How can Ukraine get rid of being Bosnia? Why is the post-war myth of insane wealth and investment easily broken?

About urban legends.

Something I’ve been starting to come across in more and more conversations lately (mostly from the side of macroeconomists and futurologists as well as futurologists, but that’s just why I’m writing) that includes a standard set of theses on the post-war restoration of Ukraine. In my opinion, these are completely flawed and fundamental and could have very negative consequences in the public eye for post-war reconstruction planning. At worst, their rooting could have long-term consequences for Ukraine and the trajectory of Bosnia and Herzegovina after the war in Yugoslavia. I mean: Bosnia was one of the three countries that won the war in Yugoslavia (together with Croatia and Kosovo), but the post-war reconstruction of Bosnia is an example of how you can very quickly deplete the political capital gained in the war. war, limited help from international donors and then fighting among themselves, getting the most negative press in the West and as a result completing the post-war reconstruction with partial restoration of infrastructure damaged during the war, but almost from foreign direct investment, the country’s monotonous trap and there is also nothing that would provide the basis for the country’s sustainable development after the war, down to the normal institutions that would allow it to have one of the largest (relative to the country’s population) diasporas who left abroad and would not return. So, to avoid falling into the trap of unrealistic expectations and false priorities about what needs to be done for post-war reconstruction to be successful, I decided to gather and comment on these urban legends. I warn you right away – this post is very gloomy, so for those who are not in the morning mood, I advise you not to read it.

But as for the urban legends that routinely pass from one performance to the next.

1. Ukraine is an important transit country.

Ukraine was an important transit country. The main reason for this was that it was a transit country for a large flow of cargo in two directions. The first of them was East-West (and vice versa), where the goods reached the Black Sea ports of Ukraine, and then went to countries without access to the sea (Belarus, Kazakhstan) or to regions that were only economically viable. It is closer to Ukraine than it is to Russian ports (the regions of Russia close to Ukraine). Second, South-North; for example, when it is cheaper to bring coal from Komi to Odessa and load it on ships there, or when it is cheaper to deliver some goods to Europe instead of a long trip around Europe. From the Baltic countries and Finland, from Turkey to Odessa, and from there already transports containers to the destination. The transit status of Ukraine was provided by the only post-USSR road (i.e. reloading in the same Romanian Constanta was unprofitable, because the train had to “change shoes” at the border, and it was expensive), the fact that there are many countries east and north of Kiev that do not have access to the sea , transportation to Odessa is easier, cheaper or shorter than, for example, Guangzhou (Kazakhstan, Azerbaijan, Belarus), and the workload is high, and Russian ports on the Black Sea are specialized.

The passage of gas, oil and ammonia from Russia through the territory of Ukraine was carried out according to approximately the same logic. Infrastructure was already built, transfer or pumping capacities were already in place, and it was not economically viable to create alternatives.

As a result of the war, Ukraine turns from a transit country to a final destination for the transport of goods, because all these arguments turn into a simple fact – after the war Ukraine’s borders with Belarus and Russia will be something like the borders between Israel and Syria: that is, a physical one. there is a border, but this is the closest analogue to a ditch with crocodiles, and not a large passage of goods, but individual people pass through it. That is, all the transit advantages of Ukraine multiplied by zero by the war, because I cannot imagine a large transit trade with Russia from Ukrainian territory, just as I cannot imagine a large transit trade with Russia simply allowing other countries. From Central Asia or from them to the West.

2. There is a lot of money in the world destined to come to Ukraine.

As a matter of fact, approximately 25 trillion money in the world is currently in the accounts and is not deposited. But they do not invest, not because they are waiting for the war in Ukraine to end, but because the current risk/reward ratio in their investment offers for this money does not suit their holders. And even 0.1 percent of those 25 trillion do not expect the war to end. They have already decided that they are not interested in investing in Chile (the largest relative recipient of foreign direct investment in 2022 as a share of GDP), they are not interested in investing in commodities (best asset class in 2022, 22% return, absolute liquidity). ), is not even interested in investing in US Treasuries, which currently yield about 5% per year.

I’ve seen many legends over the years. In the nineties there was a myth about stupid Arab money, that Arabs were ready to give money anywhere with a 5% annual return (and many people called Deloitte, where I worked at the time, with suggestions): “Investing to buy flats here in Kiev We have an interesting idea such as: it gives a minimum of 20 percent in dollars, we read in the newspaper that Arabs give money at 2 percent a year, we will give them 5 dollars”, no, 7 percent, please find us a way to the Arab sheikhs!”). , was a myth about stupid Russian money, there was so much that it was deposited everywhere, because there was too much. In the tenth, there was a legend about stupid Chinese money that was circulating restlessly around the world. Nobody saw this money, but everyone knew the person who confiscated it. and he had a nephew who now works for a businessman who is “mastering” it.

The arrival of big money in the country is the result of a combination of many factors; Two major waves of money were already coming in Ukraine in the 1993-1998 period (after independence and before the first financial crisis), and in the 2005-2008 period (from the Orange Revolution to the global financial crisis) and both periods bring many positive memories to many investors. did not leave. At a shareholders’ meeting under television cameras, at the behest of one of Odessa’s leading police chiefs, and I am old enough to remember a reporter’s comment: “These dishonest businessmen – representatives of international capital, have come to take this capital away from you.” Representatives named “Odessa’s best assets” were shackled to Invesco (still quite large, under management of around $1.5 trillion), one of the largest pension asset managers in the UK and US at the time. Unfortunately Ukraine has a very bad history as an investment destination, and the story about the money coming soon, because there are so many, why so many foreign investors, both portfolio and strategic, leave Ukraine without such an analysis with an extremely negative taste. It leaves no room for an analysis of what he has done, and because of mistakes it will be very difficult to attract anyone but the most speculative investors.

3. The Ukrainian economy is one of the most underestimated economies.

I advise those who say this to try to buy at least 10,000 hectares of farmland in the West or the liberated South of Ukraine. Or buy a business that works and has export earnings. Or buy a house (and compare the cost per square meter in Kiev with the cost per square meter in the war-free Port, Cologne or Riga).

4. Ukraine is a large sales market.

Ukraine was one of the oldest countries in Europe before the war. The country got older as a result of the war. The average age of Ukraine’s population is 44.7 years, meaning that 50% of the country’s population is already approaching or over the retirement age. Even if you don’t look at the horribly low incomes and GDP per capita, older societies do not consume as much as younger ones (with the exception of three consumption categories – aged care, funeral services and tourism). Vladimir Ilyich Paniotto, the best Ukrainian sociologist, suggests thinking about how Ukrainians will live in a country of 20 million people. It is still a large country by European standards, close to Romania, but its demographic is not Romanian at all. If there is no rapid and steady GDP growth after the war, then the market will only be of interest for the sale of cheap retail services and unfortunately for aged care and funeral services because the elderly have already bought almost everything they need.

5. Many new businesses will be established in Ukraine.

see above. Ukraine is one of the oldest countries in Europe. If nothing is done about demographics, there will be no one left to work in new businesses. No one builds large new businesses where labor costs risk skyrocketing within a few years because the labor pool is shrinking every year and there will be no one to work for. It’s easier to do things in Turkey (a young country, average age of population is 31.8, population is increasing by one million each year, total population is 85 million).

6. Mutual funds can rebuild the country.

“Let’s raise $25 billion for Ukraine’s reconstruction fund and let our economy prosper.” The problem is that in Eastern Europe (its closest analogue) mutual funds played a much smaller role in the transformation of the country’s economies than strategic investments. There is one exception; the health sector, where the activity of mutual funds has completely transformed the sector and actually created a completely new sector. In all other cases, strategic investors played the main role. Volkswagen, which bought Skoda and turned it into a completely new company, or Porsche, which saved Porsche from disappearing from the world map of automakers by establishing a factory in Slovakia. Deutsche Telecom, which developed mobile and wired communications in almost all post-socialist countries. “Unicredit”, which buys banks and provides access to credit resources. “Arcelor Mittal” reinforcing metallurgy. Carlsberg, Danone, Nestle, Kraft, who have completely changed food production. And I haven’t started talking about the service industry yet, from auditing to law to hotels. So private companies need money (and national or regional champions can come out of it), but from a sustainable development perspective, strategic investments are perhaps the most important. At the same time, we do not currently have an investment infrastructure. The main problem for donors today is not money, but where that money can be invested with a reasonable level of risk if we go beyond lending to government companies or the government. Our legislation to protect investors’ rights has been out of date for three decades, our judicial system (I won’t say anything because you know everything), and all this against the background of war and the risks associated with it.

Sorry for such a pessimistic post, but either I have such an information bubble, or does the rhetoric change to say that you can’t really do anything, money will come by itself, a simple construction worker will earn that much? Poland, Turkey and Romania will rush to Ukraine, and we will bend them.

The most attractive countries for FDI in 2022 are Chile (FDI accounted for 4.5% of the country’s GDP), Sweden (3.9%), Israel (3.7%), Poland (3.6%) ) and Australia (3.2%). What is it that unites them? No, it’s not a low tax burden (taxes in Chile are a macroeconomist’s dream, a single tax of 40% of income, while Sweden and Australia can be completely silent). Sorry for the facts, but the rule of law and fairness of application, the protection of investors’ rights, and the absence of three-letter corporations in the daily life of businesses. I know it sounds boring, but it wouldn’t be a normal investment without it. At least, I think so.

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