In the recent years, economic growth of Ukraine has become critically dependent on the agricultural sector’s prospects. In 2010-2016, the industrial share in the country’s GDP dropped from 31.3% to 26.3% (down 5 p.p.), while the agriculture’s contribution grew from 8.3% to 14.4% (up 6 p.p.). Over the three years (2014-2016), the export share of agricultural produce expanded from 31% to 42.5% (up 11.5%!). According to preliminary assessment, the agricultural sector accounted for almost one-third (28%) of currency receipts in 2016.

Further growth of the agricultural sector requires affordable and sizable financing. The financing goals may include the following:

  • expanding the production volume and assortment of agricultural products,
  • improving their quality and increasing the added-value share,
  • major overhaul of production facilities and technologies
  • optimization of the production-sale cycle

Indeed, growth of capital investment in the Ukrainian agriculture has far outpaced growth of agricultural output. The gain in investment was 27.1% in 2015 and 49.5% in 2016, while gross agricultural output sank by 4.8% in 2015 and increased 6.1% last year.

At the same time, the agriculture’s portion in the total investment volume steadily grew from 6.1% in 2012 to 13.8% in 2016.

Taking into account that Ukraine’s economy is an open economy and much of necessary modern agricultural equipment and technology are imported, the assessment of real possibilities of capital investment must be dollar-based.

The investment volumes and production growth are indicated or calculated above in hryvnia value terms. However, these indicators are far less impressive in dollar equivalent. Hryvnia investments in the agricultural sector rose from UAH 18.8 Bl in 2014 to UAH 30.2 Bl in 2015 and UAH 45 Bl in 2016. In dollar terms they dropped from $2.4 Bl in 2012 to $1.4 Bl in 2015 and increased by $500 Ml to $1.9 Bl in 2016.

Remarkably, in hryvnia terms, annual investment in the food industry actually stayed unchanged at some UAH 13.5 Bl from 2012 till 2015. This amount grew to UAH 16.9 Bl last year. In dollar terms, as the diagram shows, investment dropped more than by half, from $1.7 Bl in 2012 to $0.7 Bl in 2016.

This trend shows that the agriculture development was not supported with an adequate gain in food processing capacities. “Excessive” agricultural produce added no value from domestic processing and was sold abroad as feedstock.

Sources of investment in the agricultural sector

A peculiarity of the Ukrainian agricultural economy is that the investment burden is carried mainly by producers, actually financing production from own revenues. The share of producers’ own money in the total investment volume went up constantly throughout 2012-2016 and reached 69.4% last year.

The latest study by UkrAgroConsult Company “2017-2022: Development of Ukraine’s agribusiness strategies. Investment climate. Factorial analysis shows that profitability of faming companies declined in 2016 – this trend will persist at least till 2022. This means the main source of investment and self-finance for maintaining growth, i.e. producers’ profits, is almost exhausted.

The next source of investment is the State Budget. Its share in capital investment decreased from 6.3% to 2.3%.

The most important source of finance for the development is bank loans, but the share of banks in investment fell from 16.1% to 7.1%, or almost by half.

Targeted agricultural loans from the international market (a €400 Ml loan program from the European Investment Bank in 2016, a $150 Ml loan program from the World Bank in 2017 etc.) support Ukrainian banks in crediting investment projects. But these loans do not solve drastically the problem of insufficient domestic resources for investing into growth points – they just put it off for some time, doing this on indemnity basis.

A multitude of reasons can be cited why the bank share in the crediting of company investment is miserable. However, this does not negate the fact that the banking system fails to fulfill one of its key roles – crediting the development of the economy’s real sector, specifically the agriculture as a locomotive of the present economic upturn in Ukraine.

The insufficient crediting horizon prevents farmers even from envisioning and planning large and break-through investment projects. For instance, to the National Bank of Ukraine reports that only 20% of 2016 loans to agricultural companies were provided for more than 5 years.

The development and implementation of medium- and long-term projects are possible with participation of foreign capital. The above table shows that the share of foreign investors’ money in investments generally expanded from 1.6% in 2013 to 2.9% in 2016 in view of the overall decline in capital investment.

Direct investments (share capital) in Ukraine’s agriculture also actually dropped. The volume of direct foreign investment into the sector reached $776.9 Ml by January 1, 2014, shrank to $502.2 Ml by January 1, 2016 and did not actually change by January 1, 2017 ($500.1 Ml).

One of the conclusions of UkrAgroConsult’s study is that, in fact, all of the three system non-government finance sources for enhancing growth and competitiveness of the Ukrainian economy’s key branch – growers’ own profits, bank crediting and foreign investment – are now losing their position as an agriculture development resource. As mentioned above, financing the production development and growth from own profits has actually exhausted its potential and, at best, it will be only able to maintain agricultural production at the previous level.

Reforms and investments

In this stalemate situation, it is understandable why the IMF, as a creditor, insists on conducting reforms by the Ukrainian government as soon as possible. The reforms are to be focused on ensuring mid-term outlook for the debtor’s solvency. One of their key points should be opening the land market.

The overwhelming majority of experts believe only this step can solve the investment shortage problem of the agriculture in the near-term without fundamental changes in the nation’s social and economic set-up. The land market will bring long-awaited significant investment to the Ukrainian agricultural sector that will cause its growth and a greater financial effect for the State Budget.

Once the land market opens, the following investor groups will most probably arise:

  • investors from offshores, who know very well the mechanisms of market relations in the country, including procedure nuances of land purchase / sale and use, and who do not mind investing in the promising asset;
  • transnational capital, which holds a dialogue on equal terms with the central authorities and is interested in the “Ukrainian” link for its technological chain;
  • speculative capital.

Medium-sized foreign investors (primarily ones from EU countries) interested in boosting production by developing the local economy will sit out for one or two years to better assess their risks (both commercial and legal ones).

The risks related to property rights observance, judiciary system effectiveness, state authority actions etc. are unlikely to get practically offset over this period.

UkrAgroConsult’s studies indicate that a substantial inflow of investment into the real agricultural sector can be expected at best toward 2020. However, it is not yet clear if agribusinesses and farmers, like Bolivar, will be able to “carry double”: 1) the burden of capital investment for stabilizing and/or expanding agricultural production; and 2) the government’s aspiration to increase fiscal payments to the State Budget.


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