Financial Times

June 15, 2007

Political turmoil has overshadowed much of the action but investors' appetite for Ukraine's fast-growing markets is rising.

They are following pioneers such as Nestlé and Coca-Cola, which entered Ukraine in the 1990s and are making big returns. Investors tune out the political noise and focus on the economic attractions of a country of 46m, which last year registered a rise of more than 7 per cent in gross domestic product, with another 7 per cent expected for 2007.

Tomas Fiala, managing director of Dragon Capital, a Kiev investment company, says he thinks the political squabbles will be kept in check for fear of hurting business. "It is just an internal power struggle in the political elite. If the population is not reacting, not withdrawing money from the banks, and the currency is stable, then nobody pays attention."

Although growth started in 1999, it took the televised events of the Orange Revolution, which brought the reform-minded Viktor Yushchenko to power, to put Ukraine on international investors' radar screens. "Everyone is fishing around," says Jorge Zukoski, president of the American Chamber of Commerce in Kiev.

Among the first to commit itself was Mittal Steel, which paid $4.8bn (£2.4bn, €3.6bn) for Ukraine's most modern steel complex. Domestic business groups, built from sometimes murky privatisations, have meanwhile turned themselves into formidable competitors and have recently been going to international capital markets to secure global valuations for their assets and enhance their integration into the European economy. Medium-sized Ukrainian companies raised some $600m last year, mainly in London, Warsaw and Frankfurt, according to Mr Fiala.

Now businessmen are preparing larger offers, starting with Kostyantyn Zhevago, a 33-year-old billionaire, who is raising about $500m this week on the London Stock Exchange, offering 25 per cent of his Ferrexpo iron ore business. Rinat Akhmetov and Viktor Pinchuk, Ukraine's richest men, are expected to list steel, energy and media businesses by 2009.

But Ukraine still has a long way to go. Annual GDP per capita stands at about $2,275; in Poland it is $8,655. Foreign investment is a fraction of central European levels. Incomes are unevenly distributed: while top businessmen rank among the world's richest, middle-class salaries are typically below $1,000 a month and the elderly often live on less than $200, despite pension increases.

Corruption, red tape, weak courts and poor infrastructure remain problems for business people and ordinary citizens alike. Jeffrey Franks, the resident International Monetary Fund economist, says: "At some time in the future, the lack of structural reforms will take a bite out of economic growth."