M&A Radar: Ukraine 9m 2024

Despite the challenges posed by Russia’s full-scale war of aggression against Ukraine, the NBU has continued to maintain a level of price and financial stability essential to achieving sustainable economic recovery. These objectives are being met through a coordinated approach utilising both interest rate and exchange rate policy tools, responding to market developments and making prudent adjustments as necessary.

The Ministry of Economy of Ukraine indicates that Ukrainian GDP increased by approximately 3.9% in the first eight months of 2024 compared to the corresponding period of the previous year, though Ministry projections for full-year real GDP growth in 2024 are expected to be slightly more conservative at 3.5%. The IMF has also refined its economic outlook for the remainder of 2024 and remains slightly more pessimistic in its outlook, estimating Ukrainian GDP growth at 3% (compared to its previous forecast range of 2.5% to 3.5%). The IMF also revised real GDP growth for 2025 down from 5.5% to between 2.5% to 3.5%, assuming the continuation of the war throughout the coming year and basing future observations on the prior impact and expected continuation of Russian attacks on Ukrainian energy infrastructure. Nonetheless, international expectations of continued growth in and of itself in the face of potential electricity shortages and infrastructural damage shows faith in Ukraine’s capacity for resilience, as demonstrated over the summer of 2024.

In terms responding to other economic challenges, Ukrainian inflation rose to 7.5% year-over-year in August 2024 and the NBU expects this trend to continue to a moderate increase of 8.5% by the end of the year. Reacting to rising inflationary pressures, the NBU has halted further reductions to the key rate, maintaining the key policy rate at 13.0% going forward. Despite these increases, inflation remains within the NBU’s forecast range and no additional monetary tightening is currently planned. The NBU’s forecast anticipates that a balanced approach to interest rate and exchange rate policies will help decelerate inflation to 6.6% in 2025 and bring it back to the 5% target by 2026.

This combination of moderate inflation and continued GDP growth in what is now Ukraine’s third consecutive year of war-time hostilities have contributed to maintaining investor confidence over the past nine months, as reflected by consistent levels of deal activity and increases in deal value compared with those observed during the first nine months of 2023.

As observed in previous editions of M&A Radar, resilient performance on the part of the Ukrainian economy is representative of both the resolve of the Ukrainian people and the effectiveness of the National Bank of Ukraine’s policies. Strong international support, as evidenced by substantial external financing, therefore reflects continued confidence in Ukraine’s economic prospects.

As noted in a recent interview with Forbes with Head of the NBU Andriy Pyshnyy, Ukraine has received USD24.6 billion in financial assistance in 2024 so far; with USD13 billion of contributions from the EU, USD3.9 billion from the United States, and USD3.1 billion from the IMF. Expectations also indicate that Ukraine is set to receive a total pledged amount of USD38 billion by the end of the year. Furthermore, member nations at the recent G7 Summit in Italy committed to providing Ukraine with approximately USD50 billion in financial assistance by year-end. The servicing of these loans is planned to be financed through anticipated extraordinary revenues generated by immobilising Russian sovereign assets held by the European Union and other jurisdictions, maintaining stable repayment schedules in the long term.

The Ukrainian government also reached an agreement with bondholders to restructure USD23 billion of international bonds, with the IMF expecting successful treatment of Ukraine’s Eurobonds to deliver “substantial debt relief, freeing up resources for priority spending areas.” The IMF's Extended Fund Facility, meanwhile, also recently completed its Fifth Review in September which enabled the disbursement of an additional USD1.1 billion in budgetary support for Ukraine.

Nonetheless, the unprecedented challenges posed by the ongoing conflict entail increasing military and war-related expenditures which puts intensifying pressure on the Ukrainian government to find additional sources of financing. In response, the Ukrainian government developed a draft law to increase some forms of taxes which the Verkhovna Rada voted on in early October. The expectation is that these taxes would generate UAH58 billion in revenues in 2024 and a further UAH137 billion in potential revenues in 2025.

However, there are still concerns that this imminent legislation may have a potential effect on an already vulnerable population, with Ukrainian businesses still grappling with the direct impact of Russia’s ongoing invasion. The Ukrainian government now faces a delicate balancing act: the need for increased tax revenue to secure vital financial support versus the need to protect citizens and businesses during this challenging time. Finding a solution that addresses both these needs effectively will be crucial for Ukraine's economic recovery and long-term stability.

In the meantime, the Ukrainian government is actively developing and implementing programmes to accelerate economic recovery. Key initiatives include the National Cashback programme, which offers a 10% reimbursement on purchases of Ukrainian-made goods to stimulate domestic demand, and a grant programme aimed at supporting young entrepreneurs under the age of 25 in starting or expanding their own small businesses. These grants are available through the existing eRobota programme which has provided over UAH8.5 billion to more than 18,000 entrepreneurs over the past two years.

As noted, ongoing focus on privatisation through the State Property Fund of Ukraine underscores the Ukrainian government’s sustained commitment to attracting increased investment and driving economic growth. Recent successes include the privatisation of two state-owned hotels, Kozatskiy and Ukraine, as well as recent news that the privatisation auction for state-owned titanium producer United Mining and Chemical Company concluded with a winning bid by Cemin Ukraine, a subsidiary of NEQSOL holding.

The domestic debt market in Ukraine has also reasserted its role in meeting the government’s financing needs, in an expression of confidence in the Ukrainian government’s capacity to repay financing in the future. As a result, governmental borrowings exceeded repayments on domestic government bonds by the equivalent of UAH105 billion between January–August 2024, with a surplus of the equivalent of UAH9 billion in August alone. Domestic resource mobilisation measures, combined with continued international financial support, should therefore enable the Ukrainian government to finance the budget deficit without the need to resort to inflationary sources of funding such as increasing the money supply.

However, in order to procure further financial support from foreign partners and accelerate Ukraine’s progress towards EU accession, Ukraine must successfully implement more structural reforms. Encouraging signs for international partners that reforms are on the right path include Ukraine’s decision in March to enact legislation to improve corporate governance in state-owned enterprises. This was a condition for continued financing under the IMF’s Extended Fund Facilities programme, as well as being essential for receiving support through the EU’s Ukraine Facility programme and advancing negotiations on formally joining the European Union.

Further required structural changes in the form of draft legislation to reform the State Customs servіce were adopted in September, with amendments to Customs service legislation before the end of October 2024 demonstrating that Ukraine has met another structural benchmark from the IMF’s Extended Fund Facility and continues to visibly comply with requests from international financing partners.

Potential destruction of energy infrastructure and generating facilities due to Russian missile and drone attacks presents a significant challenge for Ukraine in the upcoming winter season. However, the war has also served as a catalyst for accelerating domestic energy reforms. Despite these adverse conditions, Ukraine continues to make progress towards decarbonisation and strengthening its energy independence.

From 20 July 2024, the Ukrainian government introduced several programmes to support energy sector recovery and diversify energy sources, including interest-free loans for citizens and use of the existing "Affordable Loans 5-7-9%" scheme to support homeowners’ associations and housing cooperatives. These initiatives aim to facilitate purchases of alternative energy equipment and energy storage systems in anticipation of seasonal challenges.

June 2024 also saw 17 major Ukrainian banks sign a memorandum to provide preferential loans for energy infrastructure recovery projects, with financing ranging from EUR500,000 to EUR25 million. The loans feature simplified collateral requirements, favourable interest rates, and terms of 5 to 7 years. As of September 2024, the total approved loan amount reached UAH7.2 billion, of which UAH1.5 billion has already been disbursed at interest rates not exceeding 13.5% per annum.

In addition to government programmes, large Ukrainian businesses have initiated their own measures to secure energy supplies for the coming winter. Home improvement wholesaler Epicentr has been active in constructing solar power plants since 2023, with a current combined generating capacity of 9.4 MW of electricity and an additional 2 MW solar station planned to be operational by the end of this year.

Petrol station chain OKKO, meanwhile, has installed solar power generation facilities at 198 of its 400 petrol stations, meeting 15–55% of their daily electricity needs. As well as exploring options to acquire more solar power plants, OKKO signed a EUR60 million loan agreement with the European Bank for Reconstruction and Development (EBRD) in June to finance a new bioethanol production plant and further reduce Ukrainian reliance on imported petroleum.

Furthermore, the IFC and Galnaftogaz Group (operator of the aforementioned OKKO petrol station network) have signed a mandate letter to finance construction of a 150 MW wind power plant in the Volyn region. This project follows OKKO’s recent implementation of a EUR20 million 20 MW energy storage project, intended to be put into operation by the end of 2024. Based on experience and expertise gained through this initial project, OKKO further plans to supplement its capacity by a further 20 MW of storage capacity in the future, exploring opportunities to launch an energy storage facility in Lviv between 2025 and 2026.

Looking towards addressing immediate energy issues, private courier service Nova Post Ukraine has deployed the equivalent of 43 MW in diesel generator capacity across 3,800 branches and managed to secure 70% of its diesel supply through long-term contracts. To transition to more sustainable energy in the future, Nova Post Ukraine intends to install 10 MW of solar and gas power plants and cogeneration units at five terminals by the end of the year.

On a larger scale, NVP Energo-Plus recently announced plans to acquire a decommissioned 60 MW thermal power plant from abroad and relocate it in its entirety to Ukraine in a project with an estimated cost of EUR50 million.

In a similar vein, there are still signs of international investor interest in developing new power plants in Ukraine despite ongoing military risks. A wind power plant with a capacity of almost 60 MW has begun operations in the Lviv region as part of a joint venture between Ukrainian Eco-optima and the Czech renewable energy firm MND.

When considering the future prospects for Ukraine’s energy sector, the promise of unwavering international financial support and proactive domestic initiatives should continue to bolster Ukraine’s efforts to overcome the challenges posed by Russian infrastructure attacks, while advancing the country’s long-term energy security and sustainability goals.

Ukrainian military tech start-ups have continued to attract funding in 2024, sourced from both the Ukrainian government (through the Brave1 coordination platform) and international private investors, with growing interest in companies providing solutions for both direct combat roles and a wide range of support and asymmetric military capabilities.

Foreign defence companies are also increasing their presence on the Ukrainian market. German, French, and Canadian arms manufacturers (Rheinmetall, KNDS, and Roshel) have announced plans to establish production hubs for ammunition and repair facilities for military equipment in Ukraine. This marks the second such announcement by Rheinmetall after the approval of an ammunition producing joint venture with Ukroboronprom at the start of 2024. Defence-tech firms have followed similar trends of increasing investment and opening production facilities in Ukraine this year, with German company Quantum-Systems localising production of reconnaissance drones that have already been deployed on the battlefield.

These developments enhance Ukrainian defence capabilities with advanced technology from international players while providing a boost to the local economy in the form of manufacturing and supply chains, new jobs, and potential new markets for Ukrainian-made defence products in the future.

This interest and investment has been a two-way street, with Ukraine’s own defence-tech companies specialising in unmanned systems also increasingly expanding their operations abroad.

According to the Ministry of Economy of Ukraine, localising 50% of the defence budget and creating new joint ventures could help to increase Ukrainian GDP by at least 3.6%, with last year’s developments in the local military sector already contributing 1% to national GDP growth. Ukraine has also established itself as a global leader in drone production, both in terms of the quantity and variety of models produced.

With continued development of the domestic military-industrial complex, Ukraine has the potential to evolve beyond its established status as an agricultural and IT hub; building on the promise of a strong existing research and development and manufacturing base to finally establish the country as a recognised player in the global defence industry.