Opportunities in Ukraine – Finnfund targets projects where Finnish companies are involved

Over two years have passed since Russia invaded Ukraine. At the moment, Russia occupies almost a fifth of Ukraine’s territory, and there is no resolution in sight. There are multiple different scenarios for the future, but the core expectation among international analysts is a protracted war. The conflict is likely to change into a stalemate in the medium-term, and probably end up as a frozen conflict.

From the onset of Russia’s attack, Finland has supported Ukraine extensively. Recently, increasing efforts have been made to catalyse private investments into Ukraine. To build a bridge between the very real opportunities and just as real risks, the Finnish government has prepared a national reconstruction plan. The reconstruction plan provides extra resources for Finland’s central financing and internationalization agencies, so that they are even better placed to help Finnish companies invest, establish, or expand their business in Ukraine.

Early engagement will provide critical support to Ukraine, but can also give a competitive advantage for companies

For Finnfund, the national reconstruction plan provides a special allocation of 25 million euros to be used for investments in Ukraine targeting projects where Finnish companies are directly involved. For example, we could be a co-investor in a new company set up by a Finnish company. Or we could provide a loan for a private Ukrainian company that is acquiring a substantial amount of tech or expertise from a Finnish provider. Sometimes we build direct bridges between potential investees and suitable Finnish business partner candidates. You can read more about the types of investments we can make into projects with Finnish companies here.

As a background for Finnfund’s future investments, we have looked at the Ukrainian economy, what types of business possibilities there are, and what types of investments Finnfund is looking to make. Despite the risks and uncertain outlook, many public and private investors are becoming active, and more and more European companies are (re)starting their business in Ukraine. Partially, this is fuelled by a desire to support Ukraine during this most challenging of situations. However, the reconstruction and extensive foreign investments channelled to Ukraine also provide vast business opportunities, ranging from providing basic services to more innovative solutions. While the risks are high, early engagement will not only provide critical support to Ukraine, but can also give a competitive advantage for companies for the vast reconstruction opportunities

Ukrainian economy has shown resilience, but risks remain extensive

The Ukrainian economy continues to show remarkable resilience but will remain under significant stress for the duration of high-intensity conflict. Even though high-intensity fighting is expected to continue in the near-term, battle lines will likely remain more or less static, and the war will be felt mainly in the east while western and central Ukraine remains relatively safe. Nevertheless, country-wide missile attacks are an existing risk.

The reconstruction needs are and will be massive. A report by the World Bank, European Commission, the United Nations and Ukrainian government estimate reconstruction costs around 486 billion US dollars, which is three times the Ukrainian GDP in 2023. Local estimate for the number is higher, even 1 trillion USD. And of course, the longer the war lasts, the more expensive the reconstruction will be.

While the Ukrainian government prioritizes the needs of the military over major reconstruction, reconstruction has already begun to some extent. First, the focus is on energy and transportation as well as meeting the vital needs (food, fuel, medicine) closer to the borderline. In the medium-term, the lack of work force will be a significant constraint for the economy and reconstruction, as many young men are fighting in the war and over 6 million Ukrainians have left the country.

Ukraine remains highly dependent on the aid from western partners. The US has been a single largest supporter of Ukraine and provided majority of the military aid which is crucial for Ukraine. The US administration approved a US$61 billion aid package for Ukraine in end-April. This package is critical for Ukraine that has been suffering from worsening equipment shortages during the Spring.4 The EU has supported Ukraine especially financially. Also the financial support is very important for Ukraine to prevent macroeconomic imbalances from spiraling out of control and financing needs continue to be high in the foreseeable future.

Growth expected in digitalisation and pharmaceuticals

Economic activity in western and central Ukraine has picked up significantly from the lowest levels and for example services have recovered very well.

Concerns over Ukraine’s energy sector have increased lately as Russia has intensified attacks on the Ukrainian energy infrastructure, resulting into power shortages. The energy sector damage is likely to result into a slowdown in economic growth and the impacts will be felt throughout the rest of the year especially in the winter when the need for heating increases heavily. However, Ukraine has now had time to prepare for blackouts and in addition to large companies, now also SMEs have generators etc to help dealing with energy sector challenges. 5 The energy infrastructure reconstruction is a priority, however, it will be a long time until the energy infrastructure is at the level it was pre-war.

Traditionally, agriculture has been a key sector in Ukraine and an important source of income. The war has created a lot of disruptions to harvesting, transportation, asset losses etc. which have been felt around the world as food prices rose heavily in 2022. By now Ukraine has found new and safe trade routes and has been able to continue its grain and food oil exports. However, agricultural output is constrained as a large share of the fields are located in eastern Ukraine and thus are more exposed to the war. The effects of Ukraine’s general lack of labor force are also felt in the labor-intensive agriculture sector.

Currently, pharmaceuticals is one of the fastest growing industries in Ukraine. Pharmaceuticals sector has continued to attract both domestic and international investment and grow regardless the war.

The new Ukrainian economy will be driven by the digital sector. It has been very resilient throughout the war and driven the economic recovery. The sector is relatively asset-light and thus has been able to continue operations undisrupted and attract foreign investment. Looking forward, the importance of the digital sector will only grow in Ukraine, providing many business opportunities. Ukraine’s advantages include large labor pool in technology as well as relatively low salary level compared to many European countries.

Education facilities and other infrastructure has suffered extensive damages and is being rebuilt or entirely modernized. These mostly government funded projects can provide opportunities for companies that are able to build relations to both municipality and state-level officials. Housing and buildings have also been destroyed but these are not the first reconstruction priority, also because many of the Ukrainians that have fled the country are not looking to return soon.

Finnfund aiming to invest 25 million euros by the end of 2025

Finnfund is constantly looking for opportunities in Ukraine that align with our investment criteria. Though the main purpose of our investments is to advance the rebuild of Ukraine through profitable and sustainable investments, Finnish companies can also participate in our investments either as providers of goods or services, or as co-owners of a investee company in Ukraine. As a rather late-stage investor, we can only consider projects in late development or operational phase, and of sufficient scale. Read more here.

Finnfund’s key sectors include digitalisation and energy, and it is perhaps in these sectors where we can find most opportunities to be an investor in Finnish projects. However, we’re more than happy to talk with projects from all sectors, including education, infrastructure, and agriculture.

Finnish companies interested in Ukraine, but at earlier stages of their projects, should consider Finnpartnership, the business partnership program we manage. Finnpartnership can financially support e.g. feasibility studies, business plans, pilots, and scalability and investment preparations, all of which can make projects more suitable for impact investors to consider.

If your company is looking for a commercial co-investor for a project in Ukraine, please don’t hesitate to get in touch.

“Our aim is to invest 25 million euros in good, bankable projects by the end of 2025. Time is therefore of the essence – both for us, and for Ukraine.”

Nea Tiililä, Economist, Finnfund

Patrik Bredbacka, Team Finland Adviser, Finnfund

Patrik Bredbacka Team Finland Adviser patrik.bredbacka@finnfund.fi +358 40 545 8447