Even China Can't Handle Ukraine

Here is a very interesting story. Chinese businessmen wanted to build a factory in Ukraine. They spent about a year on filling paperwork, getting permits, and bribing government officials. I assume that they have to do the same in China so that their learning curve is pretty insignificant. Then Chinese businessmen told their Ukrainian partners that they need to put their project on hold for couple months. Couple months turned in a full year. When Ukrainian partners contacted their Chinese partners about a status of their joint venture, Chinese partners said that they just finished building the same factory in China. So you can build a factory in China in less time than it takes you to get a permit to build a factory in Ukraine. I knew that Ukrainian bureaucracy is terrible. Now I know how terrible it is to do business in Ukraine for foreign investors. Unfortunately, the story is literally told by the book. Here is the book - the Mystery of Capital by Hernando de Soto. Ukraine's economy must have a significant issue of the dead capital. Many businesses cannot work legally in Ukraine because of extraordinary corruption and bureaucratic red tape.  

So what's happening to the net foreign direct investment (henceforth, FDI) in Ukraine?  The following graph shows that the FDI dropped from a 9-percent to 5-percent share of Ukraine's GDP between 2005 and 2010. You can also see that Ukrainians who work overseas transfer back to their families or friends the amount of dollars that is almost equal to the amount of the net foreign direct investments between 2009 and 2010.

It's also interesting to see how foreign direct investments and international remittances behave during the economic downturn (2007-2009). While the net FDI dropped from 7 to 4 percent share of GDP, the international remittances increased from 3 to 4 percent share of GDP. Please, keep in mind that 1 percent of Ukraine's GDP is $1,3 billion. So the one-percent increase of the personal money transfers is a pretty large raw figure. That's the case when percentage is not impressive as much as raw figure is itself.

You can also see that the amount of the net FDI and international remittances are different from their benchmarks under the Yushchenko presidency and the Yanukovych presidency. Of course, we cannot really compare averages with a single year observation. Let's just agree that the net FDI jumped from 2.6% to 9.1% after the 2004 Orange Revolution when President Yushchenko and Prime-minister Tymoshenko came to power. Since then the net FDI has had a declining trend.