Along with direct destruction, the constant threat of new attacks, and broken supply and distribution chains, one of the key problems of an economy operating in war is the lack of insurance for ongoing operations and investments. The usual peacetime insurance programs are not in place, and the reinsurance market is not working. So even businesses that have free money are in no hurry to invest in modernization and expansion of production. What can we say about planning development with borrowed funds and foreign investment? They say that after the war, Ukraine will see an investment boom. But it is so important to have at least a piece of this "resource pie" right now to keep the economy afloat and meet the country's defense needs despite the enemy's aggression. The government announces good news related to the launch of war risk insurance programs and the reinsurance market.
Ukrinform learned more about the details from Oleksandr Hryban, Deputy Minister of Economy of Ukraine on Investment, Innovation and War Risk Insurance, Head of the Advantage Ukraine Investment Team.
ON COOPERATION WITH MIGA AND DFC AND INSURANCE MARKET RECOVERY
- Mr. Hryban, Ukraine has been negotiating with international partners to restore the insurance market almost since the first months of the great war. Are there any concrete results yet, or is everything limited to promises?
- Ukraine started working actively in this area exactly one year ago, in August 2022. Then the Ministry of Economy turned to the Multilateral Investment Guarantee Agency (MIGA) for help. This is an organization that has historically operated and guaranteed investments in environments where tensions arise or non-standard business conditions are formed. This is a core activity for MIGA, and they have done it in more than one country. We have done the fundamental work for them to add Ukraine to their agenda.
The way this organization works is that it multiplies the funds it receives from donors. And since MIGA is part of the World Bank group, its donors are different countries whose governments give it a mandate to support investments around the world. After that, in the classic model, they launch the market of large reinsurers. After all, the market works in such a way that an insurance company that insures a certain object - life, car, ship or building, the investment itself as a lost profit of an investor and entrepreneur - first (conditionally) sells this risk, reinsures it in large specialized companies. And they, in turn, are reinsured by large reinsurers - global giants. MIGA has always turned to such partners - reinsurers, development institutions, or export credit agencies - who usually provide $5 of insurance coverage for every dollar.
- And how will it work in Ukraine under the current extreme conditions?
- Given the current situation - a direct military invasion of our country - the reinsurance market is not working for Ukraine. Its participants do not buy Ukrainian risks. Therefore, MIGA is essentially left with only the funds provided by donors. The agency tries to multiply this resource through financial intermediaries, such as banks. In particular, there is a program under which the multilateral agency expands the limits for Raiffeisen Bank, their traditional partner in Ukraine. And recently, at the initiative of the Ministry of Economy, an agreement was signed in London between MIGA and ProCredit Bank. This allows us to use a multiplier by attracting a bank resource. In this case, ProCreditBank, which works in particular with small and medium-sized businesses, will make the insurance service available to its clients. Specialized refinancing lines have always existed in such banks, and financial institutions essentially resold the resource, adding their own commission for managing the funds. By the same token, Ukrainian small and medium-sized businesses, clients of ProCreditBank, can apply to the bank and purchase insurance coverage for their investments.
Separately, MIGA is available to guarantee direct investments. It is for those borrowers and investors who meet the requirements and criteria of international financial institutions. The main requirements are transparency of business operations, absence of political background of the owners and, of course, transparent audited financial statements in accordance with international standards. So far, these are only pilot cases. At the International Conference on Ukraine's Recovery held in London at the end of June, MIGA representatives announced the first agreements on direct guaranteeing of war risks of investments. They will be signed in the near future.
- What are the prospects for attracting other global players to our market?
- There is also such an organization as DFC, the American Development Finance Corporation, which also has a separate mandate to work in Ukraine. The publicly announced resource is $1 billion, which can be provided through various instruments. These include both guarantee and direct lending instruments. Under this mechanism, the corporation can insure investors against lost profits in the event of force majeure or insured event.
The principle is the same here: companies that can apply directly to them and meet their criteria are already doing so. DFC is already considering pilot cases worth hundreds of millions of dollars. We are constantly communicating with them and hope that they will also launch pilot projects in the near future. And then it will be clear to Ukrainian and international businesses that the mechanism is working and working well. At the same time, we must take into account that the decision-making process in such structures can take up to 9 months.
- Doesn't the war speed up these processes? Or does it slow them down, given the high degree of risk?
- It slows down somewhat at the first stages of implementation. Because this is an unprecedented case for everyone, and no one understands how to evaluate it, what the risk system is, etc. Therefore, I agree that the preparatory stage is taking longer than it should. However, after the successful implementation of the "pilots," I am convinced that the implementation of other projects will accelerate. To this end, a number of measures are being taken to mobilize the reinsurance market. There are several initiatives in this area. The European Bank for Reconstruction and Development is setting up a separate trust fund, to which several countries have already agreed to contribute. The European Commission has also provided guarantees. Thus, the guaranteed funding for the fund is $80 million. The goal is to raise at least $300 million. This resource will also be available to reinsurers. Since it is conditionally free, the money will be paid only for the EBRD's administration, this will trigger the entire insurance market. This mechanism should be in place by the end of the year.
ON ATTRACTING DOMESTIC RESOURCES AND THE NATIONAL INSURANCE POOL
- Are there any opportunities to attract domestic resources to the insurance market?
- Yes, in parallel with its efforts in the international arena, the government is considering creating its own international pool, which will be managed in the same way, either through an international financial institution or at the interstate level with delegated representatives from donor countries. The goal is the same: to mobilize the reinsurance market, which is then multiplied, turning a notional 1 billion dollars into 5 billion in insurance coverage. This is currently being tested as a pilot on the grain deal. Negotiations are underway, and the government, as you know, has made a statement about the possibility of using the Road Fund money for reinsurance - precisely to cover the risk of ships moving in the Black Sea basin. And now we are actively working with the international insurance community to create a mechanism where these funds will be used not directly by ship owners, but by insurance companies that will multiply this resource. I believe that it will be possible to develop such a mechanism very quickly. The Ministry of Reconstruction, the Ministry of Economy, and underwriters such as Lloyds and Marsh & McLennan and other leading network insurance and reinsurance brokers are involved in its approval.
When making a decision to underwrite a risk, an insurance company takes into account a number of factors, one of which is the availability of information and statistics on potential insurance claims. We understand that there is now open data that can be collected independently, without access to closed sources, and there is semi-closed data for official use, as it is sensitive information (for example, about flight destinations). That is why we are developing tools to create a data exchange platform for professional players who will have access to the resource only after authorization. That is, there will be a certain level of access and, of course, the detail will be at least sufficient for decision-making. We already have the first ideas of zoning certain territories with colors depending on the degree of risk - from red to green. In this way, we will demonstrate to our partners and the insurance business that not all of Ukraine is "red", that there are relatively safe places, as well as places where there have never been any statistical insured events. Accordingly, the amount of insurance premium will be formed with this in mind. And the decision to provide such insurance should be much easier to make than in places where the risks are constantly high. We are also working on such a data exchange portal together with global players to speed up the launch of the reinsurance market, which, in turn, should revitalize the insurance market in Ukraine.
We also continue to cooperate with the National Bank of Ukraine, which is the regulator of the insurance market. The NBU wants to launch a national insurance pool, similar to the Motor (Transport) Insurance Bureau, which covers motor vehicle liability. This pool will also be self-regulating, meaning that it will be funded by deductions from each insurance premium sold. Ukrainian insurance companies will have the option of either reinsuring in this pool or going to large reinsurers who will use all the tools I mentioned earlier.
- By the way, what are the priorities of investment insurance and reinsurance? Is there a difference whether we are talking about a domestic or a foreign resource?
- It all depends on the degree of readiness of the investor and his current state. There are investors who meet all the criteria and requirements, which allows international partners and organizations to make a sober and full-scale assessment of a particular applicant for insurance. They have to look at its anamnesis: financial statements, information about its status and the conditions in which it does business. There are already many companies in Ukraine that have undergone an international audit, and now it no longer costs a lot of money. And we urge all domestic entrepreneurs, including medium-sized ones, to move to such a system of performance assessment. This will help not only in insurance, but also in attracting investment, lending, etc.
Those companies that for some reason are not yet ready for such an audit, or the scale of their business or capital turnover does not allow them to do so, can apply for insurance from Ukrainian companies. This insurance will be a little more expensive because, among other things, intermediary services of other insurance market players are added to its cost. But there is another important initiative for Ukrainian investors. This is the draft law on expanding the powers of the Export Credit Agency, which was adopted in the first reading. The document provides the Ukrainian ECA with additional budgetary funds that will be used to insure military risks for Ukrainian applicants. I think this mechanism will start working soon. We are actively working on preparing the draft for the second reading.
- And how does the "grain deal" you mentioned help (or have helped) in adapting the relevant processes and identifying any bottlenecks? I remember that at the stage of preparing the agreement and immediately after its signing, experts talked most about the need to establish war risk insurance and the problems associated with it. Later, the Russians' obstruction of the agreement's implementation at the Joint Coordination Center and other aggressor's mischief came to the fore.
- The issue of the "grain deal" is more specific and more complex. There are many stakeholders involved, and there is a direct threat from the Russian navy, fueled by constant threats from the Kremlin. On the other hand, the grain deal itself pushes us to test all the mechanisms I mentioned. That's why we continue to work in a consortium with various ministries, with representatives of the insurance community, with reinsurers, insurance brokers, reinsurance brokers, and Ukrainian banks that will potentially issue their letters of credit. We are already testing the model of a larger insurance pool. We will soon see how this guarantee of the government as the guarantor of last resort works. The main thing is that we already have the necessary resource - the Road Fund, which can be used to launch insurance.
And this is a kind of "battlefield reconnaissance" before scaling up this idea to cover all the damage caused by the aggressor. And you realize that we can talk about a colossal amount, up to a trillion dollars. The amount of investment will be enormous. This is unprecedented, never before seen in world history. Of course, Ukrainian budget funds and even the Road Fund will not be enough. That is why we are so hopeful about the resources of Ukraine's partners, money from international organizations, etc. But the grain deal, its model, will allow us to show our partners this case and say: look, it worked here, there was state money, instead of which international financial resources can be used (with benefits for investors). So, in principle, the mechanism is the same. It's just that only Ukrainian banks are likely to participate in the "grain deal" after Russia's withdrawal, and then, when mobilizing the international pool, reinsurance companies and insurers will play a greater role, working directly with the market.
- And when forming the private insurance and reinsurance market in Ukraine, I understand that the emphasis will be on the participation of large international players, since the capacity of the domestic insurance business will clearly not be enough?
- We must understand that the Ukrainian insurance business does not insure war risks. This is the principle of their work. The model of existence of domestic companies implies that they always buy reinsurance, otherwise they will have to bear responsibility with their capital, which is limited in our conditions. Therefore, domestic players have always sold risks and bought additional reinsurance.
Until reinsurance starts working, the Ukrainian market will not be able to recover. Companies need to "park" this risk somewhere: it can either be an Expert Credit Agency that will work directly with investors or provide insurance companies with coverage, or, for example, the aforementioned international or national insurance pools. But they will still need to find a guarantor of last resort. Our insurance companies will not be able to do this on their own.
ABOUT INVESTMENT SEARCH AND THE UKRAINIAN DEVELOPMENT FUND
- In parallel with the formation of the insurance and reinsurance market, of course, the government and our international partners are actively seeking investment for Ukraine. Is there any result? Please tell us, in particular, about the prospects of creating the Development Fund for Ukraine.
- I would start with the efforts of the Ukrainian government and, in fact, the Advantage Ukraine platform, which was created at the initiative of the President to, on the one hand, collect quality projects in Ukraine, and on the other hand, tell the world about all these opportunities, including the elements of deregulation and investment incentives that the government is implementing. This platform is already receiving inquiries from investors and consolidating local projects. And most importantly, funds are allocated from the very beginning. This is both the EBRD's resource and the money of the IFC, the International Finance Corporation. The European Investment Bank has received guarantees from the European Commission, and a large package of assistance from the European Commission, the Ukraine Facility, is being prepared, within which a large amount will be accumulated.
That is, there is an investment resource. The main thing is that we have projects that meet the requirements of international partners. Because the requirements are dictated by the one who gives the money. And our partners say that in order to integrate not only into international production and supply chains but also into global capital markets, you have to "clean up your act," so to speak, in terms of legal, financial, and reporting hygiene. Our platform selects such projects, selects initiators, owners of promising transparent businesses, and explains everything to potential recipients of international programs. We plan to hold educational events and tell medium-sized Ukrainian businesses why this is important. We have already launched a number of regional events that we implement with the help of partners, such as the USAID Competitive Economy of Ukraine Program. In the future, they can provide grants to Ukrainian enterprises that want to transform and become accessible (meet international criteria) to attract investment.
- Do you have any interesting projects?
- Since the launch of the platform, we have received almost 1500 applications from companies. Among them are those looking for investment and trade cooperation opportunities, including about 500 interested in potential investments. The Advantage Ukraine platform works with more than 130 projects with a total value of $67 billion. These are ongoing strategic investment projects and opportunities to raise debt and equity capital in six key sectors:
- construction and engineering, including the production of building materials, equipment, and design work. Investment portfolio of 32 projects worth $30.8 billion.
- in energy, including the production of green energy, hydrogen, and biomethane - 36 projects worth $25 billion
- in logistics, including the modernization of transport infrastructure - 30 projects worth $6.5 billion.
- in the agricultural sector, deep processing and full utilization of waste - 18 projects worth $700 million.
- in the extraction of minerals, critical minerals and the production of products from them, in particular in the establishment of a full cycle of production of lithium-ion batteries and electric vehicles - 10 projects worth $3.6 billion
- in the healthcare and pharmaceutical sector - 8 projects worth $300 million.
Currently, 85 projects totaling about $10 billion are in active work (pipeline). These include the agricultural sector, woodworking, building materials, and wind energy.
- And what about the necessary resources, in particular, the prospect of creating a Development Fund for Ukraine?
- In this area, we are cooperating with the giants of the global capital market, such as BlackRock, JPMorgan, and McKinsey. This is a consortium joined by such well-known lawyers as Freshfields, which is part of the so-called "magic circle" of the world's best law firms. All these professionals, as part of their contribution to our common victory, help us to adapt the best practices and create a Ukrainian instrument based on interstate cooperation, international method and international management practices. However, this will be a Ukrainian fund that will allow us to always have our own financial instrument, which will be filled in the same way as international financial organizations like the EBRD. But it will be filled specifically for the needs of Ukraine. Because with all due respect to the assistance we are currently receiving from international financial organizations, we understand that they have many developing countries on their agenda. Right now, the focus is on Ukraine, because we have a war going on. But in the future, after the victory, we will need our own tools that will be trusted by international donors, international organizations, governments, or, for example, philanthropists, rich people, superbillionaires like Andrew Forrest or Richard Branson. In other words, we are talking about a global ecosystem.
The principle of the fund's operation is as follows: it will be the initiator, taking on a slightly larger part of the risk than international financial organizations are currently doing. A separate investment team will be formed to analyze all potential opportunities in Ukraine. And the fund, by selecting certain projects, will demonstrate that it is entering into this investment, which means that this project is worthy of attention, meets all the criteria and requirements. That is, the fund believes in the investment future of this project and in the return of capital. Consequently, other investors can trust it. In this way, the fund will mobilize additional sources of capital and, for example, even by entering a certain project as a minority shareholder of 10-20%, it will attract additional private investment funds, sovereign wealth funds, international financial organizations, expert credit agencies, and international commercial banks. All this will allow multiplying the funds of partner countries and those philanthropists who will entrust money to the foundation itself, and turning every dollar received into $5 of mobilization of the entire ecosystem.
- Do you have any calculations of the result: what can this result in for the country and for a particular business? For example, an entrepreneur has a great project, what can he expect? What will be his own contribution, the share of insurers, reinsurers, what is the state's contribution, and what will have to be supplemented by bank loans?
- Usually, the ratio of equity and debt in the implementation of investment projects was 30 to 70. Now we need to understand that this requirement for equity is gradually increasing, so now we are talking about about 50 to 50. And you need to be prepared for such realities. In fact, if a business is ready to attract an international partner to the joint capital, if it meets all the requirements, it can share up to half of its own contribution with someone. One such source of contributions to promising projects could be the aforementioned Ukrainian Development Fund, which we are creating with the support of BlackRock. On the other hand, it could be private equity funds. That is, businesses should be prepared to have at least 20-30% of their own funds to start a project, depending on how much they are willing to share in the project. And debt capital - at least 50% - can be attracted with this configuration and financing structure.
The Ukrainian Development Fund aims to raise up to $10 billion in the coming years, which will allow it to multiply this into a total of $50 billion in investments in Ukraine, including both credit and insurance resources. Now the rate of attracting international capital is certainly not the best. This is because inflationary processes, including those caused by the war in Ukraine, affect the entire world. Our discount rate is simply insane, at 22%. Globally, foreign currency borrowing rates are at 6-7% per annum. However, the very nature of the rate formation, where there is a floating index and a fixed margin, indicates that in 2 years, when inflationary processes subside, these indices will be reduced, and those who raise funds today for 10-14 years will receive a more competitive and lower rate in the future.
ON IMPROVING THE INVESTMENT CLIMATE AND INTRODUCING INNOVATIONS
- Recalling your words about restoring order here at home... how does the war and the realization of the scale of post-war needs contribute to this? Of course, I will have to leave the topic of corruption, the efficiency and impartiality of the judicial system, and the protection of property rights out of the picture, as this requires a separate discussion. What about such basic things as deregulation and investment preferences? Does the law on investment nannies work?
- Work in these areas is ongoing. The Ministry of Economy has set up a separate deregulation group, which brings together representatives of various ministries to cancel outdated or duplicate permits, licenses, etc. In fact, as far as I know, such an audit is almost complete. And in our dialogues with business, we rarely hear that something from the "regulatory system" is hindering them. That is, while entrepreneurs used to say that they were tired of this story, now we have simplified or digitalized everything as much as possible. And those "global" things you mentioned are chronic diseases. There is a political will to overcome them, and the country is gradually moving in this direction. But since the system has been tectonically overgrown with these stones for decades, it is clear that you cannot get rid of all this "baggage" in a day or a week.
In terms of incentives, the state has quite competitive tools. These are industrial parks and investment zones. The legislation adopted in these areas allows us to start working on bylaws, which will lead us to more simplified mechanisms. You know, at the beginning, some foreign investors were somewhat surprised by Ukraine's ideas to stimulate investment. But now the criteria for participation in the programs are being clarified and brought in line with international practices. For example, the threshold for investments eligible for participation in the state support program has been reduced from 20 million euros to 12 million euros. And when finalizing the bylaws, I am sure the Ministry of Economy will bring everything in line with the standard and customary process of assessing investment attractiveness in the civilized world. Accordingly, this mechanism will become more understandable and popular. I would like to remind you that this is an opportunity for an investor to save up to 30% of capital expenditures by postponing or canceling certain taxes and duties. You can import equipment without import duties, without import VAT, you can postpone the payment of income tax...
This mechanism also works for residents of industrial parks. It is the clustering of production with new industrialization around such centers that has proven effective in other countries. Moreover, at the initiative of the Ministry of Economy, changes are being made to the procedures that have so far limited municipalities to some extent in terms of costs and support for such projects on their territory. The creation of many industrial parks was initiated by communities. And permission has already been granted, exceptions have been made to the list of restrictions, so that communities can connect networks to industrial parks at their own expense, at the expense of development budgets. Then the technical conditions for connecting the residents of such parks to communications will be much simpler, and the process itself will be cheaper. This is an additional incentive for manufacturing businesses and investors. Procedures for compensation for connecting to networks have also been developed, but unfortunately, the budget does not yet have the funds to put these tools into practice. However, work on facilitating business conditions in such clusters is ongoing, and the proposed tools are constantly being improved. We have already received a lot of positive feedback from investors. We hope that following the recent legislative changes and the development of the "bylaws", this tool will become more and more popular.
- What about innovations? Are international partners ready to share new developments within the framework of technology transfer, or do we still have to rely on ourselves, as they say: okay, we will give you money, we will come up with something with insurance, reinsurance, and the rest is up to you to think, invent, and implement?
- In fact, it could have been the way you described it if we hadn't received investment resources from our partners. After all, if you receive money from some source, from an investor, the investor usually has a vested interest in it. So we shouldn't live under the illusion that we are getting all this for nothing. In principle, all export promotion programs, support programs, intergovernmental finance, etc., primarily involve the participation of international companies in our market. The United States usually supports American companies, and France supports French companies, making investments conditional on their participation in projects, at least as contractors... And here is our task, the government's task, to ensure a certain level of localization, including through technology transfer and adaptation of certain elements of the production chain in Ukraine. And this always sounds like a kind of recommendation. When foreigners come and offer their money, we say: we understand the context, we understand that we need to use French, English, German contractors and suppliers, but we have such and such enterprises that can be their local partners. We need added value in Ukraine, we don't want to go into direct imports. And our partners have no desire to "put us on the import needle" because all financial incentive programs related to the involvement of their suppliers and contractors still provide that about 40-50%, and sometimes 60-70%, can come from other sources, including Ukrainian partnerships. This allows us to use the technology transfer mechanism you are talking about. They are happy to share technologies because we are opening a new market for them. And the scale of damage caused by the aggressor is unprecedented. The work after the war is untold. That is why they are ready to come here and participate in the distribution of expected profits. For us, it means investments, economic recovery and high-quality reconstruction.
- And finally, about the timing of the projects and programs we have mentioned. Formation of the outlines of the real private insurance and reinsurance market, creation of a portal to connect all participants in the relevant processes, filling the Ukrainian Development Fund with a specific resource... Which of these will we have in the near future and which will have to wait until the war is over?
- Some elements of reinsurance, for example, from the EBRD, will be operational by the end of this year (at least, there are such expectations). We are also moving quite dynamically in creating a data exchange platform. And by the end of the year, maybe even earlier, in the fall, it will be operational. As for the international reinsurance pool under the auspices of Ukraine, it is a rather painstaking and lengthy process. It may be launched before the end of hostilities, but it will definitely be in demand after the war is over.
We plan to crystallize the legal model and launch the registration of the Ukrainian Development Fund by the end of the year. I can't talk about the specific mechanism yet, it is still being discussed. I am convinced that in the spring, in March, we will see the first activity of the Fund, it will start reviewing deals and analyzing potential investment objects. By that time, the first donors who will make contributions to the fund's capital will have been identified. That is, we are talking about a matter of months to implement everything we have planned.
Vladyslav Obukh, Kyiv
Photo by Yulia Ovsiannikova