The Kyiv Weekly: Awaiting for intense investment

Article published in The Kyiv Weekly, 15/10/2012The 3rd International Black Sea Economic Forum held in the Livadia Palace in Yalta on October4-5 attracted more than 200 participants from Black Sea countries and elsewhere, where they discussed investment climate, competitiveness and international joint projects. At a part of the Forum, an agreement was signed allocating USD 1.5bn of foreign direct investment to diverse projects in CrimeaInitiated by the government of the Autonomous Republic of Crimea (ARC), the forum put a specific focus on the development of the peninsula. «The potential of Crimea is huge», Ukrainian Vice Prime Minister and Minister of Social Policy Serhiy Tihipko stated. «I hear investors saying that on the one hand, they are extremely interested. On the other hand, they see problems and obstacles. This is what we are working on.» He announced that the government would be ready to consider offering the ARC with special tax and regulatory regimes in order to ensure its proper development. «The most conservative estimates show that the need for investment in the next five years is about 15 to 20 billion dollars,» he said.As evidence of the investment potential of the peninsula, ARC head Anatoliy Mogilyov and the Crimean Venture Company signed a memorandum foreseeing the implementation of USD 1.5bn worth investments in multiple projects. A new seaport is to be built. Simferopol airport will be renovated and expanded. The funds should also go towards developing recreational centers along the southern coast, enhance agricultural development and install recycling and waste disposal facilities in the north of the ARC. Neil Smith, owner of the Crimean Venture Company and the key actor behind the deal, is since September 2011 the owner of the Simferopol-based Crimean Vodka company. As he explained, «Through my business here, I am a major contributor to the Crimean economy. Unlike many foreigners, I have spent an enormous amount of time here. Crimean Venture Company was set up to capture the opportunities which we perceive».These opportunities might not be simple to turn into reality. As Neil Smith acknowledged, he encountered problems regarding ownership and the implementation of the rule of law and highlighted that the investing in Crimea is conditioned to some prerequisites. «Building assets is easy. Building assets which make sense and actually connect with other things is the main challenge. You can start by building hotel towers, but if you don´t have sewage and you don´t have electricity, guess what? Your hotel is not very valuable.»It is no secret that the quality of infrastructure and tourist facilities in Crimea has undergone a significant decline since the collapse of the USSR. Compared to European countries and to more-than-ever-close Turkey, the peninsula offers questionable standards of tourist comfort and distortedly high prices. Back in the 1980s, about 10 to 15 million people were visiting Crimea each year. In contrast, less than 6 million tourists came in 2011. «Crimea has this potential to become one of the major touristic destinations in Europe, especially when it comes to «fun» tourism. Look at the mountains, the sea, the amount of wellness centers. But there are many issues that need to be tackled,» Beka Jakeli, Officer of Regional Programme for Europe at the World Tourism Organization Network, said.Overall, most participants of the Forum were critical of the actions of the government and regretted the lack of visibility. Neil Smith admitted that his main concern was that his investment plans were to spread over at least 10 years. «A lot can happen in Ukraine over a 10-year period. History tells us that.» At the same time large international companies see the opportunities in the region.  «SUN InBev Ukraine invested 925 mln USD into the Ukrainian economy and will keep investing further, in particular in the infrastructure and energy efficient projects, as they are keystone for building profitable business,» said Timur Miretskiy, Senior Country Lawyer of PJSC «SUN InBev Ukraine».In 2011, the U.S.-Ukraine Business Council ranked Ukraine 164th out of 183 countries in terms of economic freedom, and recent developments are unlikely to reverse that status. Apart from cases of political persecution, corporate raiding and weak respect of the rule of law, the government has lately upset its trading partners by announcing its intent to raise the ceiling on more than 350 import tariffs. Rumors are rife about a devaluation of the hryvnia after the October general elections. Furthermore, the signing and implementation of the EU-Ukraine Association Agreement is off the agenda. To many observers, it does not look as if the government is really willing to attract foreign investors. Asked by KW on the difference between the actions of the government and its declarations, Tihipko acknowledged that the government had to be open to critics and to question itself. Yet, he did not see any contradictory signals in its policy. It remains to be seen whether potential investors participating to the Forum may feel as confident as he does.