period, Ukraine has lost 16.6% of all direct foreign investments raised to the economy from the date of independence. It accounts for USD 9.6 billion in monetary terms.

Domestic policy crisis, Crimea’s loss, war in the south-east of Ukraine, and Russia’s aggression amid the lack of any thorough economic reforms and a single decision making unit built-up in Kyiv have triggered Ukraine’s loss of direct foreign investment in the first nine months of 2014. Over this period, Ukraine has lost 16.6% of all direct foreign investments raised to the economy from the date of independence. It accounts for USD 9.6 billion in monetary terms. According to our estimations, at year-end, Ukraine will have the foreign investment quote equivalent to mid-2011.  At the same time, we believe that the state has already passed the peak of investment losses. This owes to both attitude of key western investors towards Ukraine’s economy and Russia’s viewpoint. 

I. Russian factor in investment exports from Ukraine. Russian aggression in Crimea and the war in the south-east have played lead role in runoff of investments in Ukraine. But these factors are far from being the only ones. Over the period of 9 months, Russia has withdrawn USD 1.33 billion from Ukraine, accounting for 31% out of all Russian investments in Ukraine’s economy. The bulk of impact fell on the first quarter of 2014. Russia withdrew USD 750 million from Ukraine over a period of these three months. 

Moreover, the critical outflow of investments in Ukraine coming from two offshore jurisdictions often used by Russian companies in Ukraine fell on this very period. This refers to the British Virgin Islands and Cyprus. USD 2.5 billion of Cyprus investments and USD 269 million of the BVI investments have been withdrawn from Ukraine in a single first quarter. Not all these funds were of Russian origin. But we estimate Russian capital’s share there to be not less than 60%. Consequently, Russia has withdrawn nearly USD 4 billion from Ukraine, accounting for 6.9% out of all direct foreign investments at the beginning of the year. Activity of Russian investors added to the investors’ panic triggered by the domestic political environment and the geopolitical situation Ukraine turned out to be in. As a result, mass exodus of foreign investors scared by the prospect of global war within the territory of Ukraine has mounted. 

II. Foreign investors’ viewpoints towards Ukraine differ. Investors from different jurisdictions demonstrated diversified behaviour towards investing in Ukraine. On the whole, four main groups can be distinguished according to their action patterns. 

The first group – these are investors from the jurisdictions demonstrating panic-driven moods. Here we qualify the investors from those jurisdictions that cut their investments by more than 20%. The RF (-31% over 9 months), Cyprus (-20.6%), as well as Belize (-30%) fall into this group. As we have already pointed out, the trend of Cyprus and Russian investment exodus from Ukraine has one and the same root cause. As for Belize, here account must be taken of the fact that this jurisdiction was traditionally used in Ukraine by Yanukovych’s clan. Thus, cut of investments from this country speaks for the outgo of the clan’s «dirty» money from Ukraine.

The second group – these are investors from the jurisdictions demonstrating quite fast and significant exit from Ukraine’s market. The share of investments coming from these jurisdictions has decreased from 15 to 20%. The investors from Austria (-17.9%), the BVI (-19.6%), Italy (-17.4%) are among them. The remarkable thing is that speaking about the investors from Austria and the BVI, in many cases we are dealing with the companies tied to the Ukrainian representatives of Yanukovych’s inner circle or with the Russian investors having exploited these jurisdictions in Ukraine to meet their own needs. Consequently, only Italian business can be named among «pure» foreign investors having given in to panic. 

The third group – these are investors from the jurisdictions demonstrating comparatively moderate exodus behaviour taking into account the processes occurring. These are the investors from the U.S. (-10.5%) and Great Britain (-14.2%). Meanwhile, over the period from April to July, British investors demonstrated their interest in Ukraine and the investment rate has slightly grown. 

The fourth group – these are investors from the jurisdictions having resisted the panic and cut down their presence in Ukraine just comparatively slightly. These are the investors from Germany (-8.2%), the Netherlands (-6.3%), France (-9.7%), Poland (-2.7%). Having analysed the monthly dynamics of direct investments coming from these jurisdictions, we are able to argue that the investors from Poland and the Netherlands are the most optimistic about Ukraine. 

We are giving accent to the jurisdiction of Switzerland from among the significant investors in Ukraine’s economy. The companies from this jurisdiction are the most optimistic about the Ukrainian market. Over the period of 9 months of 2014, Swiss companies have built up presence at the Ukrainian market. The share of direct Swiss investments in overall volume has grown up by 0.6%, while direct investment rate has increased by 5.2% (USD 69 million).

As of today, the investors from the bulk of jurisdictions are demonstrating panic’s decrease. The outflow of direct foreign investments has considerably decreased this autumn compared with the start of the year. The Netherlands and France are just the exception. 

III. Ukraine’s economy offshorisation rate has lowered. Ukraine’s economy has been characterised by the growth of offshore jurisdictions’ rate in overall volume of direct foreign investments. That happened both by virtue of strengthening traditional offshore investors from Cyprus and the BVI and a large-scale use of new jurisdictions for Ukraine, Belize in particular. 

In the first nine months of 2014, the investors from three major offshore jurisdictions in Ukraine – Cyprus, the BVI, and Belize – have cut their rate in the overall volume of direct foreign investments by 2% from 38.8% to 36,8%. The total investment volume coming from these three jurisdictions dropped by USD 4.7 billion, and decreased by 21% in percentage terms. First of all, that is related to withdrawal of the Russian capital and Yanukovych’s clan capital from Ukraine. 

In case the Ukrainian government succeeds in creating investor-loyal business climate in the country through the reforms, the de-offshorisation trend will go on. Otherwise, growth of the offshore rate is expected after economy’s revival. 

IV. The investments are withdrawn from Ukraine unequally by regions. In the first nine months of 2014, just two regions of Ukraine – Ivano-Frankivsk (+15.6%) and Chernivtsi (+3.2%) oblasts – have shown the growth of direct foreign investments in their economy. It bears reminding that these two regions are situated in the west of the country.  The rest of the regions have shown the negative trend. 

The most negative changes were observed in several central oblasts at once, as well as in the oblasts where the warfare is conducted: Kirovohrad (-39%), Cherkasy (-33%), Sumy (-32%), Zhytomyr (-20%) and Donetsk (-20%). Such changes are most likely to be outlined in Luhansk oblast as well, where the current statistics in the corresponding period is absent. 

The bulk of the regions have lost from 10 to 20% of foreign investments. Such regions include: Volyn (-14%), Dnipropetrovsk (-12%), Zakarpattia (-16%), Zaporizhzhia (-15%), Kyiv (-11%), Lviv (-14%), Mykolaiv (-12%), Odesa (-12%), Rivne (-13%), Ternopil (-15%), Kharkiv (-18%), Kherson (-16%), Khmelnytsk (-12%), Chernihiv oblasts (-16%) and Kyiv (-14%).

Two oblasts of the Central Ukraine, where foreign investment decrease was negligible, are standing apart. It is referred to Poltava (-2%) and Vinnytsia (-2%) oblasts. 

The economies of Kyiv (-USD 3.9 billion), Dnipropetrovsk (-USD 1.1 billion) and Donetsk (-USD 707 million) oblasts sustained the greatest losses by quantity. 

V. Conclusions. Political and military situation, domestic political situation and reforms will become the key factors affecting the attraction of foreign investments in Ukraine’s economy in 2015. Serious investment inflow is not expected until the situation in the east is settled and a single effective decision making centre is established in Kyiv. At the same time, we are of opinion that Ukraine (further Russian offensive failing) has passed the peak phase of foreign investors’ exodus. The Western oblasts, Kyiv, Kyiv oblast, as well as some agricultural oblasts with effective management and presence of pressure business groups (such as Vinnytsia and Poltava oblasts) will be the most investment-attractive. We are not expecting the investors from the jurisdictions that started a full-scale withdrawal from the country as early as in 2013 to return to Ukraine just yet. First of all, this refers to Sweden. We are not expecting the investors from China and the Arab world countries to come to Ukraine on a massive scale as well, in spite of their strategic interest towards Ukraine.

Trends of Foreign Investment Behaviour in Ukraine is republished with permission from the Da Vinci Group

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The ongoing depreciation of currencies in advanced economies has forced several emerging countries to empty their foreign reserves in order to maintain exchange rates. Is this policy sustainable in the long-term; and why are countries willing to fix their exchange rates despite the risk of their reserves running dry?

The ongoing depreciation of currencies in advanced economies has forced several emerging countries to empty their foreign reserves in order to maintain exchange rates. Is this policy sustainable in the long-term; and why are countries willing to fix their exchange rates despite the risk of their reserves running dry?

The development of the global economic crisis sharpened the problem of national monetary policy in countries outside monetary unions. In order to return exports back to pre-crisis levels, many countries reduced the value of their national currencies – reformatting the zones of influence on foreign markets and taking advantage of the crisis consequences on competitors.

In 2010, Brazilian Finance Minister Guido Mantega first warned that a new ‘Currency War’ was brewing as a result of such policies. In September 2012, Mantega repeated his warning, claiming that the round of monetary stimulus in the U.S. (the Q3 Quantitative Easing) would further reduce the value of the dollar in comparison to other currencies, thus hitting the export competitiveness of developing countries, including Brazil.

According to Mantega, the devaluation of the dollar has reduced the value of dollar-denominated foreign exchange reserves in Brazil because Brazil had little choice but to contain the relative growth of its own currency in order to preserve the positions of its exporters.

Other nations, including Jordan, Morocco, Egypt, Tunisia, Honduras and Ukraine, have also begun using their foreign reserves to artificially fix their exchange rates. But as their foreign reserves slowly become depleted, they also face trouble in other economic issues problems, including payment balances.

Why then are countries still persistent in fixing their exchange rates, despite a loss in their reserves? Is this a correct financial policy?

Routing The Reserves

Diagram 1. Some of macroeconomic data on Jordan, 2007-1012.

As we can see from the diagram above, the Bank of Jordan, despite a stable negative trade balance, attempted to increase its foreign reserves by engaging grants and increasing the national debt. This need, besides the sagging of economy, was dictated by the policy of the national currency rate retention at the same level as 0.709.

As a result, since the first quarter of 2012, the struggle to keep the level of reserves in the context of the ongoing crisis in the global economy has become extremely difficult. This has led to a sharp decline of foreign reserves at 24.36 percent at the end of 2011. By this time the level of state debt has increased by 6 times.

Another country, Morocco lost DH 21 billion in foreign exchange reserves in 2011, reaching the level of $20 billion, according to a statement by Bank Al-Maghrib, the country’s central bank.  Its foreign exchange reserves have been in steady decline since 2007. In contrast, net claims on the central government increased by 29.1 percent, due to higher borrowings from the other depository corporations. So Morocco’s foreign reserves fell by 11.82 percent over 2011. But, again we can see the policy of supporting the currency rate of DH after 2008 without significant changes. 

A similar picture is seen in Egypt. After the events in Tahrir Square in 2011, the government has been routing the foreign currency mainly to support the economy and national currency – the Egyptian pound. The Central Bank of Egypt tried to restrain the fall of the national currency, keeping it due to interventions. But they dried the reserves –by 18.35 percent only in 2011. Egypt’s reserves have plunged by more than a half since the uprising, which has scared away tourists and investors, two of Egypt’s main income sources.

In Tunisia foreign reserve level fell down from 13672 mln TD in 2010 to 11281 in 2011. But this became a reality due to Jasmine revolution that hit the tourists and investments inflow. But despite the collapse of reserves, government fixed the exchange rate on the same level.

In Ukraine, there is a discussion about the necessity of currency devaluation. Drawdown of the leading export industries has reduced the inflow of foreign currency into the country. In this case, there has been the reduction of reserves since August 2011. But the National Bank of Ukraine together with the government decided to maintain the level of currency exchange rate near 8 UAH per USD. So the main losses of foreign reserves occur through the currency interventions of Central bank. The negative trade balance of around $13 billion in 2012 is background of that policy. The only one way to maintain reserves today is to continue state loans and IMF support: In other words – to increase state debt.

Diagram. 2. The currency exchange rate to USD of Honduras, Jordan, Morocco, Tunisia and Ukraine.

A Costly Policy?

The practice of keeping the rates fixed regardless of the reduction of reserves does not look quite an effective policy. However, we believe that in this way the governments want to prevent civil unrest caused by inflation. The devaluation of the national currency in countries with a negative trade balance may cause commodity prices to become much more expensive, leading to a rise in the level of poverty and the risk of social unrest.

Statistics show that in the aboved mentioned countries – Jordan, Morocco, Egypt, Tunisia, Honduras and Ukraine – inflation rates are now relatively low. Thus relatively cheap import helps to avoid shortages and price increases. This supports the stability of political regimes. However, this policy also indicates that there is no further development strategy and governments are only hoping for improvements on the global markets.

Continuation of the policy of spending reserves by central banks for interventions has its limits. They are in general deficit of credit resources, amounts of public debt, which affects the cost of such loans. Thus, this policy would help to pump up public debts of some countries.

Related: A Risky New Era For Central Banking?: Mohamed El-Erian

Related: Will 2013 Mark The Start Of A New, More Dangerous Currency War?: Mohamed El-Erian

Related: Are Financial Markets Depressed or Repressed?

None of these countries, which showed decrease in reserves in 2011 did not stop the support of currency rates for today. So we can draw some conclusions from our analysis:

1. Retention of exchange rates is due to the threat of unrest provoked by increasing of import prices.

2. Countries that show the greatest drawdown of foreign reserves have a negative trade balance and have no opportunity to build up reserves without loans.

3. Maintaining the exchange rate leads to growth of public debt.

4. Maintaining the exchange rate leads to a deterioration of the competitiveness of national products.

5. Falling of reserves reaches a critical level of import ensuring and then the government turns to external borrowing.

By Da Vinci Analytic Group

Da Vinci AG is a private intelligence and analytic group founded in 2002. It provides analytic support to government structures, business and investment organizations. Da Vinci AG uses intelligence-based approach to gathering information via open-source monitoring and a global network of human sources to provide precise political and economical analysis & forecasts. Web: www.davinci.org.ua

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The fallout from the Fukushima nuclear disaster in 2011 has forced a global rethink over the future of nuclear energy. Today, some countries have outright rejected any further use of nuclear power, while others continue to pursue the energy source for economic reasons. How has the events at Fukushima affected the development of the nuclear power industry, and what is the global outlook for industry?

The fallout from the Fukushima nuclear disaster in 2011 has forced a global rethink over the future of nuclear energy. Today, some countries have outright rejected any further use of nuclear power, while others continue to pursue the energy source for economic reasons. How has the events at Fukushima affected the development of the nuclear power industry, and what is the global outlook for industry?

The following article is a translated summary provided by the Da Vinci Analytic Group Breaking Report on “The Future Of The Nuclear Power Industry: A Year After The Nuclear Disaster In Japan.” The full report can be downloaded here. (in Russian)

In the wake of the world’s largest nuclear disaster since Chernobyl, many global leaders were forced to relook their energy priorities. Several European leaders for instance ordered the closure of their nuclear power plants (NPPs), while other countries decided on the cessation of further construction to their nuclear power capacities.

Not surprisingly, among the countries that supported the idea of complete or partial refusal of nuclear energy were well-developed European economies – such as Germany, Switzerland, France, Belgium – and Japan. In each of these cases however, political realities, rather than economic reasons, may have influenced their decisions.

Related: Will Germany Regret Going Non-Nuclear?

Related: Japan’s Enduring Resilience: Lessons For The Rest Of The World

Governments of these states for instance are often led by an active civil society and stand to gain, or lose, “voting bonuses” with the public depending on their views on nuclear power. The global public outcry over Fukushima as such undoubtedly played a part in their present policy making decision.

In this scenario, France or Belgium could be the first to waver. In Paris for instance, the state-owned nuclear energy company Areva has proven to be not only highly profitable, but also an important image tool for the country on the external markets. Consequently, France is unlikely to completely reject the nuclear power industry, except in the case of an emergency or if the right-wing political party assumes power.

Economic expediency on the other hand may change the nuclear situation in Brussels. Unlikely Germany and Switzerland, Belgium simply cannot afford the expenses involved to completely go off nuclear energy and seek renewable resources.

Nuclear Power Around The World

The rest of the world also does not appear to be ready to give up on nuclear power any time soon. Increased volatility in the traditional energy market, coupled with growing activity by key nuclear reactor producers across the world, has meant that the nuclear power industry remains on a rapid development path just a year after the Fukushima disaster.

The U.S., Russia, China, India, Canada, South Korea, Great Britain, Brazil, Mexico and South Africa – all countries who already have NPPs on their territories – for instance, are now aggressively expanding their nuclear power capabilities. In these states, the economic rationale behind their decisions can effectively be classified into four groups.

The first of these groups include world leaders who adopt a cost-factor analysis for energy in the development of their economy. This group prioritises lower energy costs and comprises the U.S., China, South Korea, and Russia among others.

The second group on the other hand is represented by rapidly developing economies for which development of NPPs is a necessity for the purpose of achieving set goals. These include South Africa, India, Iran, and Mexico.

Related: Nuclear India: Powering the Future

Related: The Price of India’s Nuclear Ambitions: People’s Lives?

As for the third group, states such as Great Britain, Spain, and Sweden are unable to abandon the nuclear power industry due to the peculiarities of their internal economy.  Correspondingly, the fourth group comprises small countries with a respectively large share of nuclear power industry on the internal market and who do not own sufficient alternative resources – this group includes most countries in Central and Eastern Europe.

But the demand from these countries pale in comparison to states that do not have NPPs  currently on their territories. At least 24 other countries have expressed interest in building in NPPs, with 12 located in Asia, five in Africa, four in Europe, and three in South America. These countries’ policies actually did not change after the nuclear disaster in Japan, with some insignificant exceptions.

Generally speaking, all the countries that today do not possess any reactors but intend to build their own nuclear plants may be classified into several main groups. The first group consists of rapidly developing economies in need of the increased power volumes, which would ensure their further development. Turkey, Vietnam and Thailand are among them.

The second group represents the countries with carbon supplies but strive for diversification of energy sources aimed at strategic development. Such countries are Saudi Arabia, UAE, partially Malaysia, Indonesia and Egypt.

The third group comprises the countries with uranium resources wishing to use their raw material capacities. Kazakhstan, Namibia and Niger belong to this group.

The fourth group is represented by countries without significant natural resources on their territories which could be used for the purposes of power industry. However, these states want to get access to cheap electric energy and reduce their import dependency. This group comprises Jordan, Poland, Lithuania, Belarus and Israel.

Finally, the fifth group includes countries with systematic problems with electric energy supply within their regions. Therefore, they are trying to solve this problem with the help of NPPs. This group is represented by Nigeria, partially Indonesia, Venezuela, Bangladesh, and partially Vietnam.

Risks To The Nuclear Power Industry

It should be noted that building of NPPs in some of these countries is accompanied by a number of risks related to both natural and social factors – terrorism in particular. Thus, building of NPPs in Jordan, Israel, Indonesia, Egypt, Turkey, Niger, Nigeria, Namibia, Ghana, Northern Korea, Bangladesh, Malaysia is, in our opinion, full of risks.

We believe that development of nuclear power industry in the nearest future will take place thanks to both world leaders and developing economies. The world leader in the development of nuclear power industry will be the Asian region.

We expect new initiatives in the area of building NPPs in developing countries in the nearest future. This will be facilitated by active position of nuclear companies and states which lobby their own interests on external markets. Russia will be particularly active.

Related: Barely A Year After Fukushima, IEA Says: Embrace Nuclear

Related: Taiwan: Another Fukushima In The Making?

It is necessary to take into consideration that development of nuclear power industry increases global risks, or NPP accidents or terrorist attacks on such sites. Security protection should become one of the priority areas of nuclear power industry. In this case, in the nearest future the ‘world atom’ will become one of the most popular ways of increasing the level of power independence and settle global problems related to the processes of economic development.

By Da Vinci Analytic Group

Da Vinci AG is a private intelligence and analytic group founded in 2002. It provides analytic support to government structures, business and investment organizations. Da Vinci AG uses intelligence-based approach to gathering information via open-source monitoring and a global network of human sources to provide precise political and economical analysis & forecasts. Web: www.davinci.org.ua

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