Ukraine will be the business opportunity of the decade

At first glance, Russia might seem the more attractive market. It has 140 million people, a $2.2 trillion economy, and vast natural resources. But even after hostilities subside, political and commercial risks will remain high and the range of investment opportunities therefore narrow.

Ukraine’s outlook is far brighter. In terms of real gross domestic product, Ukraine’s economy is still more than 20% below its prewar level. But once a durable cease-fire takes hold, it will become one of the world’s most dynamic emerging economies.

In the immediate aftermath of the war, Ukraine will become the site of the largest reconstruction project since World War II. The World Bank estimates more than $500 billion will be spent in the country over the next decade.

One of Ukraine’s strongest opportunities will be its defense technology—an area where engagement with Russia, which relies on China for its defense materials, offers little to the U.S. Ukraine has become a global model for defense technology innovation. Ukrainian firms are already partnering with U.S. companies to develop prototypes of one-way, long-range unmanned aerial systems.

Ukraine’s economic record after its independence in 1991 was arguably the worst of all the former Soviet Union’s former member states. In 2013, before former Ukrainian President Viktor Yanukovych was removed from office, the country’s business environment was mired by “complex tax and customs codes, byzantine laws, and regulations, poor corporate governance, weak enforcement of contract law…and official corruption," according to a U.S. Department of State report.

Ukraine has since made reforms to improve its investment climate. It restructured its banking system, closing banks that accounted for more than one-third of banking assets and recapitalizing others. Reforms to gas pricing and management resulted in the state-owned gas company, Naftogas, paying 1% of GDP into Ukraine’s budget in 2019. That helped reduce the government’s stubborn budget deficit.

U.S. multinationals noticed. Their sales in Ukraine grew from less than $6 billion in 2014 to almost $11 billion in 2021, before Russia’s full-scale invasion. Meanwhile, their sales in Russia declined during that period.

Ukraine continued these reforms after Russia’s invasion. The government’s Ministry of Digital Transformation launched new features on its mobile app, Diia, where business can be registered, foreign national business owners can pay taxes, and the government can provide business-related public services. The government passed a new public-private partnership law last year, which will streamline the process and expand allowable funding sources for rebuilding the country.

Its bid to join the European Union, which began just four days after the Russian invasion, will compel Ukraine to continue reforming. Since it applied for EU membership, Ukraine has climbed to 105 out of the 180 countries ranked in the Transparency International’s Corruption Perceptions Index, above countries like Brazil and Turkey. Russia, by contrast, has dropped to 154th.

Even though it still is years away from joining the EU, Ukraine enjoys a comprehensive free trade area with the bloc. For U.S. companies producing goods in Ukraine, the free trade area means access not only to the Ukrainian market but also to the entire EU—the world’s second-largest economy.

The U.S.-Ukraine Reconstruction Investment Fund formed last April may further support a wide range of natural resource-related investments. Jointly funded by the U.S. and Ukraine, the fund will receive royalties from new resource developments for reinvestment into Ukraine. Its investment targets include critical minerals, energy, transport and logistics, information and communications technology, and emerging technologies.

Even during the war, thousands of U.S. and other foreign businesses opened up in Ukraine. More are likely to come soon. CEOs and managers told the American Chamber of Commerce Ukraine in a recent survey that jumping into Ukraine before reconstruction started in full was important for gaining first-mover advantage.

Russia faces a grim economic outlook. Its wartime economy, highly distorted and slowing, has become more centralized and less productive. Its rule of law is weak, and it lacks reliable contract enforcement. It isn’t clear that Russian leadership even wants to take on the monumental challenge of converting from a wartime to a civilian economy. Western sanctions are likely to continue for years, too. There are still business opportunities to be found in Russia, but are likely open only to the largest players who can bear high risks.

In contrast, Ukrainians have an optimistic future with the West. With U.S. and European support, Ukraine is poised to emerge as a secure sovereign state deeply integrated with the global economy. When that happens, it will not only be a symbol of resilience. It will be the business opportunity of the decade.

About the author: Howard J. Shatz is a senior economist at RAND and a professor of policy analysis at the RAND School of Public Policy.