Go West! The New Investment Center of Ukraine

Over the last five years the city of Lviv, known as the capital of Western Ukraine, has become the centre of attraction for business, tourists, investors and cultural venues. Initiatives undertaken by the local administration have created a unique climate for investment activity in the region, while the deteriorating trends with the Ukrainian currency and distressed value of assets confirm this is the right time for those, who are willing to risk and use the fantastic opportunities that Western Ukraine offers.

We decided to go West to meet Markian Malskyy, PhD, head of the Western Ukrainian branch of Arzinger, for a conversation about Lviv, his native city.

 UJBL.:  Foreign business shows great interest in developing outsourcing of manufacturing capacity to Western Ukraine. Do you see signs of further prospects for this trend? What is important for investors in relocating their capacities to the region?

Markian Malskyy: Relocating European manufacturers to Western Ukraine is not new but still a worthy idea to obtain a product of a decent quality for minimum expense. Lviv Region is persistently ranked as one of the most investment striking amongst Ukrainian regions. There are numerous motives for opening manufacturing in Western Ukraine.

Exceedingly skilled staff and comparably low wages, which applies to all industries, allows investors to be very flexible in determining the necessary number of employees and to completely satisfy its HR needs for the lowest cost. As Lviv is one of the leading educational centers of Ukraine, doing business here not only provides an opportunity to straightforwardly hire workers but also to discover prominently capable employees focused and qualified in particular sectors such as: software deve- lopment and IT, engineering, architecture, economics, biology and chemistry, physics, agriculture, medicine and pharmaceuticals industry, healthcare, automotive, light industry, energy, food and beverages, etc.

An extra reason making Western Ukraine so attractive, particularly for European investors, is its perfect location neighboring the European Union, which allows significant reduction of logistical overheads, even compared to transportation of products or raw materials from some other European countries. Even though in the West of Ukraine there is no connection with the sea the transportation system is well industrialized.

In most cases raw and supply materials produced in Ukraine are cheaper than foreign analogs and habitually not worse in quality, which makes them competitive on the local market. What is even more important for big production is that energy resources in Ukraine are still at low-tariff rates compared to Europe. Moreover, in case an investor is building a new factory using energy saving technologies, together with low-cost energy resources, it will permit a significant reduction in manufacturing expenses and increase the profitability of a business. The same applies to fuel, which is also cheaper in Ukraine.

The devaluation of the Ukrainian currency, the hryvna (UAH), which depreciated intensely for the last year became another newly discovered advantage for export-oriented production. Put simply, this year most expenses of foreign investors in Ukraine were reduced almost by half since last year if calculated in a foreign currency.

Among the brightest examples of successful investment projects in the region are: Nestle (Switzerland), Carlsberg (Denmark), Leoni Wiring Systems (Germany), Kredobank (Poland), FAKRO Lviv (Poland), Danish Textiles (Denmark), AVE (Czech Republic), Halychyna-Zahid (Denmark), Agrokultura Zakhid (Sweden), Provimi (Poland), KingKross (Italy) and others.

 

 UJBL.: What sectors are potentially attractive for investors in Western Ukraine?

M. M.: Relocation of manufacturing and raw materials processing is striking in all sectors and industries. Besides, agriculture is a renowned area provoking investment in the region as well as in the rest of the country. Ukraine has rich black soil, wide fields, rivers, climate and everything else necessary for effective growth of agriculture production, including grain, sunflower, sugar beet, corn etc. Growing fruits and vegetables is even more widespread in the West of Ukraine, as are stockbreeding and dairy production. Therefore, investments in agriculture as well as the food industry are very promising. A certain shortage of cow milk exists. The wood and wood processing markets are traditionally attractive sectors for investors due to the rich natural resources in the Carpathian Mountains though it is harder to get into. Long-term investment in infrastructure development is also interesting, even though it will require much greater investment funds.

The financial services market has become extremely stimulating for investments, but only for the “courageous ones”. Due to the near collapse of the national banking system investors received a unique opportunity to participate in reallocation of capital and to try their luck buying not only loan packages with a discount of around 70-90% but even  whole banks with all of their assets, including real estate and investment projects.

The tourism, leisure and accommodations sectors are in vogue and investment in these industries might shift all expectations. The same applies to the IT sector, as one of the most promising and profitable for investment, still offering great revenues. Software engineering as well as tourism are developing extremely rapidly.

 

  UJBL.: Lviv is the largest IT outsourcing region in the West and the second largest in the country. What does Lviv offer as an offshore development center?

M. M.: The IT segment is evolving extremely fast. IT resource is one of the bestselling products in the Western region with continuous demand for innovative projects. Each year the number of software developers surges, as do their qualification and contribution to international projects. The possibility of distance work in software engineering breaks down the borders and boundaries between different jurisdictions and simplifies the process of outsourcing relevant services.

New tax reform introduced at the beginning of the year offered a more preferable tax regime for small and medium sized enterprises, which also applies to IT services. More- over, the Association Agreement between the EU and Ukraine provides special conditions on mutual trade of IT services and their taxation.

The IT services sector does not usually produce the whole product but only the modules or components of final products — called component-based software engineering by outsourcing serviced and outstaffing or leasing of employees. The main goal for an investor in this area should be relocation of the whole cycle of final software decisions’ production to Ukraine and to receive direct orders from the biggest market players and final customers.

Support of start-up projects might bring very fast and great dividends and who knows tomorrow one could become the co-founder of a new project like Facebook or Google.

  UJBL.:  Lviv is continually named the cultural capital of Ukraine. It hosts various festivals and venues every year. What is the impact of this on the city’s economy?

M. M.: Lviv with its old European architecture and unique charm, Carpathian Mountains with their skiing resorts, while health resorts such as Truskavets, Morshyn, Skhidnytsa attract more and more tourists every year. Each year Lviv and the whole region contributes a lot to developing its tourism attractiveness and those contributions are fairly remunerated. Lviv City Council agrees that various festivals and venues have already increased the number of tourists by up to 30-40%. According to the statistics provided by Lviv City Council around 1,700,000 tourists visited Lviv in 2014 compared to 780,000 tourists in 2010. Therefore, the number of tourists in 2014 exceeds even the number of residents of the city.

The tourists visiting Lviv are mainly from Ukraine, the USA, Germany, Austria, Italy and Poland, though tourists from other countries also visit Lviv. Taking into account these factors we estimate that the number of tourists will keep increasing from year to year and, therefore, the demand of respective services in this are such as leisure and restaurants, accommodation, transport and excursions will increase respectively.

 

  UJBL.:  You are the Head of the West Ukrainian branch of the European Business Association. What challenges do the members of the Association face within their operating activity in the region? How do you interact with local administrations to resolve existing problems? Can you share success stories from this perspective?

M. M.: I was elected Chairman of the Board of the West Ukrainian branch of the EBA at the beginning of 2015 and until that time I was Head of the Legal Committee and Deputy Chairman for about five years. Challenges faced by business in Lviv basically are not different compared to other Ukrainian regions, and these are ones like the often somewhat bureaucratic approach taken by state and local authorities, large number of inspecting authorities and checks, complicated tax and customs systems.

At the same time, last year was notable for being a year of reforms, which brought new local regional governance, tax reform, EU Association Agreement, moratorium for inspections and most importantly — new approach by government, which is oriented towards open dialog with business and support for foreign investments.

As representation and protection of European business in Ukraine are the main goals of the EBA, the Association has become one of the most active public non-profit organizations to use new opportunities of cooperation with the government. Participation in the process of amending and drafting laws, holding meetings and round-tables with senior state officials, market research and other activities conducted by Association contributes a lot to building new, effective dialog between business and government. The EBA has become a powerful platform allowing the protection of interests of European business in Ukraine.

Particularly in Lviv Region the EBA has established a constant cooperation with the City and Regional State Administrations, arranging very productive regular meetings of different experts and working groups.

 

  UJBL.:  How would you define the legal market of Western Ukraine?

M. M.: The legal market of Western Ukraine is mainly oriented on medium and small business. There are not a lot of law firms ready to work with big or medium foreign investors. The language barrier is another problem as still there are not so many English-speaking lawyers. For that reason it is usual that such investors enter the Western Ukrainian market through Kiev legal advisors or chose randomly. In contrast, Arzinger is the only law firm headquartered in Kiev to have its regional offices in Western and Southern Ukraine. We have also planned further expansion in Ukraine, which may take place somewhat later. As a result, for over 10 years Arzinger has been offering extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters, for top representatives of the international and local business almost everywhere in Ukraine. Local offices bring greater closeness to clients and allow faster implementation of managerial decisions.   

  UJBL.:  Western Ukraine is culturally much more similar to Europe. Is this crucial for cooperation with European partners?

M. M.: Lviv unquestionably welcomes foreign citizens and especially Europeans to our city. Most of the population in Lviv speaks Polish and every year more and more people learn English or German. Together with European architecture and historical heritage Lviv is very pro-European. The number of foreigners visiting and living in Lviv is growing constantly from year to year. Each of them creates a new city by sharing part of their culture and unique experience. Therefore, Europeans can feel themselves more comfortable and confident in Lviv compared to the other Ukrainian regions, not considering Kiev, which is obviously the biggest multicultural and investment center. But, of course, it is not only Europeans that are welcomed here; Lviv is open to everyone who is willing to visit it, live in the city or to start new business projects here.

  UJBL.:  What should be done to contribute to the city’s investment image?

M. M.: Obviously, there is no simple and single solution. First of all the level of investment coming into the Western region will increase as soon as the situation in the rest of Ukraine is stable and the war is finally over. Another crucial factor will be effectively combating corruption, lustration of officials and reforming the court system and police force. These are all tendencies taking place right now. The taxation system has to be simplified even more and the number of inspections reduced. It is also important to ensure fair inspections and fair appeals against the results of such. The banking and currency systems should also be stabilized. As soon as this is done I am sure potential investors will place their funds in Ukraine.

In the view of the Western region I think it is expedient to conduct complex work showing potential areas for investments in the region on different road shows, presentations and conferences, spreading awareness of such via international chambers of commerce, honorary consulates, business associations and via other means.

It is also very important to conduct round-tables and seminars involving state authorities (including tax and customs) explaining for business all the benefits of EU association for particular sectors as well as similar events for foreign investors. The Department of international cooperation of the City council and relevant business associations should cooperate in this regard. Our law firm as well as the West branch of the EBA already had successful experience of holding such meetings and we will definitely keep working on this in the future. In general the local business community is very optimistic and is looking forward to further successful development.

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Arzinger

Key facts:

Year of establishment 2002

Number of lawyers/partners 58/6

Core practice areas

• Antitrust and Competition
• Banking and Finance,
• Bankruptcy
• Corporate and M&A,
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• Real estate & Construction,
• Litigation,
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• Anti-Corruption Compliance and Business Ethics,
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