Cabinet of Ministers of • Economic vision - 3

• Macroeconomic policy - 12 • International economic policy and trade - 27 • Investment attractiveness - 43 • Agricultural industry - 69 • Energy sector - 92 • Mineral industry - 107 • Transport and infrastructure - 121 • Industry - 138

Source: Centre for Economic Recovery CabinetCabinet ofof MinistersMinisters of of Ukraine Ukraine MISSION OF UKRAINE’S ESTABLISHMENT IN THE SCOPE OF ECONOMIC STRATEGY To lay the groundwork for fulfillment available geographic, resource and human potential of the country to provide welfare, self-fulfillment, safety and freedoms of each citizen of Ukraine through innovative and advanced economic development

ECONOMIC VISION OF UKRAINE Free country with the high level of welfare and effective service digital country which is a reliable economic partner globally and an example of development for all countries.. The most attractive country of economic opportunities for investments and doing business; the best place for creative potential fulfillment, ideas realization and self-development.

UKRAINIAN STRATEGY To realize the vision it is necessary to (1) develop competitive conditions for business and investments and recover trust to the state, (2) win in competition for capital in the international market, (3) facilitate development of innovations and modernization of economic sectors to provide their competitiveness in the international market, (4) facilitate development of human potential and win competition for talents.

Source: Centre for Economic Recovery ECONOMIC VISION OF UKRAINE Free country with the high level of welfare and effective service digital country which is a reliable economic partner globally. The most attractive country of economic opportunities for investments and doing business; the best place for creative potential fulfillment, ideas realization and self-development.

ANALISIS OF ELECTORAL PROGRAM OF THE PRESIDENT (marked with bold type) AND PROGRAM OF THE PARTY “SLUGA NARODU” (“PUBLIC SERVANT” (marked with italic type)) Not fight but victory against corruption People’s rule through plebiscites Elimination of institutional corruption. Fair and independent courts, affordable 1 National identity and civil consent 6 trials Healthy and educated people Human is of ultimate value 2 7 Affordable healthcare. Education and science

Justice and equal treatment before the law Comfortable country 3 Cleared, updated and responsible authorities. Reform of 8 Reform of the social sector. Energy sector and tariff setting. the law enforcement authorities Infrastructure. Environment protection

4 Safety of the human. National safety 9 Digital country Safety and defence. Ukraine and the world Innovational economy

Wealthy citizens - prosperous state 5 Economic strategy. The best conditions for business

Source: Centre for Economic Recovery, electoral program of the President of Ukraine, program of the party “Sluga Narodu” (“Public Servant”) PRINCIPLES OF STRATEGY IMPLEMENTATION RED LINES: WHAT IS UNACCEPTABLE IN THE PROCESS OF STRATEGY IMPLEMENTATION 1. Direction • Termination of structural reforms • European and Euro-Atlantic integration • Growth of business over-regulation 2. Law (“inviolable private property”) • Growth of tax burden • Rule of law • Failure to comply with the Association Agreement with EU • Protection (and priority) of private ownership • Loss of independence by the , • Intolerance to corruption Antimonopoly Committee of Ukraine, Accounting Chamber of Ukraine, National Anti-Corruption Bureau of Ukraine 3. Economic freedoms (“entrepreneur is a pivot of economy”) • Sectors monopolization / tycoonization • Free and fair competition, equal access for business • Dishonest use of economic incentives • Development of business, innovations and talents • Departure from reform of underdeveloped markets • Barrier-free capital flow • Increase of fraudulent use of budget funds 4. Institutional competence (“the state which is capable to provide • development”) Loss of creditworthiness and credit rating • • Realism and subjectivity in determination of economic development Accumulation of critical debt volume directions • Decrease of transparency in state-owned assets administration • Integral economic approach, ability to combine liberal and institutional approaches effectively • Effective service digital country and compact state institutions • National security based on partnership and investments

Source: Centre for Economic Recovery Successful implementation of Ukraine's course for EU and NATO membership will have a number of side effects in the country, as well as at the regional and international levels.

1 Will increase the investment attractiveness and price of assets in its territory due to reduced risks to international capital

2 3 It will change Ukraine's role in the region as a guarantor of security, Ukraine will be a successful role model among all Eastern not a source of potential threats Partnership countries, which will strengthen its soft power

4 5 Ukraine's military-industrial complex and defense sector will Access to EU Structural Funds will allow modernization of social gradually reorient to NATO standards and will be included in the infrastructure and acceleration of living standards in Ukraine arms and defense chains of member states.

6 The country will improve indicators of gender equality and general respect for human rights and freedoms, which will change its image in the international arena

Ukraine's active involvement in 's One Belt One Road initiative should be based on the EU-Asia Connection Strategy. It should take place on a parity basis and change transport corridors and value chains, taking into account the interest of Ukraine.

Source: Centre for Economic Recovery Current level in the countries of the region Current level Target value1 (2019) Indice (2019) (2030) Turkey

Real GDP, bln USD 136 300-400 660 1 251

GDP per capita (USD) 3 659 7 300 – 11 200 15 595 9 042

Added value per employee, USD 8 286 from 18 400 to 26 000 41 675 44 153

Direct foreign investment (net inflows), bln USD 5.8 from 15 to 23 14.4 9

Export of goods and services, bln USD 67 from 120 to 160 324 236

Budget (expenditure), bln USD 53 from 90 to 140 176 249

Source: Centre for Economic Recovery, World Bank, cost.ua, Note: 1 – according to estimates of V.Vlasyuk “Economic recovery through industrial development:; А. Аmelin, V. Andruziv “Vision of Ukraine 2030”; indicators will be adjusted after the results of economic modeling Stage 1. Increasing competitiveness Stage 2. Innovative growth Stage 3. Sustainable development

2021–2022 2022–2025 2026 –2040 2041–2050

European Center for Providing incentives for business Development of digital, innovative, Attracting talent from around the Entrepreneurship, Science and development creative industries world Education, Creative Industries

Providing attractive conditions for Credit rating upgrade The best place to invest in The country is a creditor and investor FDI

Consolidation of the country's Development of modern industries, innovation parks Modernization of production position of prosperity and well-being

Introduction of automation and robotization of processes, digitalization of economy

Talent retention. Gradual return of skilled labor

Development of export of value- The country is an exporter of high- Expanding the geography of exports added products tech products and services

Introduction of modern higher and Development of innovation Reform of fundamental science vocational education infrastructure

Source: Centre for Economic Recovery Healthcare Rule of law

Education Regulatory environment

Culture Macroeconomic stability Ukrainian as

Stable government Environment protection policy

Safety High investment yield

Conditions for foreign Social security trade

Service support Vast internal market

Source: Centre for Economic Recovery Competition for Competition for goods and services Basis development Competition for human capital capital markets

National Entrepreneurship / Digital economy / Regional development economic Efficient Direct strategy: macroeconomic policy foreign targets and (monetary, fiscal, Development of capital intensive and investments Service industry roadmap taxation policy) innovative industries Manufacturing Agricultural Development and defence sector and food of internal Healthcare industry industry market of Efficient state demand Rule of law Education administration: Growth of IT sector Mining industry targets well-being of Domestic Culture cascading and investments the congruity of the International economic Creative industries and hospitality population strategy policy industry Social security Incentives for Infrastructural sectors export Efficient regulation the ofstate Creation reputation Safety Transport and Creation of Energy sector Environment offices to Public infrastructure

Development of the unified vision of ofthe thecountry unified vision Development protection implement the investments state policy Administration of the state-owned assets Cultural and value transformation

Source: Centre for Economic Recovery CabinetCabinet ofof MinistersMinisters of of Ukraine Ukraine ASPECT VISION: Ukraine is a country with efficient public finances and developed financial sector facilitating economic growth in the country

Connection with Direct impact – Budget (revenues and expenditures), Direct foreign investments strategic indices of Minor impact – GDP, added value per employee economic vision

Strategic objective 1. Provide rapid and stable growth 2. To provide stability of public 3. Maintain macroeconomic stability 4. To develop efficient financial sector 1 of the country's economy funds and improvement of the sovereign ratings

Strategic • Reach household consumption • To achieve credit rating BBB • To maintain inflation rate within the margins • To provide 100% transparency of property objectives of the expenditures at US$ 150-280 (S&P, Fitch, Moody's) specified by the National Bank of Ukraine in the structure for all entities of financial sectors aspect billion. (50-60% of GDP in 2030) • To maintain cyclically adjusted framework of inflation targeting policy • To decrease share of state-owned banks in • Provide a gross capital state budget deficit at a level of assets of banking system to 25% accumulation of US$ 60-140 2-3% of GDP • To achieve credit financing of banking sector to billion (20-30% of GDP in 2030) • To provide public debt to GDP GDP ratio of 50%. • Achieve current government ratio at a level of 30-40% • To increase share of non-cash transactions in expenditures of US$ 45 billion (~ • Ensure the optimal structure of total transactions up to 85% 15% of GDP in 2030) public debt in terms of interest • Increase savings per capita to $ 1,800-2,800. USA • Achieve net exports of US$ 9-23 rates, maturities and repayment • To achieve level of gross insurance premium billion (3-5% of GDP in 2030) currencies equal 300 USD per capita • To achieve capitalization of Ukrainian stock market equal 40-50% of GDP

Source: Centre for Economic Recovery 1 Preliminary estimates based on existing concepts of strategies; indicators will be adjusted after the results of economic modeling ASPECT VISION: Ukraine is a country with efficient public finances and developed financial sector facilitating economic growth in the country

Connection with Direct impact – Budget (revenues and expenditures), Direct foreign investments strategic indices of Minor impact – GDP, added value per employee economic vision

Strategic objective 1. Provide rapid and stable growth of 2. To provide stability of public funds 3. Maintain macroeconomic stability 4. To develop efficient financial sector 1 the country's economy and improvement of the sovereign ratings

High-priority steps • Improving the purchasing power of • Full transition to medium-term • Maintenance of efficient inflation • Provision of institutional capacity and the population by stimulating budget planning targeting policy coordination of efforts of market regulators economic development and • Reducing tax discretion and the level • Provision of floating exchange rate of and the Deposit Guarantee Fund improving welfare of tax burden the national currency • Clearing of all segments of financial market • Attracting foreign investment, • Improvement of effectiveness of from troubled institutions, restoring financial stimulating domestic investment public expenditure management sector credibility and improving the efficiency of • Carrying out effective verification of • Enhancement of financial sector transparency public investment social and pension payments and public access to information • Increasing the efficiency of public • Reduction of public debt risks • Development of technologies use, spread of finances non-cash payments • Stimulating the export of goods and • Implementation of three-level pension services and improving the balance provision system of international trade • Provision of insurance market development • Creation of virtual financial center • Implementation of national portfolio guarantees system • Development of modern infrastructure of capital market

Source: Centre for Economic Recovery 1 Specific measures are listed in other chapters of the National Economic Strategy 2030 Inflation rate (consumer price index), Unemployment rate (of workforce), Real GDP growth, 2019 3.2% 4.1% 2019 8.9% 2019

ROLE OF MACROECONOMIC POLICY IN ECONOMIC GROWTH IMPACT OF MACROECONOMIC POLICY IMPACT OF MACROECONOMIC Average growth of GDP over a 10-year period, % ON MARKET PLAYERS POLICY ON ECONOMY 9,0 • Population | Efficient macroeconomic • There is a relationship between the Area of the circle demonstrates policy facilitates job creation and level of macroeconomic stability 8,5 GDP per capita in the country increase confidence of population and long-term economic 8,0 (USD) about the future, encouraging savings development. Countries, which 7,5 in financial system pursue efficient macroeconomic policy, usually have higher and • 7,0 Business | Macroeconomic stability is more stable rates of GDP growth China a precondition for private sector 6,5 development and effective planning, as • Unsuccessful macroeconomic 6,0 it makes direct impact on business policy has made essential impact access to funding on economic development of 5,5 Turkey Ukraine. Over the last 20 years • 5,0 International investors | International reduced for investors usually make investments in 4,5 more than 15% twice, which was the countries with foreseeable caused not only by the Great 4,0 Kazakhstan macroeconomic policy Recession and military conflict with 3,5 • Government | Besides, macroeconomic , but also by ineffective Egypt stability has a positive impact on macroeconomic decisions of 3,0 Armenia Poland sovereign credit ratings allowing government and regulators 2,5 government to attract financing on • Shrinking of Ukrainian economy 2,0 beneficial terms was usually accompanied by 1,5 • International financial organizations | growth of unemployment, Brazil significant inflation and fall in 1,0 Argentina Provision of macroeconomic stability is an important precondition for support exchange rate. However, growth of Ukraine 0,5 provided to Ukraine by international institutional capacity of the 0,0 financial institutions National Bank of Ukraine over the 30 40 50 60 70 80 90 100 last years allowed maintenance of Macroeconomic stability, 1-1001 macroeconomic stability in 2020 notwithstanding the crisis triggered 1 Level of macroeconomic stability is calculated within the framework of Global Competitiveness by pandemic of COVID-19 Index and includes level of inflation and dynamics of public debt Source: Centre for Economic Recovery, Global Competitiveness Report TYPE OF POLICY ELEMENTS OF MACROECONOMIC STABILITY PRIORITY

0. Creating preconditions for economic development REVENUE 0. SUSTAINABLE ECONOMIC MANAGEMENT 1. Provision of public finance stability aiming GROWTH development of preconditions for private sector development EXPENDITURES STABLE PUBLIC FINANCE 1. Provision of sufficient revenues under reasonable tax MANAGEMENT burden 2. Maintenance of moderate share of GDP reallocation PUBLIC DEBT through budget and efficient use of budget Cooperation of MANAGEMENT expenditures to facilitate economic growth government and the NBU 3. Maintenance of moderate budget deficit and efficient MAINTAINING PRICE public debt management STABILITY 2. Maintenance of institutional independence of the MACROENOMIC MONETARY STABILITY POLICY National Bank of Ukraine to pursue efficient monetary policy STIMULATING 1. Maintenance of moderate inflation rate ECONOMIC GROWTH Cooperation in support of 2. Maintenance of floating exchange rate price and financial stability 3. Facilitation of sustainable development of financial FINANCIAL STABILITY sector for fundraising in the most advanced and innovative sectors of economy SUSTAINABLE 1. Provision of financial system stability DEVELOPMENT OF FINANCIAL SECTOR 2. Provision of development of all elements of FINANCIAL SECTOR financial sector of the country DEVELOPMENT

Source: Centre for Economic Recovery CHARACTERISTICS OF THE TAX SYSTEM COMMENTS

Comparison of basic tax rates in Ukraine and countries,% • In terms of the size of tax rates in Ukraine, in general, they are in the same range with European countries. However, tax administration remains an 23% 22% important issue. 20% 20% 20% 19% 19% 18% 18% 18% 17% 18% 15% 16% 15% • According to the World Bank, in terms of filling the budget and 12% extrabudgetary funds, the largest share in Ukraine is occupied by taxes on 10% 10% goods and services (including VAT), while income taxes (income tax, personal income tax) are relatively smaller part. Social contributions also play an important role (SSC in Ukraine accounts for about 20% of public sector revenues). Ukraine Georgia Kazakhstan Poland Romania Turkey • In the context of corporate tax in Ukraine there is an income tax of 18% and Income tax Value added tax levied on the company's profits. Despite the fact that the tax rate is Income tax for households generally consistent with world practices, the tax itself is quite discretionary, which, firstly, creates the preconditions for the pressure of tax authorities on business in determining the tax base and, secondly, creates opportunities for withdrawals in the jurisdiction with lower taxation, Share of various types of taxes and contributions in public finance revenues in 2018,% causing a shortfall in the state budget. • From the point of view of labor tax, despite the fact that the personal 56% income tax rate in Ukraine can also be compared with other countries, the burden on wages is also significantly affected by the single social 44% 40% 38% contribution to compulsory state insurance (22%) and military duty (1.5 %). 34% 37% 35% 31% 33% As a result, the total tax burden is> 40%, which leads to the shadowing of 25% 20% 21% the economy, the abuse of the simplified taxation system and rising 16% 19% 13% 15% unemployment. 3% N/A Ukraine Georgia Kazakhstan Poland Romania Turkey Income tax 1 Social contributions Tax on goods and sevices (ПДВ)

Source: Centre for Economic Recovery, the State Treasury Service of Ukraine, PwC, IMF CHARACTERISTICS OF BUDGET EXPENDITURES COMMENTS

Structure of Ukraine’s consolidated budget expenditures per economic classification in • In the context of economic rationale, the main part of Ukrainian budget 2007-2020, % expenditures is directed to current expenditures: salaries of public sector 100% employees, purchase of goods and services by the state, social provision for population etc. 80% • Efficiency of budget current expenditures may be improved significantly. Thus, in particular, notwithstanding the functioning of pay-as-you-go 60% pension system in Ukraine, more than 20% of expenditures for pensions are funded from budget. Implementation of the second level of pension fund 40% scheme, aimed by the country, would allow gradual decrease of budget expenditures for social provision. Besides, for example, digitalization and optimization of public sector may decrease budget expenditures for 20% support of the state institutions. • Instead, capital expenditures, that is public investments, which have high 2007 2009 2011 2013 2015 2017 2019 multiplicative effect and provide development of economy (for example, investments in infrastructure) amount to 10-15% of total expenditures of Comparison of budget expenditures structure per economic classification in Ukraine budget of Ukraine. and countries of the world in 2018, % 100% 100% 100% 100% 100% 100% 100% • In comparison with international practices, such level of capital expenditures is peculiar to majority of countries relatively similar to Ukraine, in particular to the countries of Central-Eastern Europe. Instead, lower level of public investments is peculiar for more developed countries (France, ). 88 89 90 86 88 95 94 • Notwithstanding the fact that public investment level in Ukraine complies with international practices, taking into consideration the need of the country in stimulation of economic growth it may be worth for Ukraine to 12 11 10 14 12 5% 6% increase the share of such expenditures, including growth for account of Ukraine Poland Lithuania Latvia Germany France budget deficit to a reasonable extent.

Current expenditures Capital expenditures (public investment)

Source: Centre for Economic Recovery, the State Treasury Service of Ukraine, OECD CHARACTERISTICS OF GOVERNMENT DEFICIT AND DEBT COMMENTS

Dynamics of revenues, expenditures and deficit of the state budget of Ukraine, bln UAH • For the last 15 years the state budget of Ukraine has always been deficient. Nevertheless, from 2015 to 2019 the budget was relatively balanced and volume of deficit didn’t exceed 3% of GDP, which is in line with the 1 000 0 Maastricht criteria. Growth of revenues and expenditures expressed in UAH -2 0 during the last years is associated first of all with inflation growth. -4 • -1 000 Coronacrisis has led to essential growth of deficit of the state budget -6 2020: from 2.1% to 7.5% of GDP, which is a record high for the last years. -2 000 -8 Draft of the state budget 2021 also has significant deficit amounting to 6% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 of GDP. Growth of deficit of the state budget is a necessary step to Revenues Expenditures and crediting Deficit (% to GDP) overcome consequences of the crisis used by the most countries of the world. At that, maintenance of high level of deficit leads to growth of the debt burden, therefore Ukraine will have to get the deficit level back to Public and government guaranteed debt of Ukraine, bln USD acceptable range. 100 1.0 • After crisis of 2014-2015 share of the state debt amounted to almost 80% 80 0.8 of GDP. Due to introduction of the debt management policy this indicator 60 0.6 decreased to 50.3%, which is in line with the Maastricht criteria in terms of 40 0.4 public finances. 20 0.2 • As a result of budget deficit growth aiming overcoming of the crisis caused 0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 by the pandemic, it is expected that debt burden on Ukrainian economy will increase. At that, in the medium term it is important to pursue efficient Extent of government debt Debt burden (% to GDP) policy of state debt management and decrease debt burden which will have a positive impact on credit ratings of the country and allow, on the one Comparison of sovereign credit ratings of Ukraine and countries of the world hand, making government borrowing on more favorable terms, and on the other hand, will facilitate business access to financial resources.

AAA AA A BB B CCC/CC SD/D Germany Estonia Poland Turkey Ukraine Zambia Venezuela

Source: Centre for Economic Recovery, Ministry of Finance, World Bank, Moody’s, S&P, Fitch CHARACTERISTICS OF THE NBU MONETARY POLICY COMMENTS

Dynamics of consumer price index and the NBU rate • In the recent several years since the crisis of 2014 the inflation in Ukraine 50 has reached a plateau and is now at the level of 2.3%. Since 2015 the National Bank of Ukraine has been implementing the inflation targeting 40 monetary policy, which is among the major causes of decline in inflation. 30 Achieving price stability and identifying medium-term inflation targets is the main goal of the Central Bank pursuant to this policy. At present the 20 inflation target makes up 5% +/- 1 p.p. The bank rate, which is the main 10 instrument of the monetary policy under inflation targeting, has dropped 0 down to the lowest level during the years of independence and makes up 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 6%. • The international reserves of Ukraine are gradually replenished due to the Consumer price index (December to December of the previous year, %) NBU transactions in the interbank currency market and the IMF loans, and Bank rate (as of the end of the period) at present make up USD 29 bln. A considerable reduction of the international reserves between 2010 and 2014 was related to the expenses Dynamics of UAH exchange rate and Ukraine’s international foreign currency reserves for maintaining the UAH fixed rate. In 2015, along with adopting the inflation targeting policy, a transition was made to floating exchange rate. Due to the 34,6 crisis of 2014-2015 and the transition to a new exchange rate formation 32,5 26,6 27,2 26,3 31,5 31,8 25,6 25,8 mechanism the UAH exchange rate was devaluated three times to its 26,5 21,8 original value from 2013 to 2016, however for the last 5 years the exchange 24,5 25,3 22,4 rate fluctuations have been insignificant. 20,4 20,8 19,4 18,8 11,9 15,5 13,3 29,0 7,8 7,9 8,0 8,0 8,0 5,1 5,1 5,1 5,3 7,5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Ukraine’s international reserves, USD bln Transition to floating exchange Weighted average annual UAH to USD exchange rate rate regime

Source: Centre for Economic Recovery, NBU BANKING SYSTEM CHARACTERISTICS COMMENTS

Number of banks in Ukraine and bank system asset value • Clearing of the banking sector, which started in 2014-2015, reduced the 1 494 number of banks almost by half (from 180 to 75 in 2019). The volume of 1 278 1 317 1 254 1 256 1 336 1 361 assets owned by Ukrainian banks is still growing, however, taking into 200 1 127 1 500 942 1 054 account the inflation, the growth for the last 5 years is insignificant. 150 880 1 000 100 • Since the banking sector clearing was completed, all banks has been 182 176 176 176 180 163 117 500 operating steadily. They are healthy and do not provide loans to related 50 96 82 77 75 0 0 parties. The most banks are operationally profitable, a large part of the 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 credit risk is reserved, the work with distressed and non-core assets is going on. Assets, UAH bln (right axis) Number of banks (left axis) • Though loan services are gradually restored, the private loans - GDP ratio is lower than in the countries of the Central and Eastern Europe. The high Domestic credit to private sector by banks as a percentage of GDP in 2019, % level of NPL, especially in state banks, low level of lenders’ rights protection 62% are the main factors preventing the development of loan services. 51% • 39% Competition in the banking market is limited by a large share of public 35% 34% sector. Since PrivatBank passed into the public property, the proportion of 25% 23% banks with private capital has made up 54% in the sector’s net assets and 63% in physical persons’ deposits.

Turkey Poland Lithuania Latvia Hungary Romania Ukraine • The level of using financial services in Ukraine is lower, than in countries in the Central and Eastern Europe – almost 40% of the population for the Share of population at the age of 15+ with bank accounts, % last two years has not used any financial services or products and only ~63% of Ukrainians have bank accounts. The proportion of electronic 93% transactions with payment cards is growing constantly and makes up 55% 87% 83% 75% 69% at present, however many Ukrainians continue using cards only for drawing 63% 58% out cash, which indicates that the population’s financial awareness is at the low level.

Latvia Poland Lithuania Hungary Turkey Ukraine Romania Source: Centre for Economic Recovery, NBU, World Bank CHARACTERISTICS OF NONBANK FINANCIAL SECTOR COMMENTS

Involved insurance premiums to GDP ratio, % • The insurance market in Ukraine is underdeveloped both according to the 2.8% insurance services consumption level and according to the volume of 2.6% 2.4% insurance companies’ assets. The penetration index of insurance services 1.9% in Ukraine, which is calculated as a ratio of involved insurance premiums to the GDP, makes up 1.4%, while in most other countries of the region this 1.4% 1.3% 1.3% index is higher, and the average index in the EU is equal to 5%. • The pay-as-you-go pension system is becoming a greater problem for the sustainable development of Ukraine with each passing year. The pension Poland Latvia Hungary Lithuania Ukraine Turkey Romania deficit reaches 40%. Ukraine does not have the second level of the pension system – obligatory funded component, and the proportion of the pension Pension assets to GDP ration in 2018, % assets is much lower than in the countries within the Eastern and Central Europe regions. 14% • Ukrainian stock market and the capital market are at the initial level of 9% their development. Capitalization of Ukrainian companies at the stock 7% market stays at a level of about 3%. In 2015-2019 the stock market was 5% 5% cleared, which made it possible to fulfill more unbiased evaluation of its 3% >1% state and scope. • At present the key barriers hindering the stock market development in Latvia Poland Lithuania Hungary Romania Turkey Ukraine Ukraine include overall low level of ownership right protection and the absence of the supremacy of law, underdeveloped marked infrastructure, Stock market capitalization to GDP ratio, % lack of free liquidity. Development of insurance and defined contribution pension system may give a momentum to the capital market development, 34% as it took place in other countries (in particular, in Poland). 27% 25% 20% 13% 10% 3%

Croatia Poland Turkey Hungary Slovenia Romania Ukraine Source: Centre for Economic Recovery, NBU, World Bank, OECD #0 – General challenges #1 – Public finances #2 – Monetary stability #3 – Financial sector

• Global economic crisis І The COVID- • Imperfect tax system І Tax • Low inflation level І Inflation is at a • Low level of loan services І 19 pandemic, global economy discreteness, high tax burden upon lower level than the NBU target due to Insufficient loan services to private collapse, irregularity of economic labor remuneration, opportunities for the decline in economic activity. sector due to high NPL level, recovery. taxation optimization. insufficient protection of lenders’ • High volatility of currency exchange rights, as well as a result of inflation • Slow economic growth І It is expected • Demographic problems | Growth in the rate І Currency exchange rate is very targeting. that Ukrainian economy will grow at a elderly population to working sensitive to the current payment slower pace, than that of benchmark population ratio and, as a balance account, as well as to external • Weak competition in the banking countries. consequence, increase in the demand loans of Ukrainian government. market | High proportion of public for pension provision. sector in the banking market. • Financial dependence of Ukraine І Dependence of economy upon the IMF • Threat of growing state budget deficit • Low financial awareness of the aid and migrants’ transfers, lack of І Necessity to increase state population І Insufficient coverage of direct foreign investment, trade expenditure, introduction of tax the population by financial services, balance deficit. incentives, linked to the necessity to large proportion of cash transactions. reduce the budget deficit. • Attribution of economy І Wide use of • Weak development of nonbank mass behavioral patterns, including • Low credit ratings І Sovereign ratings financial sector І Insufficient professional players in the market, of Ukraine are lower, than those of penetration of insurance and funded vulnerability of Ukrainian economy to competitors for capital. pension plan. investors’ mood. • Difficulties of financing budget deficit • Underdeveloped capital market І Lack І Necessity of gradual transition from of liquid funds due to concessional financing to market underdevelopment of nonbank financing. financial institutions, imperfection of legislation, underdeveloped market infrastructure.

Need in economy priming with Insufficient lending to economy, weak Global economic challenges, connected Vulnerability of monetary stability to simultaneous reduction of debt and development of nonbank financing and with vulnerability of Ukrainian economy. economic shocks. improvement of credit ratings. capital market.

Source: Centre for Economic Recovery ECONOMIC RECOVERY & DEVELOPMENT FRAMEWORK

Addressing current Fundamental change of Ukraine (2020) challenges functioning Ukraine (2030)

AS-IS TRANSIT TO BE

• Budget planning is conducted for the current and next three • Medium-term budget planning is functioning. • More than 13 million Ukrainians have switched to a funded pension years, according to the law. • Distributed profit tax is functioning, capital amnesty has system, all levels of pension provision work effectively • Tax system discreteness, high tax burden upon labor, shadow been fulfilled. • The state budget deficit makes up 2% of the GDP. economy and off-shoring. • Reduced tax burden on the payroll to 22-25% (excluding • The public-debt level makes up 30-40% of the GDP. • The proportion of capital expenditure in the budget makes up 11- personal pension savings). • Ukraine’s sovereign credit rating – BBB. 12%. • The defined contribution pension system has been Sustainable • The state pension fund has a shortfall of 40%. introduced. • The state budget deficit – 7.5% of the GDP (2020). • The state budget deficit - 2-3% of the GDP. public finances • The public-debt level makes up 50.3% of the GDP (2019). • The public-debt level makes up 40-50% of the GDP. • Ukraine’s sovereign credit rating – B. • Ukraine’s sovereign credit rating – BB.

Monetary • The annual inflation rate is lower than the NBU target as • The inflation level is within the limits defined by the NBU • The inflation level is within the limits defined by the NBU within the of September 2020 within the inflation targeting policy framework. inflation targeting policy framework. development • Floating exchange rate regime. • Floating exchange-rate regime. • Floating exchange-rate regime.

• Lack of the regulators’ institutionary capacity, lack of the • Institutionary capable regulators, the sector is cleared off • The public sector share in the banking system has been reduced to financial sector’s transparency. the troubled financial institutions. 25%. • Large proportion of state-owned banks. • The strategies for state-owned banks have been developed. • The bank lending to the GDP ratio has increased to 50%, nonbank Sustainable • Low level of private loans (23% of GDP). • The bank lending to the GDP ratio has grown to 40%. lending is widespread. • Low level of financial inclusion. • The financial awareness and the population’s access to • The proportion of electronic transactions makes up 85%. development • Low level of nonbank financial sector, capital market. financial services have been improved. • The level of insurance coverage – USD 300 per capita, of financial • Low level of new technologies’ penetration in the sector. • An open financial market architecture has been developed. • Accumulative pension system assets – USD 5 000 per insured sector persons • Capitalization of the stock market to GDP - 40-50% • Wide distribution of FinTech, SupTech&RegTech, digitalization of the sector.

Source: Centre for Economic Recovery NEED FOR CHANGES

Addressing current challenges

1. Budget planning | 1. To introduce medium-term budget planning at the national and local levels. 2. Tax system | 1. To replace corporate profit tax for distributed profit tax.2. Conduct additional analysis and determine the optimal model for the possibility of reducing the tax burden on the payroll with the definition of compensators for the budget 3. To fulfill capital amnesty. 4. To reduce the level of real estate tax discreteness, increase the level of budget revenues from these taxes. 3. Budget expenses | 1. Activate financing of public investment projects with a high multiplier 4. Pension system | 1. Determine the optimal concept for the implementation of a multilevel pension system. 2. Introduce the second level of pension provision (compulsory state pension insurance) according to the chosen concept. Fundamental change of functioning

1. Pension system | 1. To transfer all the population which has not attained the retirement age to the defined contribution pension system.

NEED FOR CHANGES Addressing current challenges

1. Institutionary capacity | 1. To maintain the NBU’s institutionary capacity and independence. 2. Inflation targeting | 1. To continue the inflation targeting policy. 2. To improve the efficiency of cooperation between the NBU and the Government in the field of ensuring macroeconomic stability and economic development. 3. Foreign currency exchange rate | 1. To retain floating exchange rate regime.

Source: Centre for Economic Recovery NEED FOR CHANGES

Addressing current challenges

1. Financial stability | 1. To introduce changes to the legislation and implementation of activities aimed at upgrading the quality of the financial sector regulation and improving the supervision approaches. 2. To insure the transparency of the financial sector through implementing the BEPS action plan, acceding to the international standard for automatic exchange of information. 3. To improve the instruments for ensuring the financial sector’s resistance to challenges. 4. To enhance the quality of corporate governance and risk management in the financial sector. 2. Macroeconomic development | 1. To develop and implement strategies for state-owned banks. 2. To take a number of actions aimed at supporting bank lending to the economy. 3. To upgrade the level of lenders’ and investors’ rights protection. 3. Financial inclusion | 1. Stimulate the development of payment infrastructure for non-cash transactions (including non-bank digital payment systems), create conditions for the development of remote sales channels for financial services, including ensuring access of financial institutions to state registers, new models of remote identification and customer verification etc) 2. To reinforce regulation within the area of consumers’ financial protection. 3. To start holding information and education activities for different target audiences in order to improve the population’s financial awareness. 4. Financial markets development | 1. To found an international financial center in . 2. To introduce regulation of cryptocurrency market. 3. To legislate issues related to introducing new and developing current financial instruments. 4. Make changes to the legislation and ensure the development of the institution of a qualified investor. 5. Innovation-driven development | 1. To introduce changes to the legislation, necessary for development of the open financial market architecture and overside. 2. To ensure open access for the regulators and participants of the financial market to public databases.

Fundamental change of functioning

1. Macroeconomic development | 1. To reduce the share of the state in the banking sector to 25%. 2. To take a number of actions in order to increase the scope of nonbank lending to the economy at a level not less than 5%. 3. To create favorable conditions for attracting long-term financial resources through investment funds, venture funds, insurance companies and non-state pension funds. 2. Financial markets development | 1. To introduce changes to the legislation and to take actions for development of nonbank financial services markets. 2. To create liquid markets of financial instruments and mechanisms/instruments for mitigating the financial risks. 3. To introduce changes to the legislation and to activate international cooperation for Ukraine’s integration into the world financial space. 3. Innovation development | 1. To create and put into industrial operation ІТ-platforms for financial services consumers. 2. To develop and implement unified databases, rules of information protection, procedure for information exchange among information databases, in particular via API. 4. To create a platform for risk analysis on the basis of operations, fulfilled via the NBU banking systems and information analysis in the information space. 4. To identify opportunities and to develop a concept for issuing digital currency of the central bank е-hryvnia. 6. To implement new ІТ-technologies by the financial sector regulators.

Source: Centre for Economic Recovery 1 Subdirection has been harmonized with the Strategy for Financial Sector of Ukraine until 2025 Cabinet of Ministers of Ukraine VISION OF THE AREA: Ukraine is an influential regional entity of international affairs, a reliable economic partner in the world, and an example of development for the Eastern Partnership countries

Connection with Direct influence – Export of goods and services strategic Secondary influence – Real GDP, direct foreign investment and budget (expenditure) indicators

Strategic goal 1. To ensure mutually profitable partnership 2. To increase competitiveness of Ukrainian 3. To modernize the border 4. To implement a balanced import with countries across the world and to goods and services, to create a positive image infrastructure and to ensure policy with a complex assessment of achieve expanded access to markets for for the country, and to ensure active presence efficient customs regulations potential impacts, which would goods and services of Ukrainian producer on international markets stimulate investment rather than consumer imports

Strategic targets • Strengthen European and Euro-Atlantic • Achieve total exports of USD 280-400 billion • Reduce customs clearance time • Get in the top 30 in the integration by 2030 to the European average for "International Trade" component of • Strengthen international economic • Achieve a share of high and average value Doing Business the "Doing Business" rating relations with strategic-partner countries added goods in exports of at least 60% • Achieve 100% implementation of • Increase a share of investment of Ukraine in priority sectors of the • Increase a share of SMEs in exports to 40% the item "Customs" of the imports to 30-40% economy (EU, USA, African countries, • The budget for export promotion in the Association Agreement between Arab countries of the Middle East, China) amount of 0.5-1% of the GDP Ukraine and the EU

Top-priority steps • Implementation of the Association • Update of the Export strategy • Arrangement of efficient • Abolishment of import duties on Agreement with the EU • Establishment of a positive image of a organizational and functional raw materials and materials not • Renewal of the Association Agreement Ukrainian producer abroad structures of the customs produced in Ukraine with the EU on Ukraine's enhanced access • Improvement of the overall national level of • Building and upgrading the • Restriction of protectionist to EU goods and services, capital and business internationalization through border infrastructure measures application that may labor markets, enhanced mobility under effective functioning of the Export • Ensuring efficient administration result in the increased cost of the New Pact on Migration and Asylum, Promotion Office and the Export Credit of the customs formalities other Ukrainian producers or and expansion of the sectoral integration Agency (customs services digitalization) become a reason for the • Signing of new investment, trade and • Strengthening of the existing Ukrainian • Coordination of the customs introduction of symmetrical / economic agreements with strategic business offices network abroad by regulation legislation with the EU asymmetrical measures against partners of Ukraine and ensuring effective strengthening the economic direction of standards Ukrainian products implementation of existing agreements diplomatic missions abroad (development of • Introduction of a mechanism for • Ensuring minimization of losses from economic diplomacy) anti-dumping investigation protective measures of foreign partners

Source: Centre for Economic Recovery -7% USD bln of goods export -16% USD bln of goods import 65% USD bln trade balance 27.6 (І half-year of 2020) 26.5 (І half-year of 2020) 1.1 (І half-year of 2020)

THE ROLE OF INTERNATIONAL TRADE IN A COUNTRY’S ECONOMIC GROWTH COMMENTS 1. Despite the high openness indicator of Openness Index*, 2019 Ukraine's economy (the ratio of total 270 The circle area shows the foreign trade to GDP is 90%), it is lower 260 country’s exports of goods and than in other countries in the region 250 services in 2019 (USD bln) Ireland (Poland, Slovakia, Hungary, etc.). 240 536,17 Slovakia Hungary 2. Intensification of foreign economic 180 115,04 167,94 activity is a necessary component for 170 The Netherlands economic growth. 160 848,87 150 3. Foreign trade is one of the most important sources of filling the state 140 Belarus Poland budget, as well as increasing foreign 130 44,59 352,37 120 currency inflows: in 2019 the budget Germany revenue from tax levied on international 110 Ukraine Croatia Denmark 45,61 1.993,18 trade and external transactions was 100 32,85 216,98 90 about USD 1.1 billion, and the revenue 80 from funds of foreign countries and Morocco 70 international organizations – USD 40 Kazakhstan Turkey United Kingdom 48,61 76,46 million. 60 926,34 295,82 50 40 30 20 10 0 0 5 10 15 20 45 50 55 60 65 80 85

*Openness Index: an economic metric calculated as the ratio of country's total trade, the sum GDP per capita, 2019, USD bln1 of exports plus imports, to the country’s GDP

Source: World Bank, Ministry of Finance, Ministry of Economic Development and Trade, Notes: 1 – the constant 2010 USD Centre for Economic Recovery INTERNATIONAL ECONOMIC POLICY AND TRADE ECOSYSTEM PRIORITIES

UKRAINIAN INTERNATIONAL ECONOMIC POLICY UKRAINIAN EXPORT POLICY 1. Development of international economic relations 1. Updating the Association Agreement between Network of 128 diplomatic missions of Ukraine Ukraine and the EU abroad and the Exporters and Investors Councils Export Credit Agency (ECA) - financing under the Ministry of Foreign Affairs of Ukraine (REI) and insurance of export activities 2. Review of existing and concluding new trade - representation of exporters abroad (operational The Export Promotion Office agreements logistics and promotion to markets) (EPO) – support of business 3. Joining regional projects ("One Belt - One Road", internationalization EXPORT TEN-T, Lublin Triangle, Three Seas Initiative) 2. Export promotion 1. Updating the current export strategy COUNTRIES – STRATEGIC 2. Improving the Ukrainian producer’s image PARTNERS 3. Internationalization of Ukrainian business (consulting in the regions and financing of International trade PURCHASING COUNTRY UKRAINE - EXPORTER agreements participation in international missions and exhibitions) 4. Ensuring the effective functioning of EPO and EKA 5. Strengthening of the economic direction of INTERNATIONAL SUPPLYING COUNTRY CUSTOMS UKRAINE - IMPORTER foreign diplomatic missions (development of ORGANIZATIONS economic diplomacy) (WTO, OECD, EU) 3. Development of the customs infrastructure 1. Modernization of border checkpoints 2. Acceleration of export-import operations (100% electronic registration)

IMPORT 3. Harmonization of legislation with the EU Importer’s bank and 4. Balance of the import policy insurance company 1. Restricting application of protectionist measures 2. Opposing the unfair competition

UKRAINIAN IMPORT POLICY

Source: Centre for Economic Recovery UKRAINE ON INTERNATIONAL MARKETS AND INTERNATIONAL ECONOMIC RELATIONS POTENTIAL COMMENTS

Comparing the volume of export and international economic relations of Ukraine, Poland, Turkey and Germany 1. Ukraine's exports of goods and services amounted to USD 45.6 billion1 in 2019. The main categories of exports in 2019 Ukraine were products of the agro-industrial Goods and services exports volume 46 bln complex and food industry (44.2%), in 2019, USD products of the metallurgical complex - (20.5%), products of mechanical Number of markets where the engineering - (11.0%) and mineral Ukrainian goods export volume 71 markets products (9.7%). exceeded USD 50 mln (in 2018) 2. EU countries remain to be the largest Quality of relations via current activity: trading partners of Ukraine. A share of these countries in the foreign trade Free trade agreements2 17 FTA turnover of goods and services of Ukraine was 40.1% in the first half of 2020. Markets with a duty-free 46 markets access of goods 3. Instead, products of Ukrainian producers Countries with a 109 are barely represented in the growing simplified visa regime countries markets of Latin America and Africa. A share of exports to both regions is only Poland 352 bln, 95 markets Turkey 296 bln, 132 markets Germany 1993 bln, 147 markets 7%.

51 FTA 20 FTA 39 FTA 66 markets 45 markets 66 markets 120 82 124 countries countries countries Goods export volume, USD mln: 50-500 150-500 500-1,000 1000-2000 2,000+

Source: International Trade Center Notes: 1 – the USD exchange rate is indicated as of 2010 2 - the number of FTAs does not indicate a number of countries covered by terms of the agreements, but only an amount of existing agreements EFFICIENCY OF UKRAINIAN EXPORT PROMOTION POLICY COMMENTS

Comparison of support for exporters in Ukraine and other countries across the world 1. Exporters' support in Ukraine is lower than in a number of comparable countries (Denmark, Volume of export сredits and Export Promotion Office Ministry of Foreign Volume of export, Poland, Great Britain, Turkey and guarantees, budget, USD mln Affairs budget, 2019, USD bln1 Germany) USD bln USD mln 2. Volume of export credits and guarantees in Ukraine amounts to USD 0.19 million, which is the 46 Ukraine 0.00 0.50 160,00 lowest figure in the region. For example, Poland has USD 5.4 billion in export credits and guarantees. 3. The budget of the Export Promotion 217 Denmark 1,83 69,00 525,00 Office in Ukraine (EPO) is USD 0.5 million, which is at least 11 and 213 times lower than budgets of the relevant institutions in Poland and Poland 5,40 11,50 700,00 352 in Germany respectively. 4. The budget of the Ministry of Foreign Affairs (MFA) in Ukraine is USD 160 million, which is at least 4 United Kingdom 5,74 6,52 1 290.00 926 and 43 times lower than budgets of MFA in Poland and in Germany respectively. 5. As a result, Ukraine's exports of Turkey 17,40 570.00 770,00 296 goods and services are lower than in comparable countries.

Germany 143.00 213,40 7 000.00 1,993

Source: European Economic and Social Committee, Export Promotion Office of Ukraine Notes: 1 – the constant 2010 USD UKRAINE GERMANY POLAND UNITED KINGDOM DENMARK

EXPORT CREDIT GUARANTEES Name ECA (does not function fully) KUKE UKEF THE EXPORT CREDIT AGENCY (EKF) ТА UNITIED LOAN GUARANTEES ~UAH 200 million (~ USD 7.1 million) USD ~143.1 bln (is equal to the total USD ~5-6 bln for export insurance GBP ~10.5 bln (funding export activity) USD ~20 bln (state guarantees of Budget approved in the State Budget of Ukraine volume of issued guaranteed export and GBP ~2.6 bln (funding projects of export loans) (approximate) to finance establishment of ECA loans) net growth) Private joint-stock company State institution, subordinate to the Polish insurance company, subordinate Governmental body – operational name Independent public company, owned Federal Government of Germany to the Polish Fund of Development of the Department for Guaranteeing and guaranteed by the state; Model and (PFD) and operates under support of the Export Credits, ECA of the United administered by the independent board subordination State Treasury of Poland Kingdom and the ministry department of of directors the United Kingdom government • Performs insurance, reinsurance and • Export credit guarantees, making it • Insurance of export credits, • Providing export financing and • Insures risks for supporting export provides guarantees pursuant to possible to attract financing for a including goods and non-trade insurance, activity and business expansion. agreements advancing export transaction coverage of risks for short-term, • Concentrates its activity on sectors • Providing guarantees for obtaining development • Ensuring profit for attracting medium-term and long-term projects and countries, where the support will loans for financing transactions, as • Takes part in implementing financing on favorable terms • Supplier’s credit and purchaser’s bring the highest economic benefits well as for its own clients abroad Functions programs of partial compensation • Competitive financing of bonds and credit for exporters and suppliers of all • Insurance for companies and banks of interest rate on export loans providing guarantees • Investment insurance sizes across the United Kingdom against potential financial and • Renders advisory services to • Bond insurance and issue of • Improving the awareness about political risks of trade with other exporters guarantees export financing and insurance countries • Internal insurance of credits support

• May apply for export credit • Duration of the insurance cover – to • Financing up to 85% of the contract Buyer’s guarantee: credit for foreign guarantees irrespective of the 15 years price buyers • Insurance payment of up to 90% of transaction volume. The insurant • Amount of coverage: up to 90% of • Period - 2-10 years; for project • Maximal guarantee - 85% the amount of a foreign trade Terms of pays the handling charge and investment cost may be covered financing – up to 14 years, plus the • Minimal first contribution - 15% contract or an export credit for the financing: sectors, premium on the grounds of risks in • This includes money liabilities, contract term • Amount - unlimited occurrence of non-commercial risks, small and medium exchange for receiving the coverage material expenses, intangible and • The minimal portion of domestic • Duration – up to 10 years and up to 85% for commercial risks business, • The amount of this premium legal assets, contributed by the production is 20% Guarantee of project financing: credit • Insurance of direct investments particular goods primarily depends on three factors: investor to the foreign business • When the entity is organized for for foreign buyers from Ukraine only if they create an etc. risk category of the OECD of the entity performing several transactions, it • Maximal guarantee - 80% export infrastructure for Ukrainian importing country, the contract acts as a credit facility • Amount – unlimited goods duration and the purchaser’s credit • Duration – up to 14 years rating • Debt / equity: 70/30 Recommendations An independent body subordinate to the Ministry of Economic Development and Trade, but managed by the supervisory board, which is elected and functions independently; provides guarantees and for Ukraine additional funding of export activity, and provides informational support and connection with banks in case when more costly investment is required

Source: European Commission, ECA, Ministry of Economic Development and Trade of Ukraine, governmental web-portals of Germany, Poland, United Kingdom and Denmark, KUKE, Export Credit Guarantees, UKEF, EKF UKRAINE GERMANY POLAND UNITED KINGDOM DENMARK

The Polish Investment and Trade Name Export Promotion Office Germany Trade & Invest (GTAI) BExA The Trade Council Agency (PAIH) • ~ USD 0.5 mln • USD 82.9 mln for GTAI and AHK. • USD 11.5 mln • USD 6.52 mln • The Trade Council budget amounts • USD ~213.4 mln in total for German to ~ USD 69 mln Budget export promotion • About 3\4 of the budget is covered (approximate) • Programs are funded by the Federal by MFA, the rest – by fee-based Ministry of Economics and Energy consultation services • State institution, subordinate to the • State agency subordinate to the • PAIH - State agency • Independent NPO, members – • Centers, agencies and platforms Model and Secretariat of the Cabinet of Federal Ministry of Economics and • COIE – systematic project of the national exporters, paying the subordinate to the Ministry of subordination Ministers of Ukraine Energy of Germany Ministry of Entrepreneurship and membership fee; the organization Foreign Affairs of Denmark Technology cooperates with the state • Absent • GTAI has over 50 representative • PAIH – Internal network is absent • Without regional representative • More than 20 representative offices offices in the world • COIE - 15 offices in Poland offices abroad • AHK is present in 90 countries across the world Regional coverage • Foreign missions are represented in over 220 countries across the world, which plays an important role for business in areas, where GTAI and AHK are not present • Education for exporters • Information for business • Building the brand “Made in Poland” • Arranging operation of the helpline, • Arranging functioning of the export • Analysis of foreign markets • Analysis of markets and industries • Support of export where specialists give advice as program Vitus, within the framework • Export consulting • Assistance in organizing global • Development of the brand and regards international trade of which a strategy of entering • Assistance in finding partners tenders support of Polish brands recognition • Providing a manual written by foreign markets is developed for (including organization of missions • Individual consultations and experienced exporters for exporters selected companies Functions and exhibitions) assistance in building contacts • Providing access to the third parties’ • Trade Council provides subsidies at • Participation in the creation and resources the level of 65% of the cost of the promotion of the Ukrainian brand commercial adviser in the selected abroad (Trade with Ukraine) country, who assists in implementing the strategy • Ukraineinvest • German Chambers of Commerce • The Network of Investors and • Invest-in Denmark • Chamber of Commerce and Abroad (AHK) Exporters’ Service Centres (COIE) • Danish International Development Industry of Ukraine • Foreign missions • Trade and Investment Promotion Agency (DANIDA) Section • Innovation Centres • Regional Business Development Centeres Recommendations A state institution subordinate to the Ministry of Economic Development and Trade and managed by the supervisory board, cooperates closely with Ukrainian diplomacy abroad and the representatives of for Ukraine the domestic business; have broad regional coverage for the local promotion of Ukrainian business

Source: Ministry of Economic Development and Trade of Ukraine, Export Promotion Office of Ukraine, European Commission, GTAI, AHK, BExA, The Trade Council, MFA, DANIDA EXPORT POTENTIAL OF BUSINESS COMMENTS

Key values of the Global Competiveness Index (GCI) in 2019, 1-100 1. According to the Global Competitiveness Index (GCI), compared to Poland and Ukraine GCI: 85/141 place Poland GCI: 37/141 place Germany GCI: 7/141 place Germany, Ukraine has the lowest values of the components, such as "Financing" (42/100), "Business Development" (57/100), and "Qualifications" (70 / 100). 2. SMEs in Ukraine account for a significant share of the economy: they generate 49.2% of the total value added, and 84 70 72 79 80 account for 62.9% of the overall 57 64 62 42 employment, compared to 67% of the employment in Poland and 54.4% of the total value added generation in Germany. Skills Financial Buisiness Skills Financial Buisiness Skills Financial Buisiness system dynamics system dynamics system dynamics 3. In 2018 the total amount of SME exports amounted to USD 11 billion, which is 6 The lowest value Higher values times lower than in Poland and 28 times lower than in Germany. Share of SME in Gross value added and export of goods in Ukraine, Poland and Germany in 2018, USD bln 4. There is a need in financing of enterprises. According to a survey conducted by the Center for International 62.9% 67% 59% Private Enterprise, 34%, 40% and 56% of respondents in micro, small and medium- sized businesses, respectively, expressed the need to attract financial resources in order to develop their activities. 54.4% 49,2% 52,9% 23,3% 25.4% 21.1% Value added Export Value added Export Value added Export

Total amount SME share xx% Share of those employed in SMEs from the total employment in the non-financial business economy

Micro-business: 0-9 employees, small business: 10-49 employees, medium business: 50-249 employees, big business: 250+ employees Skills: higher education and professional training; Financial system: level of financial market development; Business dynamics: companies’ competitiveness level

Source: World Economic Forum, OECD, Ukrainian Service of Statistics, Center for International Private Entrepreneurship, European Commission, Centre for Economic Recovery UKRAINIAN CUSTOMS INFRASTRUCTURE EFFICIENCY COMMENTS

Expenses and time for international trade, DB 2020, 1-100 1. The mechanisms of export and import of Ukraine are distinguished by significant consumption of time and 192,0 money during the reconciliation 158,8 162,0 procedures at the customs. 150,0 2. In accordance with the World Bank 100,0 data the time consumption for 87,6 85,9 87,3 75,0 80,1 customs processing and inspection of 66,0 export in Ukraine make up only 6 48,0 hours, however handling and approving 25,1 32,0 16,1 20,4 23,4 all the necessary documents take 6,0 about 32 hours, which is 1.5 times Time spent Expenses Time for Expenses for Time spent Expenses Time for Expenses for Total rating higher than the average value for at the customs, at the customs, reconciliation reconciliation at the customs, at the customs, reconciliation reconciliation Europe and Central Asia and almost 4 hours USD of documents, of documents, hours USD of documents, of documents, hours USD hours USD times higher than the average value for countries with high income. Export Import The values for Ukraine is worse than average The value for Ukraine is better than average Average for Europe and Central Asia 3. Since 2016 in Ukraine the “”Single Window” mechanism has been operating, which has considerably General indicator “International Trade”, DB 2020, 1-100 improved the work efficiency of Ukrainian Customs Service. Since the 1st quarter of 2020 99.7% of transit Ukraine occupies the transactions and 100% for import has th 74 place among 190 countries been fulfilled through this system, 100 100 100 100 100 93.8 96.5 which has significantly reduced the 87.2 88.4 91.6 91.8 80.1 85.6 time for customs formalities. However, as compared with other competitor countries, Ukraine is still falling behind in the indicators of customs efficiency Ukraine Morocco Ireland Canada Turkey Germany World Bank Belarus Slovakia Poland The NetherlandsHungary Denmark and occupies the last places according to the DB2020 rating. Higher indicator

Source: World Bank, Centre for Economic Recovery CURRENT BARRIERS FOR DEVELOPMENT OF INTERNATIONAL ECONOMIC POLICY AND TRADE

#1 – International economic relations #2 – Export promotion #3 – Customs infrastructure #4 – Import policy

• Slow pace of the EU Association • Export strategy | Low level of • Unclear structure | Constant change • Unfair competition | Lack of system of Agreement execution | Insufficient implementation of Ukraine's export of management, which hinders the non-tariff protection against low- institutional capacity of the strategy and the need to update it after reform process and makes business quality imported products. Goods, Government Office for Coordination of 2021 communication with customs more which are imported to Ukraine, are European Integration. Low level of complicated mainly registered in the internal • Insufficient awareness of Ukrainian responsibility of some authorities for customs terminals, whose operation is business about possibilities | There is • Lack of development strategy of non-compliance with the Agreement not regulated by the legislation. no unified system of collecting customs registration system | Complication of competition on the • Insufficient involvement in regional information about export markets. Absence of unified standards and domestic market, the growth of projects | There is no strategy for Lack of proposals and insufficient requirements for establishing, manifestations of unfair imports attracting and effectively managing demand for export consulting constructing and upgrading customs investment funds within regional infrastructure (in particular, border • Need of policy aimed at import • Absence of solid foundation for projects (eg TEN-T) checkpoints). Aggravation of substitution | High volumes of import promoting export development | Lack conditions of customs control and of goods with high added value • Limited access to foreign markets | of unified policy regarding business increase in duration of customs indicate that Ukrainian manufacturer Asymmetry of certain concluded trade promotion. Lack of efficient procedures. Complicated and cannot satisfy this need independently agreements, as well as the use of instruments for promotion of building separated procedures for registration within the domestic market protectionist policy instruments by up export volumes across the entire customs other countries, including in violation • Lack of funding | Key export infrastructure, which takes time of the provisions of international promotion institutions (ECA, EPO and agreements of Ukraine • High level of smuggling and diplomatic missions abroad, REI) lack corruption | Lack of effective sufficient funding mechanisms for control and punishment for illegal movement of goods across the customs border

Absence of clear vision of the Export Weak legal framework and mechanism The customs infrastructure and service It is necessary to introduce mechanisms Strategy and efficient implementation of for communication on a global stage of Ukraine are inefficient aimed at import substitution1 the required initiatives Source: Centre for Economic Recovery, АСС, Ministry of Economic Development and Trade, Customs Service Note: 1 – all measures must be in accordance with Ukraine's international of Ukraine, Ukrainian Institute for the Future obligations, including WTO MATRIX OF ECONOMIC RECOVERY AND DEVELOPMENT

Addressing current Fundamental change of Ukraine (2020) challenges functioning Ukraine (2030)

AS-IS RECOVERY TO BE

• Ukraine has been the WTO member since 2012, which • Trade liberalization advancing according to the • The legislation of Ukraine is harmonized with the relevant Development has considerably expanded capabilities for foreign trade, identified top-priority goals and sectoral integration legislation of the EU. Ukraine has been fully integrated into of international however there is asymmetry in the trade relations of are in process. the EU market. Ukraine. • Updating the association Agreement. • Ukraine has advanced trade relations with all the strategic economic • Need for reforms aimed at approaching the European • Updating trade agreements, reducing the partners. relations economic, social and political and legal standards. misbalance in trade conditions. • Communication has been built, and presence in all priority • Development of strategic partnership. markets across the world has been expanded.

• Ukraine has raw-material export model of development, • Increase in high value-added products exports and • Ukrainian companies are in the list of the leading exporters and the top priority sectors of economy and sales growth of export opportunities of enterprises, of countries in the selected priority markets. Ukrainian markets are not identified clearly enough. including growth due to increased state support. products complies with all the international quality standards Export • Ukraine, as a trade partner, remains unknown for the • The functioning of EPO, ESA, REI is well established. and are regarded as competitors to the leading international majority of countries across the world. products. promotion • There is no efficient network supporting the interests of • Ukrainian branding is recognized abroad. Ukraine and Ukrainian business abroad. • The network of exporters interests representations in the key countries of the world (on the basis of the MFA) is functioning effectively

• The customs infrastructure is neither efficient, nor • The customs administration is approved and has • The control efficiency has been improved, which has reduced Customs integrated, which brings about a need of double customs clearly defined functions. the level of corruption and smuggling. infrastructure formalities and redundancy of entered data. • Border checkpoint enlargement has been started. • There is an Authorized Economic Operator, approved and development • The time for passing customs procedures has been recognized by the Customs Service. Its existence and reduced considerably. functions are recognized by the EU.

• Although the ICIT1 has established a whole list of anti- • Setting new fair and changing the current rates of • The ICIT works efficiently, protecting the domestic Import policy dumping duties, the mechanism for monitoring the entrance duty. manufacturer against dumping from the importing countries. results of the implemented instruments does not work. • The efficient legislative framework has been • Fair customs tariff and non-tariff restrictions are set within optimization • Weak training of experts to negotiate tariff and non-tariff developed, aimed at implementing the mechanisms the framework of the current international agreements. restrictions on international platforms (EU and WTO). for protecting the domestic manufacturer. • Import substitution in favor of Ukrainian manufacturer.

Source: Centre for Economic Recovery, АСС, Ministry of Economic Development and Trade, Notes: 1 – The Interdepartmental Commission on International Trade of Ukraine (ICIT) Customs Service of Ukraine, Ukrainian Institute for the Future NEED FOR CHANGES

Addressing current challenges 1. Relations with the EU | 1. To advance sectoral integration with the EU due to fulfilling the tasks set forth in Section 5 (Economic and Industry Guidance). 2. To accelerate preparation to signing the Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) with the EU. 3. To enlarge the quota and / or to the reduce the standard custom rate as a result of the negotiations regarding updating of the Agreement. 4. To adopt a list of regulations from Annex XVII-2 to the Association Agreement, including introduction of insurance companies regulation in accordance with the Directive 2009/138/EC, known as Solvency II. 5. To implement on the capital markets of Ukraine the recommendations given by the International Swaps and Derivatives Association, Directive of the European Parliament and of the Council No. 2014/65/EC of 15 May 2014 on markets in financial instruments (MiFID II) and the Regulation of the European Parliament and the Council No. 600/2014 of 15 May 2014 on markets in financial instruments (MiFIR). 6. To ensure intensifying of Ukraine’s presence in the international markets of the defence industry complex, especially in armoured and aircraft building clusters. 7. To proceed improving the system of state regulation of military and technical cooperation and export control. 8. To intensify the activity on attracting the resources owned by the NATO trust funds, entering into offset agreements. 2. Participation in regional projects | 1. To identify pilot projects of the transport and logistic infrastructure development according to the main areas: working out the activities for implementing the Silk Road Economic Belt project; inland waterways (river harbours); Ukrainian railroad; regional harbours. 2. To introduce the electronic system for collecting customs duty (E-Tolling), the system of weighting motor vehicles in motion (Weight-in-Motion), the systems of automatic speed control. 3. To construct multilevel transport junctions between railroads and highways, 6 zones for recreation and parking along the roads Kyiv-Chop, Kyiv-Kharkiv, Kyiv-Odesa. 3. Trade and economic relations with countries across the world | 1. To conduct an audit of efficiency of current international agreements on free trade areas. 2. To revise the terms and conditions of the free trade agreements regarding equality and symmetry. 3. Do draft new free trade agreements on the grounds of economic research with consideration taken of their relevance for Ukrainian economy. 4. To develop the unified consistent policy for choosing the strategic partners. 5. To enlarge the agencies for Ukrainian products promotion in the African continent. 6. To ensure approval and implementation of sectoral and cross-sectoral programs to support Ukrainian exporters. 7. To improve and implement the FTA with Turkey (protect the domestic market from rapid import growth, especially in light industry).

Fundamental change of functioning

1. Relations with the EU | 1. To increase access to the EU market for Ukrainian goods and services (on a first-priority basis in those positions where quotas for export are applied. 2. To extend the effect of the ACAA to the products of other industry sectors. 3. To develop Ukrainian export potential in the sphere of the military industrial complex and dual-use goods, especially of aircraft building and and armoured cluster. 4. To ensure integration to the EU capital market. 5. To integrate the European transport standards into the Ukrainian infrastructure. 2. Participation in regional projects | 1. To implement infrastructure projects for the TEN-T network. 3. Trade and economic relations with countries across the world | 1. To create the mechanism for adjusting trade agreements and resolution of legal disputes regarding the customs policy of partner countries. 2. To increase Ukraine’s presence in African markets. 3. To revise the provisions of the free trade agreement with Israel in order to enlarge the number of trade groups with reduced duty. 4. To ensure promotion of Ukrainian manufacturers of products with high added value. 5. To improve the transit infrastructure for winning a competition with other corridors (Belarus, Baltic route).

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future NEED FOR CHANGES

Addressing current challenges

1. Export strategy | 1. To update and approve the export strategy, in particular in terms of identifying the top-priority sectors and sales markets. 2. To provide the necessary regulatory framework for implementing the strategic initiatives, sectoral programs aimed at promoting the domestic manufacturer in the selected markets. 2. Positive image of Ukrainian manufacturer | 1. To create a grant program for funding promotion campaigns about Ukrainian exporters’ success stories. 2. To share the information about successful practices of entering international markets. 3. To create information and analytical materials (value proposition) for trade partners abroad. 3. Representing the exporters’ interests abroad | 1. To develop a concept of work of overseas representative offices , which will render professional advisory services. 2. To develop the principles for functioning of the platform promoting the interests of Ukrainian business and to approve the budget for its functioning. 4. Internationalization of Ukrainian business | 1. Include entrepreneurship courses in school curricula. 2. Create and support a single export web portal to inform exporting companies about foreign markets. 3. Create an analytical center for the collection and analysis of information on foreign markets on the basis of the Office for Export Promotion. 4. To ensure the annual presence of Ukrainian collective stands at the world's largest exhibitions, to provide funding for trade missions. 5. Institutional support of export | 1. 1. Increase funding for the State Enterprise "Export Promotion Office" and the Council of Exporters and Investors at the Ministry of Foreign Affairs of Ukraine. 2. Ensure that the Export Promotion Office provides paid services. 3. Develop and implement sectoral internationalization programs. 4. Ensure the effective operation of ECA.

Fundamental change of functioning

1. Export strategy | 1. To identify the top-priority sectors of economy and sales markets. 2. Positive image of Ukrainian manufacturer | 1. To unify the Identity Guidelines, proper branding of all goods manufactured in Ukraine. 2. To held regular campaigns on promoting the Ukrainian brand of export goods and services in foreign markets. 3. To arrange regular functioning of the State Agency for Export Promotion as regards updating of the information and analytical materials on all the top-priority sectors of Ukrainian economy. 3. Representing the exporters’ interests abroad | 1. To reinforce the network of sales offices, covering all countries identified by the export strategy. 2. To ensure providing professional highly competitive advisory services to Ukrainian sales offices. 4. Internationalization of Ukrainian business | 1. To ensure increasing the interest of youth to entrepreneurship and international trade by way of including practical projects to education curricula of higher educational establishments and business schools, founding awards for entrepreneurship in cooperation with business representatives. 2. To arrange on-the-job training of students at the National Agency on Export Promotion with further training at the exporting companies. 3. To develop and implement pilot projects on creating business incubators and business accelerators for export-oriented companies in regional centers, and expanding these network to all regional centers. 4. To introduce state grant programs with a partial compensation of consulting services costs. 5. Institutional support of export | 1. To provide possibility for the State Institution “Export Promotion Office” to give financial support to potential exporters, including in the form of grants, in particular, for participation in export exhibitions, trade missions, conducting market research of potential export opportunities, other export promotion services. 2. To implement providing export loans to business via the existing ECA

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future NEED FOR CHANGES

Addressing current challenges

1. Upgrading border checkpoints | 1. To carry out works aimed at approaching technical and technological standards of building and functioning of Ukrainian border checkpoints. 2. To introduce the electronic system of reserving places in the queue in international border checkpoints. 3. To introduce the system of preliminary notification on emergency situations on the state borders by way of entering into the relevant Memorandum. 4. To introduce joint control at all border checkpoints. 2. Organizational and functional structure of the customs | 1. To agree upon and to fix the managerial personnel of the State Customs Service. 2. To develop a policy, system and legal instruments for creating the efficient risk management system, which is able to ensure balance between benefiting the trade and control functions. 3. To arrange development of the customs IT system. To implement the program of the customs data protection. 3. Customs control and register | 1. To set procedures for providing the binding tariff information (Binding Tariff Information - BTI). 2. To ensure facilitating of customs formalities for companies with high level of trust. 3. To develop the web portal for the access to the register of previous decisions regarding goods classification. 4. To put in place the system of efficient assessment and collecting customs fees. 5. To harmonize the customs legislation with the EU legislation and to adopt the Single Administrative Document (SAD). 6. To ensure mutual identification and implementation of economic operators by the EU and Ukraine. 7. To introduce the obligatory 100-persent electronic registration. 4. “Single Window” mechanism | 1. To ensure the development of the electronic information exchange system (“Single Window” system) and facilitating efficient administration of customs fees. 5. Integration of the Customs legislation with the EU | 1. To ensure resubmission and support of draft laws aimed at implementation of the EU Regulations No. 608/2013 and No. 1186/2009 for the register replacement. No. 4614 and No. 4615 of 6 May 2016 and facilitating their consideration by the Verkhovna Rada of Ukraine.

Fundamental change of functioning

1. Upgrading border checkpoints | 1. To build the border checkpoint infrastructure. 2. To ensure exercising joint control and the “single stop” principle. 3. To ensure setting the political arrangements and signing the necessary agreements with neighbor countries and the European Commission regarding joint operation of customs service. 2. Organizational and functional structure of the customs | 1. To create an Authorized Economic Operator, as in the EU, with the prospect of their mutual recognition. 2. To enhance the institutional potential of customs executive activity 3. To implement the declaration principle of compliance with non-tariff regulatory measures and to hold the customs applicant responsible for passing the particular types of control 4. To introduce financial liability for legal entities (customs applicants, customs brokers). 3. Customs control and register | 1. To upgrade the system of calculating the customs value and to introduce automation to customs formalities. 2. To arrange all customs processes and procedures in order to minimize the illegal actions of customs officers. To improve the procedures and methods of customs laboratories operation. 3. To revise processes and procedures, related to performing customs formations regarding the goods passing through the border. 4. The sanctions for violating the customs procedures must be proportional to the loss, caused by the state due to such violation. 5. To implement the New Computerized Transit System (NCTS). 6. To ensure mutual recognition of the results of the particular forms of customs control. 4. “Single Window” mechanism | 1. To develop the legislative framework, which will make it possible to provide all data on import, export and transit transactions in the electronic format to different public authorities and agencies with the help of the “Single Window” mechanism. 5. Integration of the Customs legislation with the EU | 1. To develop and adopt the relevant secondary legislation for the full-fledged program of adjusting the standards for Ukrainian customs service functioning to the EU standards. 2. To sign the Convention on a Common Transit Procedure and Convention on the Simplification of Formalities in Trade in Goods; program of the authorized economic operator. 3. To adopt the EU Regulation No. 608/2013 concerning customs enforcement of intellectual property rights. 4. To adopt the EU Regulation No. 1186/2009, which provides for the system of reliefs from customs duty. 5. To adopt the Customs Code of the Union (EU Regulation No. 952/2013) and its implementation and delegated acts. 6. To develop the regulatory framework for post-customs control and customs audit in accordance with the EU and the WTO standards. Source: Centre for Economic Recovery, Ministry of Economic Development and Trade, Customs Service of Ukraine, Ukrainian Institute for the Future NEED FOR CHANGES

Addressing current challenges

1. Customs tariff restrictions | 1. To ensure revision and assessment of the fixed new and current rates of entrance duty, which are defined by the Customs Tariff of Ukraine. 2. To ensure adoption of the respective laws by the Verkhovna Rada of Ukraine. 2. Taking anti-dumping measures | 1. To introduce mechanisms to increase the effectiveness of the Interagency Commission for International Trade anti-dumping investigations, which will not contradict international agreements and will not lead to an unjustified increase in the number of such investigations.

Fundamental change of functioning

1. Customs tariff and non-tariff restrictions | To introduce the system of assessing non-tariff regulation of imported products. 2. Customs tariff restrictions | To ensure introduction of tariffs pursuant to the terms and conditions of the renewed international agreements.

Source: Centre for Economic Recovery, Ministry of Economic Development and Trade, Ukrainian Institute for the future Cabinet of Ministers of Ukraine VISION OF THE AREA: Ukraine is a safe and competitive environment with highly profitable, diversified and sustainable investment opportunities

Connection to Direct influence – foreign direct investment (FDI), real GDP strategic Secondary influence – Export of goods and services, size of the state budget indicators

Strategic goal 1. To create the necessary conditions for attracting 2. To create the favorable ecosystem for accumulation 3. To ensure profitable nature of state investment foreign investment and multiplication of the domestic capital

Strategic targets • To improve the position of Ukraine in the • To increase capitalization of the Ukrainian stock market • To increase the volume of public finances, invested in international rating OECD country risk classification to 40% of the GDP state investment projects with positive financial return. th – to the 5 (in the nearest year), further on – to the • To enlarge the assets of the defined contribution • To enlarge the proportion of projects implemented th 4 risk group pension system to 25% of the GDP within the framework of state-private partnership in the • To improve the positions of Ukraine in the • Increase gross fixed capital formation to 20-30% of the total list of projects on public property management international ratings S&P and Fitch: to ВВ by the GDP end of 2022 and to ВВ+ by 2024 • To increase the FDI volume to 35-45 bln USD by 2030

Top-priority steps • Ukraine’s achieving the regional average credit • Introducing amnesty of capital • Introducing the information system for state budget rating • To replace profit tax for distributed profit tax management • Gaining competitive edge in the capital value • Creating the International Financial Centre Kyiv • Ensuring competitive justification of expenditure for • Creating state incentives for investment • Introducing the defined contribution pension system state investment activity • Arranging safe regulatory environment for • Introducing insurance medicine • Increasing transparency of the process of initiating the performing investment activities • Creating the two-level platform of shares emission for state investment policy SME and big business • Developing sectoral strategies for attracting direct • Involving public opinion into development of foreign investment • Consolidation of information about issuers and players investment projects of the stock market under the unified system • Providing potential investors with relevant and • Introducing the point system of projects assessment reliable statistical data • Creating a subdivision for support of project assessment, consideration of proposals and providing standardized data

Source: Centre for Economic Recovery FOREIGN DIRECT INVESTMENT COMMENTS

FDI and private money transfer, 2019, USD bln Attracting foreign direct investment (FDI) makes a direct effect upon the economic development. The 1.30 1.35 sectoral structure of FDI inflow to Ukraine is 31.97 dominated by industry (43% of all inflow in 2019), Lithuania 20 financial and insurance activity (20%), wholesale and retail trade (14%). 1.42 1.27 15.97 10.43 1. The level of direct investment attraction to Belarus 15 6.50 Ukraine is significantly lower as compared with Russia 464 neighboring countries. In 2019 Ukraine attracted 15.68 49 USD 5.83 bln of FDI, which is almost 3 times lower Poland 236 5.83 than in Poland. 2.09 2.31 2. However it is necessary to point out, than in 2019 Ukraine direct foreign investment in Ukraine were almost Slovakia 59 3 times lower than private money transfers. Besides, the scope of private money transfer in 7.69 6.91 2019 grew by 7% as compared with the previous 1.91 0.59 2.26 1.27 19 year (by USD 0.98 bln). 3. In 2019 the FDI to private transfers ratio in Ukraine Romania 97 Moldova 5 Georgia made up 37%, while in Moldova, Bulgaria and Romania – 31%, 64% and 90%, and in such 2.34 1.50 8.79 countries as Poland, Russia and Turkey - 246%, 306% and 1085% respectively. Bulgaria 52 0.81 Turkey 153

Cumulative FDI from 1991 to 2019 (FDI stock), USD bln: 4.5 - 20 50 - 100 Private money transfer1 20 - 50 100+ FDI

236 cumulative FDI to the country from 1991 to 2019 (FDI stock), USD bln

Source: World Bank, calculations of the Centre for Economic Recovery, Note: 1) Private money transfers (transfer by overseas workers, experts, relatives to Ukraine) IMF 2) FDI – foreign direct investment in payment balance (net return) APPROACH TO ATTRACTING INVESTMENT

Supply of investment Demand of investment

1. Overseas business (including bank institutions) 2. Foreign investment EXTERNAL DEMAND (countries – Ukraine’s competitors1 for investment) funds (mutual funds / 5. International 1. Risk 1. Central and Eastern Europe (Poland, Czech Republic and Hungary) hedge funds) financing and credit 2. Returns EXTERNAL 2. The CIS countries (Russia, Kazakhstan and Azerbaijan) institutions 3. Compensation of INVESTORS 3. Foreign venture funds 3. Balkan Peninsula (Greece, Serbia and Bulgaria) risk-returns / angel investors 4. Middle East (Israel, Turkey and UAE) 5. North Africa (Egypt, Morocco and Algeria) 4. Foreign investment companies (P/E)

1. National business companies (P/E) Sectors of economy (including bank 1. Agriculture 5. Transport and 2. National investment institutions) infrastructure 4. Infrastructure 2. Industry funds (mutual funds / 6. IT (stock market, 3. Energy INTERNAL hedge funds) 5. Private insurance and 7. Service sector international 4. Mineral industry INVESTORS pension funds 3. National venture financial center, funds / angel statistics) investors 4. National investment INTERNAL Projects / instruments DEMAND 1. Direct investment (greenfield or brownfield) (Ukraine) 1. State and municipal 4. Ukrainian Fund for 2. Financial investment (capital instruments, debt and enterprises Start-ups derivative instruments) 3. Capital investment (purchasing tangible and intangible 2. State and local 5. State Fund of Energy 5. Procedure and mechanism for assets) STATE authorities (state Efficiency selecting, governing 4. Venture investment (phases of seed, start up, early, INVESTORS investment projects) 6. Pension Fund and assessing expansion, bridge/pre-IPO) 3. State Fund of projects 5. State-private partnership (concession, property Regional management, joint venture, mixed) Development

Source: Centre for Economic Recovery Note: 1 – Three countries, which attracted the largest amount of foreign direct investment in 2017- 2019, have been considered in each region EXTERNAL INVESTMENT ATTRACTION PROCESS

1. ANALYSIS OF KEY INVESTOR 2. ANALYSIS OF COUNTRIES – 3. COMPENSATION OF RISK-RETURN 4. ENSURING SECTORAL DEMAND COUNTRIES COMPETITORS FOR INVESTMENT FOR THE INVESTOR OF INVESTMENT

• Ukraine obtains ~0.1% of the world • Ukraine falls behind other countries of • As compared with other countries of • Ukraine has neither a unified strategy amount of FDI, which is several times the region in the judicial system the region, Ukraine has a higher risk, of economy sectors development, nor lower than the other countries of the quality, credit rating, political and however it does not compensate it clear assessment of investment CURRENT region military stability with additional incentives for the needs STATE investor

• Creating campaigns on promoting • Consistent reforms of the judicial • Benefits for innovative industries and • Portfolio of projects for investors, Ukraine’s investment potential and its system and independent courts industries with high expenses in investment guides and functioning strong points scientific research advisory services for investors • Independent national bank for WORLD • Creating Ukraine’s positive image in increasing economic stability • Using special economic zones and PRACTICE the mass media creating industrial clusters

• Improving Ukraine’s investment • British law and justice • Fund of funds • Sectoral strategy image • Improving credit ratings • Reimbursement of CAPEX • Portfolio of investment projects • Promoting Ukraine at international according to sectors of economy OPPORTUNITIES • Reforming the service of statistics • Tax exemptions investment events FOR UKRAINE • Specific incentives according to • Special economic areas types of investors

Source: Centre for Economic Recovery AGGREGATE INVESTMENTS (FDI STOCK) IN 20181, USD MLN COMMENTS

Key investors EU countries USA China Middle East countries 1. 3 countries with largest FDI Key recipients inflows1,2 in 2017 – 2019 Netherlands Germany France USA China UAE Saudi Arabia Qatar have been reviewed in each of Poland Central and 21,393 4,976 50,342 4,976 307 46 20 - the regions. Central and Eastern Czech Republic Eastern Europe 12,255 1,397 31,619 1,397 716 24 2 - 2. Countries with the largest Europe Hungary 4,080 18,947 19,993 18,947 62 454 -0.35 -8 FDI: Poland, Czech Republic, Kazakhstan, Turkey and Russia 22,377 4,888 52,082 4,888 3,719 464 119 - Russia. The investment inflow CIS countries Kazakhstan 13,327 5,404 62,430 5,404 7,848 1,019 87 29 in Poland is higher than the investments in Ukraine by Azerbaijan 1,128 668 972 668 176 866 178 65 over 12 times, and Kazakhstan by 10 times. Greece 1,759 998 5,614 998 264 26 13 64 Balkan 3 Serbia 2,224 411 7,377 411 434 476 8 - 3. Largest investors in Ukraine Peninsula The Netherlands, Germany, Bulgaria 1,375 977 9,321 977 124 139 11 16 France and USA.

Israel 706 29,781 12,201 29,781 4,260 - - - Middle East Turkey 6,771 7,001 41,763 7,001 1,471 5,152 1,072 5,174 UAE ------

Egypt ------Northern Morocco 21,374 3,076 1,178 3,076 - 12,951 2,119 - Africa Algeria 2,939 6,961 520 6,961 845 617 - 502

Ukraine Ukraine 950 682 5,181 682 22 47 7 0

The legend: Colouring marks the relative investment amount from a specific investor country into the recipient country (e.g. from USA the largest investment amount was into Israel (marked green), and the smallest amount into Serbia (marked red))

Source: Economic Recovery Centre, UNCTAD Note: 1 – Foreign Direct Investments, 2 – some data is given for a different, more current available year since 2015, 3 – in 2018 from countries reviewed FDI BEFORE COVID-19 COMMENTS

FDI volumes (FDI outflow) in 2019 1. Capital proposal will drop significantly during the next couple of years, and enhance competition among countries for FDI. 2. It is anticipated that in 2020 the FDI volume will constitute under USD 1 trillion for the first time in a long EUROPE period of time. FDI volumes in 2021 will constitute a • FDI outflow: USD 474.9 bln total of 40% only , of the 2015 peak volume. Negative • % of the global volume : economic indicators in the coming years and slow 36.1% • TOP 3*: The Netherlands recuperation of investors` activity is capable of causing (125/13), Germany (99/27), more damage than the global financial crisis of 2007 – France (38/31) 2008. CHINA • FDI outflow : USD 141.2 bln 3. Global tendencies of the new decade will affect • % of the global volume : international production , principles of dispersion and 10.7% USA length of links for creation of value on a major scale. • No. of Fortune 500 • FDI outflow: companies : 124 USD124.9 bln 4. The main influence factors on international production • % of the global development are: volume: 9.5% • No. of Fortune 500 1. Technologies (automation through robotics, companies : 121 WEST ASIA** • FDI outflow : digitalization of supply chains, additive USD 35.5 bln manufacturing) • % of the global volume : 2.7% 2. Regulatory policy (increased number of • TOP 3: UAE government interventions and protectionist (16/0), measures in trade and investments, regional Саудівська level cooperation) Аравія (13/1), Катар (4/0) 3. Well-established production (adaptation of production processes and ready goods to well- established development objectives) source: Economic Recovery Centrer, UNCTAD, Fortune 500 *Volume of FDI outflow/No. of Fortune 500 companies **Western Asia: Bahrain, Iraq, Jordan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Palestine, Turkey, UAE, Yemen INVESTMENT HYGIENE IN INVESTOR COMPETITOR COUNTRIES OF UKRAINE COMMENTS

International Credit rating Current official Country risk premium | 1. International arbitration as an amicable Political stability arbitration S&P data Equity risk premium, % settlement mechanism for international disputes is prescribed by many international Poland А- Acts of corruption 1.25 | 6.48 law deeds, in particular the UN Charter. The CentralCentral and andEastern adoption of law in “Investment nannies” and Czech Republic Acts of corruption 0.89 | 6.12 EasternEurope Europe АА- implementation of the respective Hungary ВВВ Acts of corruption 3.23 | 8.46 mechanism in Ukraine will provide more favourable conditions for FDI, as the Russia ВВВ- Acts of corruption, sanctions 3.23 | 8.46 confidence of investors in the statutory regulation of conflicts will grow. CIS countries Kazakhstan ВВВ- Acts of corruption 3.23 | 8.46 2. Credit rating of Ukraine is currently lower Azerbaijan ВВ+ Acts of corr., military action 4.41 | 9.64 than that of its competitors and belongs to the highly speculative grade. Greece ВВ- - 6.61 | 11.84 3. Absence of fresh and reliable statistics data Balkan Peninsula Serbia ВВ+ - 5.29 | 10.52 in Ukraine makes it impossible to take the Bulgaria ВВВ Acts of corruption 2.81 | 8.03 decision on investing in Ukraine. 4. Political stability and corruption for the last Israel АA- Military conflict 1.03 | 6.26 5 years is an adverse incentive for investors. Middle East Turkey В+ - 6.61 | 11.84 On the other hand, military action as a risk factor may be counterweighted with high UAE АА No transparency 0.73 | 5.96 defence ability, as in the case of Israel. Egypt В Acts of corruption 8.09 | 13.32 Northern Africa Morocco ВВВ- Acts of corruption 3.67 | 8.9 Algeria - Acts of corruption 17.63 | 22.86

1 Ukraine Ukraine В Acts of corr., military action 9.56 | 14.79

Source: Economic Recovery Centre, Fitch 1 – The recently approved draft law on “Investment nannies” (Draft law №3760), which will provide for the support of national and foreign investors, if the investment amount exceeds EUR 30 mln, the term of implementing the investment project shall not exceed 5 years. The total support amount of the state shall not exceed 30% of the investment amounts in the project. IMPROVING UKRAINE’S CREDIT RATING COMMENTS

Ukraine’s credit rating by S&P by components and opportunities for improvement Ongoing challenges • Standard & Poor's credit rating for Ukraine stands at B, which is the level of credit ratings for the Central Africa Target Target long- Current Category assessment term Changes required states. assessment 2022 assessment • By its credit ratings, Ukraine lags behind Central European states (Poland and Slovakia) that are Ukraine’ main Rating B B+ A- competitors for investments. • Ukraine lags far behind in terms of institutional capacities, 1. Achieve a complete “freeze” or resolution of the military economic assessment, and regulatory framework for conflict in the East of Ukraine to remove its impact on the Institutional 5 4 4 economic, political, and financial stability in Ukraine. investments. assessment 2. Arrange a visit of analysts to demonstrate them the • There is a gap between real conditions and assessments of stability of the national security certain parameters by analysts. Ukraine can have better ratings even if the situation does not change. 1. Implement a national strategy of economic development Economic that includes a land reform, improvement of the business 5 5 3 Opportunities for Ukraine assessment environment, and restoration of affordable loans to ensure a robust GDP growth. • Due to the use of a special methodology for calculating the rating (has been calculated in the past six years), Ukraine External 1. Create new opportunities for raising financing and 5 4 3 has favorable opportunities for improving its credit rating in assessment diversification. 2021 and 2022. Fiscal • To improve its credit rating, Ukraine needs to ensure the assessment: 3 2 3 1. Reduce the debt-to-GDP ratio. stability of its fiscal and monetary policies, reduce debt flexibility and burden on the economy, secure stability of banks and results ensure transparency of institutions.

Fiscal • The other important factors include stabilization of a 1. Maintain the debt service ratio below 15% of the GDP. assessment: 5 4 2 geopolitical situation and macroeconomic stability of the 2. Reduce the state’s share in the banking sector. debt burden state. • Ukraine has to establish connections with analysts to 1. Continue with liberalization of foreign exchange regulation. Monetary ensure more objective assessment based on the existing 4 3 2 2. Maintain the inflation rate at 4% (+/- 1 pp) assessment 3. Ensure the independence of the NBU. methodology.

Sources: S&P Global Ratings, Centre for Economic Recovery COMPETITION ADVANTAGE OF INVESTMENT COMPETITOR COUNTRIES OF COMMENTS UKRAINE Human Nature Energy Electric energy1 | Logistics Domestic Access to 1. Human capital index in Ukraine is capital resources independence Construction2 DB index market3 markets5 higher than in a third of major competitors. Poland 0.75 60 | 39 3.54 38.2 | 592 | 1.7% 95 2. A large amount of nature resources Central and Czech Republic0.78 11 | 157 3.68 10.7 | 246 | 3.5% 83 is a short-term advantage, as Eastern Europe countries move toward highly Hungary 0.7 125 | 108 3.42 9.7 | 161 | 2.7% 64 intensive productions.

Russia 0.73 7 | 26 2.76 141.7 | 1,700 | -3.8% 112 3. High dependence of Ukraine on external supply, all sectors of the CIS countries Kazakhstan 0.75 67 | 37 2.81 19.0 | 180 | -4.0% 46 complex do not meet the criteria of Azerbaijan 0.59 80 | 59 2.45 10.2 | 48 | -8.6% 27 energy security and have a high degree of equipment wear. Greece 0.69 40 | 86 3.20 10.6 | 210 | -2.4% 70 4. Complex connection to electric Balkan Peninsula Serbia 0.76 94 | 4 2.84 7.0 | 51 | 1.8% 35 energy adversely affect investment potential, while it is easier to get Bulgaria 3.03 7.0 | 68 | 3.6% 0.68 151 | 43 64 approval for construction in Ukraine than in the majority of competitors. Israel 0.76 83 | 35 3.31 8.6 | 395 | 5.0% 55 5. Ukraine is lagging far behind in its Middle East Turkey 0.63 41 | 53 3.15 82.0 | 754 | -4.2% 132 logistics. UAE 0.66 1 | 3 3.96 10.0 | 421 | 0.9% 119 6. A large domestic market in Ukraine, but a persisting low consumer Egypt 0.49 77 | 74 2.82 104.1 | 303 | -0.2% 63 purchasing power. Northern Africa Morocco 0.5 34 | 16 2.54 35.5 | 119 | 1.5% 59 7. Sufficient access to foreign Algeria 0.52 102 | 121 2.45 43.0 | 170 | -4.5% 31 markets in Ukraine.

Ukraine Ukraine 0.65 128 | 20 2.83 42.04 | 154 | 2.9% 71

Index gaps: Rating positions: Index gaps: High > 0.69 High < 30 High > 3.20 Average 0.6 - 0.69 Average 31-90 Average 2.60 -3.19 Low < 0.6 Low > 91 Low < 2.59 Source: Economic recovery Centre, CIA, UN, Note: 1 – connection to electric power, 2 – obtaining construction permits, 3 – mln persons | GDP, USD bln | aggregate average yearly GDP growth for the last 5 World Bank, Aswath Damodaran years, 4 – without temporarily occupied territories AR Crimea, Donetsk and Luhansk regions, 5 – number of markets to which the export volume of goods of the country exceeded USD 50 mln in 2018 INCENTIVES FOR RISK-RETURN COMPENSATION IN INVESTMENT COMPETITOR COUNTRIES OF UKRAINE COMMENTS

Coordination body Fund of CAPEX Corporate tax Tax holidays Industrial parks 1. Almost all of Ukraine`s investment competitors have funds compensation Coordination bodies for investors. 2. The creation of a Fund of funds may attract FDI and Poland 19% (9% for certain kinds) public funds to distribute them to investment funds. For Central and Czech Republic 19% (5% for certain kinds) example, in Greece, the activities of such a fund are Eastern Europe aimed at competitive development of venture capital Hungary 9% funds focused on supporting SMEs. In Ukraine, the functioning of such a fund would allow investors to Russia 20% invest in the development of business activities with less CIS countries Kazakhstan 20% risk.. Azerbaijan 20% 3. CAPEX compensation takes place through reduction of taxation of the part of the investment amount and is a Greece 28% significant lever for reducing risks for investors. Construction in Balkan Peninsula Serbia 15% 4. The corporate tax rate in Ukraine is close to the regional progress average, inferior to the most liberalized tax regimes 10% Bulgaria (Hungary – 9% corporate tax, Bulgaria – 10% corporate tax). Unlike some countries in the region (Poland, Czech Israel 23% Republic), Ukraine does not have special tax regimes for Middle East Turkey 22% high-tech (IT and R&D) industries. UAE 0-55% 5. Tax holidays as a tool of tax benefits exist in Ukraine, but are not very effective. It applies only to newly created Egypt 22% (oil business 40%) micro-companies, and therefore does not encourage increased investment in the development of priority Northern Africa Morocco 31% sectors and industries with high added value. Algeria 26% 6. There are industrial parks in all the reviewed competitor countries. However, the success and share of such 2 Ukraine Ukraine 1 18% parks varies significantly from the entire industry. Industry-specific technology parks (for example, in Hungary, focused on the car industry) and those that 1 – In Ukraine CAPEX compensation is present in the agricultural industry only solve problems of lack of infrastructure in certain areas 2 – In Ukraine the 0% tax rate is applied to small entities, which show in their return gross annual income under UAH 3 mln and pay each (as in Israel or Morocco) are effective. employee a salary that exceeds two minimum salaries according to the legislation. Source: Economic Recovery Centre, KPMG ESTIMATION OF DEMAND FOR INVESTMENTS PER ECONOMY SECTORS

Economy AGRICULTURE INDUSTRY MINING ENERGY TRANSPORT ICT SERVICES sector

Total Ukrainian agricultural Ukrainian industry Ukrainian mining The energy sector Transport industry of Ukrainian IT sector Ukrainian housing investment sector requires a total requires minimum sector requires USD 7 requires minimum Ukraine requires USD requires USD 70 bln stock requires the demand of USD 50 bln to USD 20 bln by 2030 bln by 2030 to USD 25 bln of 30 bln by 2030 to of investments by attraction of USD 120 achieve the proper for the purpose of conduct geological investments by 2030 provide services in the 2030, which should bln investments to condition of land, providing the exploration works and to provide the growing demand for constitute 0.63-0.67% carry out full Agtech development modernization of enhance the mineral replacement of transportation: of GDP, to ensure renovation of the and stimulation of production facilities resource base. generating facilities infrastructure active growth entire old housing R&D and reduction of Separate financing is and modernization of modernization, stock emission release` necessary for the energy compliance with EU volumes infrastructure provisions

Directions • Purchase of land • Modernization of • Entering into • Upgrading the • Private • Attract investors to • Creation of funds for investing plots fixed assets of production sharing energy investments on the rounds A and B. and reconstruction production facilities agreements infrastructure terms of PPP programs • Modernization of • Development of between private (concession) and irrigation and drain • Development and • Replacing thermal new financing tolls, • Issue of securities, investors and a through markets` systems production of hi- generation facilities such as crowd issue of promissory state-owned liberalization tech products with funding, risk notes, bonds • Modernizing company environmentally • Funding from financing storages and • Implementing • Raising investments • Concession acceptable green international recycling equipment energy saving • Attraction of from international mechanism - and accumulation financing technologies of international companies and • Launch and obtaining energy organizations manufacturing venture funds investment funds development of exploration and • Ensure the effective • Target financing R&D Centres mining licenses • Raising own funds functioning of of developers • Production • Agreements with enterprises in automation mining license communal holders ownership

Source: Economic Recovery Centre ITHE PROCESS OF INCREASING DOMESTIC INVESTMENTS

3. ENHANCING THE EFFICIENCY OF 1. IDENTIFICATION OF CAPITAL 2. RETAIN CAPITAL 4. CAPITAL EXPANSION USING CAPITAL

• A large share of non-functioning • Lack of financial institutions • Income tax is inefficient, as only 5- • A small number of non-public pension capital – undeclared by citizens. governed by UK law and guaranteeing 10% of enterprises pay it, and 1% of funds. full protection of an investor`s entities provide 85 % of budget • A pension system that does not investments. revenues from Income tax. CURRENT encourage investment opportunities STATE OF • Faults in the legislation and the • The outflow of capital to offshore for non-public pension funds. AFFAIRS judicial system create obstacles for zones reaches up to UAH 300 bln domestic investment. annually.

• Many countries around the world • Countries around the world offer • Estonia ranks first in the International • Developed countries have fully (Italy, Germany, Spain etc.) have favourable conditions for investors, Tax Competitiveness Index. One of operating stock markets, they have managed to bring undeclared assets inter alia, understandable law (UK) the main reasons is an effective insurance medicine and the State to the regulated sphere of economy and a singe coordination body Distributed profit tax. provides efficient tools for pension WORLD through capital amnesty. accumulation by individuals PRACTICE

• Capital amnesty (zero tax return) • International Financial Centre Kyiv • Reducing income tax • Stock market • Distributed profit tax • Pension fund • Insurance medicine OPPORTUNITIES FOR UKRAINE

Source: Economic Recovery Centre INTERNATIONAL PRACTICE OF CAPITAL AMNESTY COMMENTS Actual budget Countries Years Rate Planned budget replenishment Assets declared Current state of affairs replenishment • Annual capital amount transferred to offshore ones, according to estimates, 2004- 15% (25% for 60% GERMANY EUR 5 bln EUR 1.1 bln - is USD10-11 bln. 2005 income) • According to estimates, from 1991 to 2017 the amount of EUR133 bln was transferred. 9% (or 6% for investment BELGIUM 2004 EUR 17 bln EUR 1 bln EUR 5.7 bln Opportunities for Ukraine of income in real estate) • Capital amnesty is used to quickly fill the budget, improve future tax compliance, reduce capital outflows, ARGENTINA 2017 10% to 15% - EUR 8.4 bln EUR 104 bln etc. Such practice is often used by developing countries as a result of legal framework faults. 10% (8% for foreign SPAIN 2012 EUR 2.5 bln EUR 50.4 mln - assets) • In international practice, there were both successful cases of capital amnesty (Italy) and those that did not bring the desired result (Spain). EUR 78 bln (capital 2.5% (or acquisition of 2001- outflow abroad ITALY government bonds at EUR 50 bln EUR 4 bln 2002 returned back to the • reduced rate) Rates range from 2.5% (Italy) to 45% country) (India). • For Ukraine a capital amnesty is primarily an opportunity to activate capital, which was not declared INDIA 2016 45% - EUR 3.8 bln EUR 8.5 bln previously or was in the shadow sector, and attract it for investing activity. 5%, 9% for foreign assets 2019 (or 2.5% for investment Yearly offshore losses of EUR10- Ukraine (draft - - in domestic government 11 bln. law) bonds)

Source: Economic Recovery Centre, Ekonomichna Pravda ATTRACTIVENESS OF COUNTRIES OF THE WORLD FOR FDI, INDEX GFICA1 COMMENTS Current state of affairs Share of domestic (capital) investments, % of GDP 1. No confidence in the legislation that hampers the inflow of capital. 75.9 70.4 59.1 2. Ukraine is 58 (of 109) of countries attractive for FDI, and Kyiv is not 54.9 54.5 48.7 46.4 45.5 44.8 41.9 among international financial centers. 38.8 35.0 Opportunities for Ukraine 1. Creating Kyiv International Financial Centre (IFCK), which will establish США Швеція ОАЕ Угорщина Польща Румунія Турція Казахстан Україна Панама Йорданія Кенія strict rules for issuing companies (a company that wishes to issue over 25% of the capital ) and become the guarantor of investment protection for investors. Comparative characteristic of IFC of Dubai and Astana 2. IFCK shall exercise legal protection under UK law. Country Financial Centre UK law No. of companies Rating GFCI2 3. One of the key tasks will be settlement of disputes between subjects of relations: Dubai International UAE 2 584 15 Financial Centre (DIFC) • Tax issues between the issuer and the State • Issues of unredeemed bonds between the issuer and the investor Astana International Kazakhstan 589 61 • Default under agreements between member of IFCK and Financial Centre (AIFC) counterparties 4. KPI of IFCK by 2025: Infrastructure of IFCK • Top 10 global investment and commercial banks have offices in IFCK. Council of IFCK • Functioning international infrastructure as from 2023. Ukrainian • Over 50 issuers trade in the stock exchange. jurisdiction Administration of IFCK Stock IFCK Court • Total amount of Ukrainian pension funds USD 5 bln, out of which Banks and IFCK exchange companies, which 50% of assets is invested through IFCK. attract capital for Accounting Clearing and • Investment accounts are opened for the amount exceeding USD 1 IFCK establishment of settlements of bln and with daily turnover of USD 1 bln. IFCK – nominee IFCK IFCK • USD 20 bln of direct investments attracted in the real sector of beneficiary of assets, economy. registered in Ukraine Investment Banks companies • USD 15 bln attracted as debt financing for Ukraine.

Source: Economic Recovery Centre, Ukrainian Institute of the Future, GFCI, GFICA Note: 1 – Global Foreign Direct Investment Country Attractiveness Index. 2 – The Global Financial Centres Index REINVESTMENT IN COUNTRIES AROUND THE WORLD COMMENTS

Share of domestic (capital) investments, % of GDP Current state of affairs 29 30 24 24 25 26 • Income tax is paid only by 5-10% of all companies. 21 21 22 23 18 19 • 1% of companies provide 85% of the amount of budget revenues from Income tax. • 25% of enterprises are loss-making. Ukraine Poland Israel USA Germany Latvia Romania Sweden Czech Turkey Hungary Korea • Accumulated losses amount to UAH 1.4 trillion as of 2019. • UAH 250-300 bln is withdrawn annually from Ukraine through offshore Comparative characteristic of effective rates and rates proposed in the draft law jurisdictions and other optimization schemes. Opportunities for Ukraine – alternative draft law Tax Effective rates New rates • The project provides for replacing the Income tax with distributed profit tax. Income tax 18% - • Through the distributed profit tax, pressure on businesses will decrease, there Distributed profit tax for individuals 0% 15% will be an incentive to keep official accounting and for companies to step out of the shadows, which will open up access to credit resources. Distributed profit tax for legal entities 18% 0% • In the future, for 5 years, companies will receive USD 4-6 bln a year of additional Distributed profit tax for non-resident legal entities 18+15% 15% working capital through the cancellation of the Income tax, and the annual volume of unshadowed profit will amount to USD 1.7-6.4 bln. Distributed profit tax (payments equated to - 20% dividends) Result of distributed profit tax • The introduction of the distributed profit tax will serve as the main investment Withholding tax for dividends 2.9-3.2% 0% project of Ukraine, because it will have the most tangible effect on the economy Personal income tax when paying dividends 5%+1.5% ВЗ 0% among all the proposed reforms. Additional investments in the economy after introducing the distributed profit tax and budget • Through the distributed profit tax, stable annual economic growth of 4-5% is revenues, UAH bln 292 possible, and the inflow of domestic investment alone can reach USD 20-30 bln. 232 232 232 232 232 232 • After the introduction of the distributed profit tax, companies will not need to 175 186 optimize costs, withdraw profits to offshore companies, etc. Part of the 126 84 102 104 released resource will be used for investment in the modernization of 41 production. • Additional investments may amount to USD 20-30 bln over 5 years. -16 -3 -34 -44 -44 -31 • Nominal GDP may grow by UAH 45-55 bln, and the additional growth rate of real 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E GDP – by 0.9-2.2% per year. Additional investments Budget revenues • The nominal salary may have an additional increase of 0.9-10.5% per year. Source: Economic Recovery Centre, Ukrainian Institute of the Future WORLD STOCK MARKETS COMMENTS

Comparison of the number and capitalization of national public companies of countries around Current challenges 1 the world • Capital outflows to markets with proper infrastructure. Market capitalization of national public companies, USD bln • Lack of confidence in the stock market and its tools, and in the national 1 000 000 currency and government agencies designed to protect the investors` interests.

The circle area shows the market • Lack of domestic “long” capital (funded pension system, long-term capitalization of national public savings of the population, etc.). 100 000 companies, % GDP • Complete isolation from the global capital market. USA • The market is fragmented – information about issuers is provided from different systems. There is no consolidated information about the market, 10 000 France and the population lacks financial awareness. Great Britain China • Lack of a unified liquidity center.

Brazil Germany Opportunities for Ukraine India 1 000 Russia Spain • Connection to global markets (including the investment account Italy Sweden accounting system) - the Currency Law of 2018 gives the National Bank the authority to create conditions for the free movement of capital. UAE Finland Poland • Opening of nominee holder accounts for foreign custodians and 100 depository institutions. Argentina Turkey Czech • Market development - simplified issue procedure for small and medium- sized businesses (two-tier platform: SME and large business). Hungary Nigeria Egypt 10 Romania Kazakhstan Norway Venezuela • Fintech and market tokenization development - stock market 2.0 (smart contracts). Ukraine Bulgaria • Amendments to the Constitution of Ukraine – introduction of the Ghana opportunity to conduct business in the country according to the laws of 1 10 100 1 000 10 000 Ukraine, the EU or the United Kingdom. • Introduction of the Distributed profit tax and funded pension system. Number of public companies, the shares of which are traded in the stock market

Source: Economic Recovery Centre, Index Mundi Note: 1 – A logarithmic scale is used in the graph. Parameter Concept 1 Concept 2 Concept 3 Entities providing pension NPFs, banks, insurance companies State Bank with MFI capital 25% + 1 (provision of risk management practices and services project financing) Additional budget costs Creating the necessary infrastructure for None (infrastructure is ready) Almost no costs (created on the basis of an existing bank, there is already an the administration of the pension system effective regulator represented by the NBU) Prerequisites for Strong state institutions, effective control Lack of ability to pay pensions to future retirees, The presence of a state-owned bank, an effective regulator (NBU), moderate implementation bodies, independent courts, moderate increasing the tax burden to ensure pension inflation inflation benefits Source of financing of SSC, personal income tax, additional Contributions to NPF by the employee (at the Employee contributions to the bank (at the expense of SSC) + individual accumulative contributions payments expense of SSC) contributions of some employees The amount of contributions to 2% - the company, 1% - the employee From 2% in 2021 to 10% in 2025 - the employee (due 3.5% (out of 22%) of SSC from social funds. insurance., SDRs in the range of 25-75 the savings system (2023 - 3%, 2030 - 4%, 2050 - 7%). to the reduction of SSC). thousand UAH., deductions from the salary of the employee: 1% from 2021, 2% from 2022, 3% from 2023, 4% from 2024. State regulator National Commission on Securities and Stock Market NBU Additional burden on the wage Present Absent fund Depositor protection Absent Deposits are 100% guaranteed by the state mechanisms Yield mechanism for investors Depends on the return on the investment portfolio Income regulation (inflation + a certain%, set by the Cabinet of Ministers) The share of funds allocated for Depends on the service provider 99% 100% minus the reservation rate (can be set by law at 0%) investment purposes Diversification of areas of use Domestic government bonds, corporate bonds, shares, deposits (may be additionally regulated) Commercial crediting of production (industry, agro, creative industries) - not less of borrowed funds than 80% of the portfolio, development of industrial parks / development of transport infrastructure - up to 15%, financing of startups - up to 5% The mechanism of protection Preservation of solidarity pension system Social guarantee Preservation of solidarity pension of pensioners on the solidarity system Impact of currency risks and Risk reduction due to asset diversification (return on foreign currency shares is adjusted for Reduction of devaluation risk through multicurrency bank accounts,% on deposit inflation devaluation) tied to inflation Additional positive effects Compliance with the purpose of stock market development Compliance with the goals of development and growth of the productive sector of the Ukrainian economy Additional risks Weak development of the stock market, fraud Commercial risks of the bank, borrowers, limited investment areas, costs due to excess liquidity, lack of global counterparts Source: Centre for Economic Recovery, Ukrainian Institute of the Future COMPARATIVE TABLE OF HEALTHCARE SYSTEMS COMMENTS Current challenges Country 1. Transition from old to new healthcare system3 in progress. The Ukrainian model is closest to the Type of system according to Universal Not universal Japanese model in terms of the organization of the coverage system. Coverage Public and primary private 100% 100% 99.9% 99.9% 90.6% according to Opportunities for Ukraine insurance type, Government or social 100% 100% 89.4% 99.9% 34% 1. Development of the stock market and banking % of the sector through the development of the insurance population Private 10.4% 34.7% 83.6% 62.7% companies` market. Expenses for Healthcare1, GDP 10.3% 11% 11.5% 10% 16.9% 2. Development of the field of healthy recreation and Governmen Public- care for the elderly, in which some insurance Type of financing Public Private t private companies invest. 3. Create a market of medical research and State, obligatory medical insurance 3,336 3,788 5,263 4,461 9,009 innovations of citizens 4. Increase the productivity of both doctors and patients. Voluntary medical insurance 236 142 182 388 479 Expenses of 5. Increase the working-age period of a person`s life, agents for Non-insurance expenses of reduce pension expenses, reduce expenses related 717 574 778 587 1,150 medicine households for medical care to the state of disability of a person, etc. according to 2 type2 Sale of pharmaceuticals 448 542 697 345 1,496

Total expenses for R&D, USD bln 42.663 13.42 10.21 16.5 194

Life expectancy upon birth, years 83.1 87.3 83.3 83.4 81.2

Source: Economic Recovery Centre, OECD, Comparing efficiency indicators [link] Note: 1- Healthcare, 2 – USD per person, current prices according to PPP, 3 – year 2012 FUNDS OF FUNDS – WORLD PRACTICE

Capital of COMMENTS Country Name of fund Description of fund Purpose of fund fund Current state of affairs

Created by the European • Unlike other countries, there are Investment Fund (EIF) in close Investments in VC, PE and no institutions in Ukraine that use Austria, cooperation with mezzanine funds, targeting future the “fund of funds” strategy, which Central Europe Czech Republic, governments of countries and stages and growth of investments. EUR 97 is based on maintaining a portfolio Fund of Funds Slovakia, national agencies. Joint investment with investment mln of other investment funds instead (CEFoF) Hungary, CEFoF invests jointly with funds for further development of of directly investing in stocks, Slovenia selected investors, based or SMEs and small and medium capital. bonds and other securities. functioning in CE countries. Opportunities for Ukraine

Created by EIF in close • The main objective is to catalyze cooperation with Bank the development of the private Joint investment with institutional Polish Growth Gospodarstwa Krajowego equity industry. investors in SMEs, at the onset of EUR 90 Fund of Funds (BGK) to stimulate Poland their development. Investments in mln • The Fund of Funds (FOF) will be (PGFF) investments in the share VC, PE and mezzanine funds. the main tool, which invests 25% capitals of entities, targeting of the capital of each fund that growth. received capital from high class investors. The basis of the Fund`s Investments for operational Fund Manager of activity is structuring and • The reserves of the National Bank programs: “Human resources Financial managing financial EUR 615 of Ukraine shall be the source of development”, Innovations and Instruments in instruments, co-funded by mln financing. Bulgaria competitive ability”, “Environment” Bulgaria European structural and and “Growth of regions”. • The operation mechanism of the investment funds. FOF: each PE fund, which gets a commitment from a limited list of Created by the Government high class foreign investors of India. Small Industries (EBRD, IFC, DEG, OPIC, FMO, KFW, Fund of Funds for Support of the development and EUR 1.2 Development Bank of India IFU etc.), gets an automatic Start-ups growth of innovation entities. bln (SIDBI) is an operational commitment from the FOF on pari India agency for FFS. passu conditions with high class foreign investors ERP-EIF is a joint initiative of Provision of venture capital and ERP-EIF VC Fund EUR 2.7 • The FOF profit gained shall return the German Federal capital for growth with focus on of Funds bln to NBU reserves with profit yield. Germany Government and EIF. German high technology companies.

Source: Economic Recovery Centre, EIF, SIDBI THE PUBLIC INVESTMENT PROCEDURE

2. TECHNICAL AND ECONOMICAL 3. COMPLIANCE WITH REQUIREMENTS 4. MONITORING THE PROJECT`S 1. PREPARING A CONCEPT NOTE FEASIBILITY STUDY AND CRITERIA IMPLEMENTATION

• Not all investment projects go • The CMU roadmap and industry • Lac of reliable and standard data and • The actual allocation of public through the competitive selection. strategies are short-term, while a realistic parameters for correct and investment projects` budget is majority of public investment projects consistent evaluation. usually lower that the budgets, • There are no statistical data on have a perspective of about 30 years. planned or requested by the project CURRENT concept notes rejected by the chief • Lack of human resource for proper No clear KPI. initiators. STATE OF administrator of budget funds evaluation process. AFFAIRS (GRBK). • Lack of financial and human • Low percentage of cost change • The selection procedure of projects resources of the initiators in the (change of 10% or more), at which the • Insufficient discussion of investment is under risk of political influence, process to develop a quality project. project is updated or revised. projects by the public. where Government members or Around a third of the feasibility politicians are involved in the process. • Lack of medium-term or long-term studies are returned to the initiators planning. for revision.

• Ministries submit candidates for a • Public and Private Infrastructure • Analytical hierarchy process which • There is system for monitoring the preliminary feasibility study (PFS) for Investment Management Centre gives points for various criteria is expenses of a public investment consideration by the Ministries of (PIMAC) carries out preliminary PFS applied to select projects (South project and increase of the cost of WORLD Strategy and Finance (South Korea and its detailed evaluation (South Korea). projects if necessary (South Korea). PRACTICE and the United Kingdom. Korea). • A specialized institution carries out • The efficiency of a project`s • Advisors may be engaged to prepare overall evaluation of all parameters realization is determined by a quality PFS. The project is evaluated and publishes the evaluation results evaluating processes (technical and by independent experts (EU). in report (United Kingdom). commercial results) and evaluating the project`s effect on the environment (United Kingdom).

• Conducting competitive selection • Increase funding for initiators to • Implementing a point-based system • Development of a medium-term for all investment projects develop quality projects of project evaluation to support National Investment Strategy autonomy of choice • Increase transparency by disclosing • Using realistic parameters when • Development of an informational OPPORTUNITIES full information and engaging evaluating projects • Creation of a new unit to support system for the state budget FOR UKRAINE citizens in project discussions project evaluation and consider management proposals

Source: Economic Recovery Centre PUBLIC INVESTMENTS COMMENTS

Comparison of expenses for social welfare and capital expenses in 2019 1. Total amount of social welfare expenses in – UAH 215 bln and equals 6.05% of Expenses for social welfare, % of GDP GDP. 34 2. In comparison, the average for OECD countries The circle area is– 20.1% of GDP, minimum of 7.5% in Mexico, 32 shows the share of capital expenses maximum of 31.2% in France, 21.1% - in Poland. 30 (investments) in 3. Total amount of capital expenses (acquisition of expenses Italy Belgium France Sweden basic capital and capital transfers)- 1.2% of GDP 28 compared to social 8% 11% 8% or UAH 43 bln. welfare expenses Spain Finland 26 (%) Germany 18% 9% 14% 22% Norway 4. Average of capital expenses for OECD countries 24 9% – 3.8% or 9% of GDP. Portugal Japan Hungary 22 9% 18% Poland USA 22% 20 The Netherlands 30% 17% 22% 18 19% Czech Estonia 23% 16 Lithuania 19% Canada 29% Latvia 33% 14 Switzerland 12 10% 19% 31% Ukraine (with current transfers) 46% Korea 10 Turkey 8 23% Mexico 6 20%

4 Ukraine (without current transfers) 2 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 Capital expenses, % of GDP

Source: Economic Recovery Centre, OECD, State Treasury Service of Ukraine Note: 1- Social security expenditures correspond to the OECD category of social spending, which includes cash benefits (pensions, maternity leave support, social assistance), social services (care for children, the elderly and the disabled) and social tax benefits (for example, tax expenses for families with children, etc.). THE STRUCTURE OF PUBLIC INVESTMENT ACTIVITY COMMENTS

Selection structure of Kinds of investment Approaches to funding from the State Amount of expenses Structure of Current state of affairs investment projects, % expenses Budget in 2018, UAH bln expenses, % 1. Investment expenses for projects, which do not go through competitive selection, constitute 33% of total investment expenses. Other expenses of Investment projects, included in the State 6,1 33 % investment Budget without competition WITHOUT 33% 2. Since 2015 Ukraine has COMPETITION improved its rating of managing public investments from C+ to D+ in 2019 according to the assessment of public expenses and PEFA financial reporting. Public investment Included in the State Budget through 4,8 26.1 % However, this rating has a projects competition as per the Budget Code significant potential for provisions improvement. Opportunities for Ukraine 1. All expenses on investment State fund of regional Included in the State Budget without projects must by justified development distribution according to projects, and 6,0 32.7 % according to economic, social, 67% environmental and other criteria, THROUGH after the budget`s approval selected through competition which are assessed during COMPETITION competitive selection of projects. 2. Such competition process shall State fund of energy Included in the State Budget without 1,5 8.2 % be obligatory for all investment efficiency distribution according to projects, and projects. after the budget`s approval selected through competition

Source: Economic Recovery Centre, Index Mundi ECONOMIC GROWTH AND DEVELOPMENT MATRIX

Overcoming ongoing Radical changes in the Ukraine (2020) challenges functioning Ukraine (2030)

AS-IS TRANSIT TO BE

• Ukraine receives ~0.1% of global FDI, which is a demonstration of low • Improved investment image and credit rating of Ukraine. interest from foreign investors. • The statistics service has been reformed. A favorable • Ukraine fares worse than its European counterparts in terms of the • Sectoral strategies for attracting FDI are in place. quality of a judicial system, credit ratings, political and military • A campaign to promote Ukraine’s investment potential is underway. environment • A fund of funds has been established. stability. • A portfolio of projects, investment guides, and properly functioning • CAPEX refund mechanisms and tax incentives for investors for foreign • High-risk investments that are not offset by additional incentives are consulting services for investors have been created. have been introduced. the characteristic for Ukraine. investments • Business can make contracts and resolve disputes under • Ukraine does not have a uniform sectoral development strategy or an alternative law. accurate assessment of the needs for investments.

An attractive • Approximately $10-11 billion are funneled into offshore zones • A fully-functioning capital market is in place, insurance-based • A capital amnesty has been granted. annually. medicine exists, and the state provides efficient instruments in ecosystem • IFCK has been created that sets out clear rules for issuers • Lack of trust in law and financial institutions guaranteeing the support of personal pensions. and acts as a guarantor of investments. for capital protection of investments. • Income tax has been abolished. • A rate of income tax has been reduced, and distributed profit • Corporate income tax is paid only by 5-10% of businesses, and 1% of • The introduction of tax on divested capital secured the inflow of invested by tax has been introduced. businesses account for 85% of income tax paid to the budget. domestic investments of about $20-30 billion. • The formation of a defined-contribution pension scheme has domestic • A small number of private pension schemes; no regulations on • Private pension schemes have invested additional $53 billion in the begun. investors personal pensions. economy.

• Complete disclosure of information about state investment • Insufficient discussion and public awareness about investment projects has been introduced. projects. • A scoring system is used to assess state investment • A state budget management information system has been created. Profit-based • CMU Action Plan and sectoral strategies are short-term. projects. • An efficient system for monitoring and adjusting the cost of state • Shortage of financing and human resources available to process state • Additional financing is provided to initiators to facilitate investment projects is in place. initiators and required to develop quality projects. development of quality projects. • A new agency for supporting the assessment of projects and review investment • Absence of standard reliable benchmarks for correct and consistent • A medium-term National Investment Strategy has been of proposal has been established. assessment. programs formulated. • The National Investment Strategy is updated every five years. • Only 33% of state investment projects are selected by a competitive • All state investment projects are selected by a competitive procedure. procedure.

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute of the Future NEED FOR CHANGE

Response to ongoing challenges

1. Providing incentives to external investments | 1. Develop sectoral strategies for encouraging direct foreign investments. 2. Ensure the availability of relevant and reliable statistics data by reforming the statistics service. 3. Create conditions and introduce a mechanism for making contracts and resolving disputes under alternative law. 4. Create campaigns to promote Ukraine’s investment potential and its strengths. 5. Ensure compliance with formal criteria (inflation rate, tax burden, etc.) of sovereign credit ratings to improve Ukraine’s position there. 6. Develop and introduce a mechanism of tax incentives for investors (tax holidays, compensation of a portion of capital investments, special tax regimes). 2. Identification of capital | 1. Declare a tax amnesty on undeclared profits and capital extracted abroad for Ukrainian nationals. 3. Retention of capital | 1. Make a decision to establish International Financial Center Kyiv (a Presidential decree is a priority). 2. Establish a project office. 3. Engage foreign partners in the implementation of the project. 3. Register IFCK and allocate a site for the Center. 4. Create a regulatory framework for IFCK based on English law. 4. Improving efficiency of capital | 1. Draft and pass into law a bill providing for the replacement of income tax with distributed profit tax. 5. Capital strengthening | 1. Draft and pass into law a bill on a defined-contribution pension scheme in Ukraine. 2. Draft and pass into law a bill on insurance-based medicine in Ukraine. 3. Create a two-level platform (SME and big business) and introduce a simplified procedure for share issue by SME. 4. Create a system that will consolidate and provide information about issuers and capital market players. 6. Management of state investments | 1. Introduce the development of the National Investment Strategy for five years with clear and measurable KPIs. 2. Develop state budget management information system that includes fiscal measures for financing the budget, budget performance, and reporting. 3. Ensure competitive feasibility study of the cost of state investment activities: all projects have to be selected by a competitive procedure. 7. Development and economic analysis of investment projects | 1. Improve the transparency of the process for initiating state investment projects through complete disclosure of information and contents of concept papers that have been rejected. 2. Raise public awareness about state investment projects. 3. Heighten liability of public treasurers for state expert examination. 8. Selecting investment projects | 1. Create a scoring system (an analytic hierarchy process) for assessing projects to ensure the independent choice. 9. Monitoring investment projects | 1. Review cost change percentage at which a project is updated or reviewed that will be aligned with macroeconomic dynamics and inflation rates. Radical changes in the functioning

1. Providing incentives to external investments | 1. Create the fund of funds financed by the National Bank of Ukraine. 2. Ensure the ability of an individual institution to maintain consulting service for investors. 2. Capital strengthening | 1. Ensure the dissemination of information about the capital market and raise public financial awareness by creating informational platforms, data publicity, etc. 3. Selecting investment projects | 1. Create a new and strengthen the existing division of the Ministry for Economic Development and Trade responsible for supporting a process of project assessment and review of proposals that will ensure standard data and parameters and will function as an office for coordination and quality assurance during feasibility studies.

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute of the Future COMPARATIVE CHARACTERISTICS OF EXISTING AND POTENTIAL OPPORTUNITIES FOR INVESTORS IN UKRAINE

SOLUTIONS FOR CURRENT STATE CONCEPTS ALREADY PROPOSED ("On state support of CONCEPT WITHIN NES 2030 INVESTORS investment projects" and other bills)

International arbitration Settlement of disputes under the laws of Ukraine The possibility of choosing international arbitration to settle Ability to choose international arbitration to settle disputes disputes is offered

CAPEX reimbursement It exists only in the agro-industrial sector Exemption from import duty on new equipment is proposed Ability to recoup capital investment in most sectors of the economy

Corporate tax Limited incentives for companies to reinvest capital No suggestions for improving the income tax Replacement of income tax with distributed profit tax

Capital de-shadowing There are no mechanisms for settling shadow and The concept of capital amnesty is proposed The concept of capital amnesty is proposed undeclared capital

Tax holidays Only exist for small businesses Investors who privatize state-owned enterprises for more Tax holidays of limited duration in most sectors of the than 10 million US dollars are offered 5 years of tax vacation economy

Industrial parks The register of industrial parks exists The preferential right to use the land plot of state or Expansion and creation of new industrial parks, creation of communal property for realization of the investment project attractive conditions for doing business within the industrial is offered park

Fund of funds Absent Absent Creation of the State Fund of Funds

International Financial Absent Absent Establishment of the International Financial Center Kyiv, Center which will operate under British law and become a guarantor of investment protection for foreign investors

Source: Centre for Economic Recovery - present - available in part, do not cover all sectors or modified - absent Cabinet of Ministers of Ukraine SECTORAL VISION: UKRAINE is one of the global centers of food security, a global leader in supplying food products with high added value and technology- intensive services for the agricultural sector.

A link with the Direct impact: Real GDP, Export of goods and services, Value added per employee strategic indicators of Secondary impact: Foreign investments, Budget economic vision

Strategic goal 1. Ensure an incentive-based and 2. Provide market players with 3. Create a favorable environment for 4. Find a balance between 5. Promote the 6. Optimize the ecosystem for advisory state policy quality comprehensive producers to enable them to procure production of high- and low- development and complete marketing products on the infrastructure (land, irrigation, affordable supplies margin products to improve support to the environment domestic and foreign markets financing, education, and science) the profitability of the sector for the functioning of the food processing segment

Strategic goals • Attract $25 billion of FDI in 10 years • Ensure cadastral recording of at • Establish not less than five R&D • Increase productivity of the • Increase the share of • Increase the volumes of export of • Hire 21 trade attachés least 90% of agricultural land and centers agricultural sector twofold processed products in the agricultural products up to • Hire 1,000 advisors for 1,470 territorial water resources • To raise no less than $100 million to and reach the indicator of agricultural sector from $45 billion by 2030 communities • Provide sprinkling / irrigation finance Agtech strartups $100 thousand per employee 21% to 50% • Achieve the indicator of the export systems to additional 1 million ha • Increase the quantity of domestic • Reduce the share of raw • Increase the number of revenue per ha of $1,500/ha of land production of seeds up to 70% of the materials production in the new clusters up to 12 • Increase the export of organic • Increase the area of certified offering on the market that satisfies GDP down to 50% • Increase the number of products up to $1 billion organic land to not less than 3% 30% of the offering of domestically • Achieve the 5% indicator of vertically integrated • Increase the export of technology- of total agricultural land manufactured agricultural equipment cultured meat production of cooperative clusters to 60 intensive services up to $1 billion and machinery the total meat production • Reduce logistics time twofold by • Achieve 30% growth of crop yield per 2025 ha • Achieve the implementation of smart farming on 30% of land

Priority steps for • Reserve the functionalities of • Digitalization of information on • Creating a competitive environment • Striking a balance and • Creating conditions for • Fostering partnerships for stable achieving the sectoral formulating and implementing the state soils, land and water resources on the domestic market of chemical optimizing the distribution of increasing the production barrier-free marketing of products objectives policy in the agricultural sector for a within the geospatial data fertilizers shares in accordance with of processed products • Increasing consumer awareness separate Ministry infrastructure • Encouraging the development of R&D the potential of crop farming • Ensuring the availability of about the advantages of • Institutional reform of the State • Continuation of the land market centers established by global and animal husbandry high technologies and consuming certain product groups Geological Cadaster • Guaranteeing safety, preservation, manufacturers of resources for the • Promoting the cultivation of relevance in created • Promoting the Ukrainian • Transition the functionality of State and maintenance of the quality of agricultural sector (fertilizers, seeds, high-margin crops products agricultural sector on foreign Service on Food Safety and Consumer land and water resources forage, machinery, etc.) • Encouraging the restoration • Creating synergies markets Protection to the European principles of • Developing the modern dual • Promoting the improvement of crop of aquaculture and satisfying between market players to control and improvement of international education system yield by ensuring access to basic the demand on the domestic develop competitive cooperation • Improving the efficiency of state materials and technical resources market with domestic products • Training professionals to be appointed to subsidies and insurance • Developing international R&D centers produce • Implementation of the the positions of advisers at territorial programs catering to the agricultural sector • Launching a traceability system from field to communities and trade attachés • Encouraging cadastral system for agricultural protein • Streamlining the business environment registration and assessment of production by reducing regulatory barriers the monetary value of agricultural • Promoting employment in rural areas land and water resources

Source: Centre for Economic Recovery, Ukrainian Institute of the Future 9% Billion of hryvnias of the GDP created 18% Million of people employed in the 6% Billion of hryvnias of tax paid by the 358.1 by the agricultural sector (2019) 2.9 agricultural sector (2019) 51 agricultural sector (2019)

THE ROLE AND LEVEL OF DEVELOPMENT OF THE AGRICULTURAL SECTOR IMPACT OF THE AGRICULTURAL IMPACT CAUSED BY THE SECTOR ON MARKET PLAYERS AGRICULTURAL SECTOR ON THE Comparison of value added per employee and gross value added to the GDP in 2019 • Business | The development of the sector ECONOMY IN GENERAL Relocate and stable demand from population will • Once the full-scale land market is The gross value added by the sector to the GDP in 2019, % promote the growth of existing launched, the Ukrainian agricultural 16 companies and entry of new companies sector is capable of attracting of up on the market, which will encourage to $10 billion of investments during 14 India The area of a circle shows the competition and improve the quality of the next 10 years after the full volume of exports by the products. opening of the land marker and Mexico agricultural sector (billion US ensure further growth of the GDP 12 Dollars) in 2019 • Population | Improved efficiency of by 1-3% annually. Egypt private farms, introduction of a Moldova • By creating the conditions for 10 traceability system, and engagement of Reference countries for Ukraine increasing the volume of foreign investors have positive impact on Ukraine processing of products and more the quality of products. 8 Belarus active introduction of digital technologies in the sector can Turkey • International investors | Once the land 6 market is launched, the investment increase the productivity per 1 potential of the agricultural sector and employee by 6 times, according to Brazil Netherlands UIM and Latifundist. 4 Australia Canada allied industries will greatly increase. Spain Germany • State | The agricultural sector is • The implementation of sprinkling 2 Kazakhstan Italy responsible for the food security of the and irrigation strategy can increase France the irrigated area up to 1.2 million state, is an export-oriented industry, and Poland Belgium hectares and attract additional 0 generates almost 40% of foreign investments of $4 billion adapting 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 exchange earnings, which impacts on the agriculture to climate change. macroeconomic stability of the state. Competitors Value added per employee, in stable 2010 prices, in US Dollars, 2019 • Allied industries | The development of • Gross value added shows the importance of the sector for the economy: the greater the the sector has positive impact on a dependence on the agricultural sector, the less developed economy is (Moldova, Egypt). number of other industries such the • The longer the value chain, the higher the value added per employee generated by the machine industry, transport, trade, sector (The Netherlands, Germany). chemical industry, etc. Source: Centre for Economic Recovery, The World Bank, State Statistics Service, Eurostat, Statistica Moldovei, INEGI, MOSPI, Belta, Export gov, TUIK, Irrigation and drainage strategy in Ukraine, UIM, Latifundist, EasyBusiness THE ROLE AND LEVEL OF DEVELOPMENT OF AGROSECTOR COMMENTS Real GDP of Ukraine (USD billion) and share of the agriculture in the GDP of Ukraine, 2007- • The agricultural sector plays a key role in Ukraine’s economy, providing 9% 2019 of GDP, 18% of employment and 6% of tax revenues. • The high level of development of the agricultural sector in Ukraine is largely 154 150 143 144 144 a consequence of favorable natural conditions. At the same time, climate 136 134 131 136 131 121 124 127 change creates new challenges for the industry and necessitates investment in efficiency. • The importance of agriculture in the economy of Ukraine has grown over the past 10 years. The largest changes in the share of the agricultural sector in GDP/exports are observed during the years of economic crises, 7% 7% 7% 7% 8% 8% 9% 10% 12% 12% 10% 10% 9% which indicates the relative resilience of the industry to crisis: during the 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 economic recession, the agricultural sector falls much less than other sectors. Ukraine’s export (USD billion) and share of agriculture in exports, 2007-2019 • The agricultural sector plays a key role not only in the domestic economy. Ukraine is one of the leaders in production and export of many types of 68.4 68.7 67.0 63.3 agricultural and food products in the world. 51.4 53.9 49.3 47.3 46.1 • 39.7 43.4 Despite the fact that Ukraine is a leader in the export of low-margin 38.1 36.4 products, the country has cases of successful development of the processing industry (sunflower, chicken) 26% 27% 31% 41% 39% 40% 13% 16% 24% 19% 19% 38% 42% • In monetary terms, sunflower oil and sunflower meal are the number 1 nd 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 products in the world in exports from Ukraine, rapeseed occupies 2 step, and corn, barley and rye – 4th. Експорт України Частка агросектору

Ukraine’s share in world production and exports of agricultural products, 2017/2018 Ukraine’s place in world exports №1 55% №4 №5 №4 №6 32% 12% 10% 15% 1% 2% 2% 3% 6% Soy Corn Wheat Barley Sunflower oil Ukraine’s share in world production Ukraine’s share in world exports Source: Center for Economic Recovery, State Statistics Service, SFS, ITC TradeMap VALUE CHAIN IN THE AGRICULTURAL SECTOR GOALS OF THE SECTOR 3 4 5 6 SUPPLY PRODUCTION PROCESSING MARKETING 1. Securing an incentive-based and advisory state policy 1 STATE POLICY IN THE AGRICULTURAL SECTOR 2. Providing market players with a quality comprehensive infrastructure: CHEMICAL INDUSTRY CROP FARMING • Finance (fertilizers andcrop • Cereals protection agents ) • Oil crops DOMESTIC MARKET • Education and science • Technical crops Small business and • Land • Fruit households mainly sell their • Vegetables produce on open markets or • Irrigation systems MACHINE INDUSTRY: • Berries to intermediaries • Transport • land cultivation machinery • Other and equipment • Storage capacity PRODUCE PROCESSING • equipment for breeding, • Food industry 3. Creating a favorable environment for growing, and slaughtering ANIMAL HUSBANDRY • Production of forage producers to enable them to procure • Fuels and lubricants • Cattle EXTERNAL MARKET • Cosmetology affordable supplies • Poultry farming • Asian and EU countries • Pharmaceuticals • Pig farming account for 75% of • 4. Striking a balance between production of • Sheep farming Other agricultural exports AGRICULTURE: high- and low-margin products to improve • Other • The core export the profitability of the sector • seeds positions include corn, • breeder flock, forage, fry wheat, sunflower oil, and 5. Promoting the development and complete oil cake AQUACULTURE support to the environment for the • Fishing functioning of the food processing segment • Breeding 6. Optimizing the ecosystem for marketing products on the domestic and foreign markets

LAND / IRRIGATION SYSTEMS 2 INFRASTRUCTURE (elevators, transport, education and science, finance…)

Source: Centre for Economic Recovery THE ROLE OF STATE POLICY IN THE AGRICULTURAL SECTOR COMMENTS The structure of state policy in Ukraine and other countries around the world • Until September 2019, the Ministry of Agrarian Policy was responsible for the formation and implementation of state policy in agricultural policy. Implementation Ratio of state support Country Separate Ministry Type of the land market1 agency to agricultural GDP • Presently, the functions of formation and implementation of state policy in agriculture are entrusted to the Ministry of Economy. The decision has USA 9% caused a lot of discussion among business representatives and market Germany 22% experts. • The other important aspect of the state policy is the regulation of France 24% relationships in connection with land as the crucially important resource for Poland 40% the agricultural sector and the sale of which remained banned for a long time. Officially, the land market in Ukraine will be launched on 01 July 2021. Ukraine 2% • The law currently imposes a number of major restrictions, such as limiting Kazakhstan 17% the area of land acquisition in one hand, a ban on the sale of land to foreigners, that will have a direct impact on the fair value of land and value added per employee. The assessed fair value of land in Ukraine, USD Dollars • According to the land market model adopted by the government, the price of 1 ha of land is expected to grow up to $5,072 in ten years following the 9 000 implementation of the reform, and the aggregate economic impact will be 16,000 ~16,100 $64 billion over ten years. However, this indicator is not the maximum 8 ……… 000 Restricted possible. The economic impact can be as high as $85 billion provided that 7 000 profitability the market is open to all stakeholders. 6 000 ~5,000 and risk 5 000 • Today, the State Service of Geodesy, Cartography and Cadaster is RMV 4 000 undergoing positive changes: a technical audit (5 million hectares of land Indexation Hryvnia Regulatory was illegally removed), inefficient processes were identified at 54 enterprises 3 000 devaluation restrictions in the structure and a new structure is being prepared, an online register of 2 000 ~1,555 ~1,080 geospatial data is being created, all lands are being recorded (inventory is 1 000 Hryvnia devaluation planned to be completed in 2020), transfer of more than 2 million hectares of - state-owned land to communal ownership od communities. 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

Regulatory monetary valuation (RMV) Expected price of land in Ukraine

Fair price for land in Ukraine Average land price in the EU

Source: The State Statics Service of Ukraine, Eurostat, calculations made by the Centre for 1The number of stars corresponds to the degree of openness of the land market (4 stars– Economic Recovery, The World Bank, FAO, Eurassian Comission, OECD open market without restrictions, 3 – open market with restrictions, 2 – market closed for foreigners) 2 Fair price – is ratio of profitability and risk of acquiring a land asset LEVEL OF INFRASTRUCTURE DEVELOPMENT COMMENTS Shortage of elevator capacities (%) • In addition to the free sale of land, soil fertility and land productivity are important prerequisites for the development of the agricultural sector. Ukraine accounts for 28% of the global chernozem that covers over 40% of 54 the Ukrainian territory. Moreover, Ukraine benefits from the largest in Europe 53 46 41 50 <25% area of arable land. For Ukraine, this indicator is 1.8 times higher than in 48 other countries. 53 16 38 46 25-50% 36 37 43 • However, in the past years soil has been losing its fertility due to the change 57 39 28 50-75% in the environmental conditions and lack of sustainable use of land by 75 50 40 45 agrarians. Ukraine has entered the period of temperature anomalies: soul 40 75-100% dries out, and crops fail. The development of a sprinkling and irrigation 13 22 29 system is a solution to this problem. XX% Percentage of capacity shortage • Ukraine records 5.5 million ha of meliorated land including 2.2 ha of irrigated land and 3.3 mln ha of drained land. However, the system of irrigation and drainage is underdeveloped: Ukraine utilizes ~20% of irrigation opportunities Transportation and transshipment of grains, 2016-2019, mln tons and ~10% of drainage opportunities. According to the EBRD data, as a result, 53.9 Ukraine loses some $1.5 billion of revenues annually, and each sixth hectare 40.3 39.8 of agricultural land is degraded. 39.4 39.2 35.9 31.2 33.0 • The reasons for insufficient use is the absence of a legal framework that 19.1 adversely impacts on investment attractiveness, imperfect water 12.0 13.1 12.7 4.4 3.3 4.0 4.2 management and land reclamation system, and outdated engineering infrastructure. In 2019, Ukraine adopted the Strategy for irrigation and 2016 2017 2018 2019 drainage.

Ports Railway Auto River • On the other hand, human activities such as arable farming practices resulted in Ukraine’s recording about 6.5 million ha of non-arable land resulting from Areas equipped for irrigation, thousand ha human interference. The reason for this is excessive use of land for 7,226 agriculture and the absence of a free land market. 5,066 4,124 • At the same time, the current state of transport infrastructure is an obstacle 2,691 2,170 1,446 to the efficient operation of the sector: a significant degree of obsolescence 676 335 of railways and non-compliance with transportation requirements, high port Mexico Brazil Italy France Ukraine Azerbaijan Germany Romania tariffs are the cause not only of product damage but also a significant share of logistics costs. Total area equipped for irrigation, thousand ha Actually irrigated areas, thousand ha

Source: Centre for Economic Recovery, World Bank, FAO, EBRD, NAAS, The strategy for irrigation and draining in Ukraine until 2030, the State Agency of Water Resources COMPARISON OF AVAILABLE FINANCIAL INSTRUMENTS BY SIZE COMMENTS Comparison of instruments available to enterprises to attract financial resources • The volume of lending to agriculture, forestry and fisheries for 7 months of 2020 has already exceeded last year’s figure by 4.7%. The share of agriculture in the loan portfolio of banks is in the range 6-9%. The volume Medium enterprises Small enterprises (<10 ths. ha) Agroholdings (>50 ths. hа) lending to fisheries remains low and hardly changes from year to year due to (10–50 ths. hа) the decline of the industry. Initial Public • Offering (IPO)1 Lending by commercial banks is one of the few opportunities to raise funds for small businesses. Due to the fact that land is not an asset because of Syndicated long-term moratorium, and the coverage ratio is about 5%, lending is loans2 expensive to borrowers. At the same time, significant shadowing of European production and a high degree of requirements for financial institutions bonds3 reduce the motivation of small producers to use credit. Providing opportunity Commercial to raise funds from international financial institutions is a way to raise lending funds for small producers. The current state of the labor market in the agricultural sector • At the same time, there is a shortage of qualified labor, despite rising wages in recent years. The reason is a social factor – the low popularity of 180 174 3,0 agricultural specialties among young people, increasing the number of 161 160 156 retired workers and migration. Stimulating the development of dual 139 84,4% 2,5 education is a way to improve the state of agricultural education. As an 140 136 73,4% 78,9% example, the development of the project “Agrokebet”. 85,3% 121 120 80,9% 2,0 85,2% • The total number of students in agricultural specialties tends to decrease 100 and amounted to less than 6% in 2019 of the total number of students. 1,5 Agricultural areas are not attractive enough for young people. 80 • The main reasons that affect the labor market of the agricultural sector: the 60 0,9% 1,0 migration of specialists abroad (for example, machine operators, skilled 40 0,5% workers and elevator workers). Over the past 15 years, about 6.3 million of 0,3% 0,4% 0,5 20 0,2% 0,2% Ukrainians have left the country without returning. Despite the fact that migrants have about the same number of people from villages and cities, 0 0,0 2014 2015 2016 2017 2018 2019 migration is more typical for rural areas, as only third of Ukrainians live in villages. Number of qualified employed population4 Number of vacancies, as % of the qualified employed population The ratio of evarage wages to agriculture to the total economy

Source: The State Statics Service of Ukraine, EasyBusiness, Latifundist, NBU 1 initial placement of securities on the stock exchange. 2 A loan granted by several creditors to one borrower. 3 Dept securities issued by the state or corporate issuer in foreign currency (dollar, euro) . 4 Population that had received higher education that corresponds to the field of employment. THE USE OF MATERIALS AND TECHNOLOGIES COMMENTS A correlation between the use of fertilizers and crop yield • The productivity and quality of land are the core components that impact on Grain yield (kg/ha) the subsequent quality and quantity of produce. However, the Ukrainian agricultural sector mainly uses cheap chemical fertilizers, and there is a 8,500 monopoly. The area of the circle shows the USA 8,000 Germany 7,500 volume of production of • The average price of fertilizers manufactured by Ukrainian producers is 7,000 agricultural sector (tons) in 2019 Croatia much higher (1.5 to 2.1 times) than the price of imported fertilizers, while Hungary 6,500 Great Britain only a small portion of agricultural producers have access to imported Denmark fertilizers due to the volatility of currency exchange rates and trade barriers. 6,000 Argentina France 5,500 Italy Ukraine imports mainly nitrogen and complex fertilizers (41% and 52% accordingly). 5,000 Canada Bulgaria Brazil Ukraine Poland 4,500 Mexico Greece • Existing barriers to the registration of plant protection products affect both 4,000 Romania Lithuania the prevalence of imported products on the market and the significant 3,500 Latvia shadowing of the domestic market. Finland 3,000 Kyrgyzstan Iraq Armenia India Iran • This is exactly the reason why Ukrainian agrarians use less fertilizers than 2,500 other agricultural producing countries, which, in turn, leads to much lower 2,000 Australia crop yield despite a better quality of soil (chernozem). 1,500 Kazakhstan 1,000 Algeria • The majority of households do not use forage in cattle farming mainly due to 500 the low level of qualification and restricted accessibility of quality forage. 0 • There is a large gap on the market of seed where demand greatly exceeds 0 10 20 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 260 the offering of certified seeds thus causing the need for imported varieties. Consumption of fertilizers (kg/ha) As one of the steps to the future development, Ukraine has been gradually The need for seeds and the volume of certified seeds, 2018, thousand tons extending its participation in global seed management systems (the EBRD seed schemes) that creates new opportunities for further development. 1,648

567 The availability of excessive quantities of certified corn allows Ukraine to export it 271 222 124 101 72 115 42 25 5 1 Wheat Barley Soy Corn Sunflower Rape Need for seeds Certified seeds Source: Center for Economic Recovery, State Statistics Service of Ukraine, World Bank, FAO EFFICIENCY USE OF TECHOLOGICAL MEANS COMMENTS Correlation between technology application and yield • The trade balance of agricultural engineering is dominated by imports of tractors per 100 sq. meters of km arable land more technological equipment, and export commodity groups are equipment 1 200 with low added value. The reason for the consumption of expensive imported 1 100 The area of the circle Poland products is low production capacity of domestic producers, low level of shows the volume of qualification and modernization of agricultural machinery creation process in 1 000 production of agricultural Greece Ukraine. 900 sector (tons) • Given the low capacity of farmers to attract additional financial resources to 800 Finland purchase imported machinery and equipment, there is potential for the 700 development of domestic production. Improving the use of quality France 600 Lithuania equipment and involving technology in the production and processing process is a way to increase the efficiency of the sector. 500 Latvia Denmark 400 • The technology used during tillage directly affects both the productivity of 300 the cultivated area and reduces damage to the fertile soil layer. Canada Hungary USA Ukraine 200 Romania • The Ukrainian agricultural sector is characterized by the use of technology Algeria mainly by large agricultural holdings due to the available funds and 100 India Bulgaria Brazil incentives to increase efficiency through demand for export products. In turn, 0 due to the low degree of fundraising, lack of awareness of the benefits of 0,0 2,0 2,5 3,0 3,5 4,0 6,0 6,5 7,0 using technology and lack of urgent need, small and medium-sized grain yield (t/ha) manufacturers use a smaller range of technologies in the production. The overall effect of technology implementation • Technologies of the first stage are able to significantly increase the Full implementation of smart farming technologies is combined with cost optimization (about 10-20%) and economic efficiency of production: parallel driving systems can reduce the increased yields (about 15-35%) impact of complex geometry of fields and reduce up to 10% of material Stage 1 Stage 2 costs; the use of autopilots allows you to get accurate current information for more informed decisions. Improving the efficiency of operations Management of heterogeneous zones • The technologies of the second stage are aimed to increase the productivity Investment 50 USD Investment 50 USD Cost reduction Cost reduction in the sector: soil analysis allows to increase the efficiency of agribusiness in ha: in ha: by 10% by 10% • Disabling • Analysis and by 10-30% by determining the “right fertilizers” in the right amount; the use of sections scan of soils meteorological monitoring on average increases efficiency by 10-20% due • Parallel driving • Yield mapping to the use of accurate, factual data with forecasting of expected weather system Yield increase • Task mapping Yield increase conditions. • Accurate sowing by 5–15% by 10–20%

Source: Center for Economic Recovery, State Statistics Service of Ukraine, World Bank, Smart Farming STRUCTURE OF THE AGRICULTURAL SECTOR COMMENTS Structure • In Ukraine, value added per employee is much lower than in leading Crop farming structure of the agricultural agricultural producing countries (91% lower than in France and 67% lower sector than in Turkey) due to a radically different balance between crop farming and 21% 33% 27% Grains animal husbandry in the sector. 46% 19% Industrial crops and Explain 5.5 - reasons 17% 31% forage • In Ukraine, crop farming accounts for 83% of the agricultural production plants while the share of animal husbandry is only 17%. The structure in other 32% 48% Fruit and vegetables states is more balanced with 50/50 distribution of the segments, for instance 49% 38% 8% Wine in the EU, with crop farming accounting for 57% and animal husbandry 11% 0% 0% 4% accounting for 43%, and in Poland with 48% and 52% accordingly. Ukraine EU Poland Germany 83% Crop farming • The other more specific difference leading to lower productivity of crop Structure of animal husbandry farming is the prevalence of low-margin crops (grains 46% and industrial crops 32%) in Ukraine and the prevalence of high-margin crops in EU (fruit 9% 21% 13% 12% Cattle and vegetables - 48%, and wine - 11%), or in Germany (fruit and vegetables - 19% 21% 38%, and wine - 4%). It is important to note that it is high-margin crops that 27% 33% Pigs 27% 23% are more profitable despite their longer payback period. 12% 8% Poultry • The important difference of the Ukrainian animal husbandry is the quality of 1% Dairy 35% 33% 42% milk and dairy products in Ukraine and the preference for poultry production 17% Animal husbandry Eggs 1% 6% 9% 4% (27% in Ukraine compared to 8-23% in EU countries). The reason for current Ukraine EU Poland Germany situation in the milk market is the high capital intensity of production and long payback period. This leads to a low level of automation, the A comparative analysis of value added per employee, 2019, in 2010 prices, thousand US predominance of human labor and a small number od suitable premises for Dollars further processing. As a result, the production of low-quality and low-cost A negligible share of produced products with added value products predominates. 65.7 and orientation towards low-margin crops are the reasons • As compared to pig and cattle rearing, the poultry rearing process is 49.2 for low value added per employee in Ukraine. somewhat simpler, takes less time, has a strong export potential and lower risks of infections, which explains the prevalence of this segment in Ukraine. 16.8 6.7 5.5 4.2

France Germany Turkey Poland Ukraine China Source: Center for Economic Recovery, State Statistics Service of Ukraine, European Commission CROP FARMING STRUCTURE COMMENTS Production of crop products, 2014-2019, billion US Dollars • Presently, low-margin crops prevail in the structure of crop farming (89% of sown area), which results in lower profits in comparison with profits that 0.5 0.5 1.0 could potentially be received from the sale of high-margin crops. 0.6 0.9 1.1 4,2 • 0.4 3,3 By way of comparison, developed countries mainly grow high-margin 0.7 0.4 0.9 cultures (80% in the crop farming structure in Spain, Italy, and the 5,4 0.8 0.4 2,9 3,3 Netherlands). 3,4 7,6 7,3 • Ukraine is a leader in the production of cereals and technical crops, and the 6,0 6,7 6,5 6,0 major share of cereals is exported: 79% of corn, 66% of wheat, and 59% of barley. For instance, a non-food portion of wheat accounts for 35%, which 10.9 11.2 9.0 8.4 8.5 means that the considerably quantities of food products are exported as 7.5 unprocessed raw materials. 2014 2015 2016 2017 2018 2019 • The gross harvest of grain and oilseeds is increasing every year, but the total capacity of certified granaries 42 million tons does not allow them to cope Cereal crops Vegetables Other crop products with the growing volumes of grain. Technical crops Fruits, berries, grapes • An important factor affecting the quality of products is the unregulated Export of crop products from Ukraine, 2014-2019, % of total exports shadow (grey) market for crop production (an average from 25 to 40%). The lack of an effective system for controlling the volume of production and 42% circulation of products, low motivation to pay taxes and register their own 38% 40% 36% 37% activities are the reasons for the shadowing of the market.

29% • During 2008 - 2018, fruits and berries were characterized by a rapid growth 22% 26% of production at the level of CAGR 6.9% due t the rapid growth of demand in 21% 21% 21% foreign markets. 16% • In the grape production market there is a significant predominance of supply 9% 9% 11% 11% 9% over demand, which, on the one hand, stimulates, due to natural competition, 7% an increase in the quality of raw materials, but on the other hand, due to 6% 6% 6% 6% 7% 6% limited sales opportunities for wine products, leads to the destruction of the vineyard area. 2014 2015 2018 2017 2016 2019

Raw materials Final products Processing

Source: Center for Economic Recovery, State Statistics Service of Ukraine STRUCTURE OF ANIMAL HUSBANDRY COMMENTS

Growing of live-stock animals, 2015-2019, billion UAH • Animal husbandry occupies 17% of the sector structure. Over the past 5 years, 52.7 there has been a downward trend – the number of cattle and pigs is decreasing, 48.2 but, increase in poultry production. 38.5 37.0 36.3 29.0 30.9 30.6 • The reasons for the decrease in the number of cattle is unprofitability. In 2019, 24.9 24.1 the level of profitability of cattle meat production was 27.1%. Since 65% of 17.0 18.5 17.3 13.6 13.9 animals are raised by private farms, and the finished product chain is longer than poultry, there is a greater demand for working capital. 0.5 0.6 0.6 0.7 0.7 2015 2016 2017 2018 2019 • The poultry stock in industrial enterprises increased by 6.7% and decreased in households by 0.3%. The main drivers of growth are cheap price of products, Poultry Pigs Cattle Sheep and goats dietetic nature of poultry products, growth of the domestic market and expansion of exports due to the low price of the final product. Production of main livestock products, 2015-2019, billion UAH • In 2019, milk production amounted to 9.7 million tons, which is a historic low for Ukraine. This, in turn, leads to an increase in prices for raw milk on the domestic 5.3 4.7 4.2 24.7 21.2 market. The market is witnessing falsification of dairy products, grey imports and 3.1 3.4 18.6 17.5 the lack of a legal alternative to the mandatory construction of local treatment 21.2 60.6 64.1 65.8 46.2 facilities for wastewater from dairy processing plants. 40.8 • The dynamics of development of domestic pig husbandry over the past five 2015 2016 2017 2018 2019 years has been negative. The pig population in the country is steadily declining. The main reasons: impact of ASF on the domestic market; competition with Dairy Eggs Honey poultry farming; lack of government support.

Domestic extraction and import of aquatic biological resources, million USD • The extraction of aquatic biological resources has been actively decreasing 753 since the end of the 90s. In 2014, there was a significant reduction by 60%, and 680 636 the pace of recovery of extraction is insignificant. Ukraine is significantly 528 dependent on imports of fish products, accounting for ~70% of the market. While 466 having a great potential for catching, Ukraine has a large shadow market formed 326 due to problems with an outdated fishing organization system and the lack of effective interaction between central executive authorities. The market, according 46 44 42 52 60 66 to experts, is estimated at $2 billion. 2014 2015 2016 2017 2018 2019

Domestic catch of fish and seafood Import of fish and crustaceans Source: Center for Economic Recovery, State Statistics Service of Ukraine PROCESSING EFFICIENCY COMMENTS Comparison of selling prices for raw materials and processed products (UAH per kg) • Ukraine is characterized by the sale of crop and livestock raw materials to the world markets, while the processing unit occupies the lowest share in the х11 х3 sector. This share of unprocessed products is exported and is the largest in х4 45 46 the total supply structure: barley – 46%, corn – 84%, wheat – 54%.

х1.3 37 • It should be noted that the selling prices of raw materials are much lower than the selling prices of processed products. Due to the fact that processed 24 products have higher added value in meeting quality standards, the Ukrainian 18 processing sector has significant potential for development, as with 15 transition to each subsequent stage of processing, added value increases. 9 4 • The productivity of the agro-industry of Ukraine is significantly lower than the competitors due to lower capacity and lower degree of manufacturability of Apples Potatoes Sunflower Corn processed products. The share of products that is further processed is low: Raw materials barley – 13%, corn – 3%, wheat – 19%. Products of processing • The volume of milk processing in Ukraine has a tendency to slow down: over the past 5 years, they have decreased by 17%. Comparison of export and processing volumes of oilseeds (thousand tons) • Extension of the value chain by creating the final product both from low- margin crops (wheat, corn, barley) and high-margin crops (berries, 37 212 2,011 4,505 2,176 4,078 11,320 16,480 vegetables and melons) is a significant multiplier not only for the cost of 1% 0% products, but also for the development of the sector in general. 19% 29% 23% 40% • Given the significant potential in the cooperation of large platforms as 63% 61% consumers of products and small and medium-sized producers as suppliers, the model of clusters interaction is the most promising. 99% 100% • An example of a successful extension of the value chain is the increase in 81% 71% 77% Ukraine's share of sunflower seed processing. Changing the conditions for 60% exporting sunflower as a raw material facilitated increase processing and 37% 39% allowed the country to become one of the leaders in the export of sunflower oil. At the same time, for other oilseeds (in particular, soybeans), over the 1999 2004 2014 2019 1999 2004 2014 2019 past 30 years has been characterized by a decline in processing. Soy Sunflower

Export of raw materials Processing

Source: Centre for Economic Recovery, EasyBusiness, USDA SALES PRODUCTS COMMENTS Comparative advantages of the areas of agricultural economics of Ukraine and the global growth • The leading positions of Ukraine in the supply of raw agricultural products in of the corresponding sectors the world market are recognized, while, at the same time, the current CAGR of global imports 2010-2019 The circle area shows the obstacle to increasing exports is the raw material quality and changes in natural and climatic conditions. 6.3 export volume (thousand Finished grain and cereal products USD) in 2019 • The main reasons for the deterioration in quality are shortcomings that can Edible fruits and nuts be traced along the entire chain of product creation: the quality and use of Oil crops chemical fertilizers, the level of automation and manufacturability of Various food products and damage to products during transportation due to low quality 4.2 Fish and crustaceans Meat vehicles. Product traceability (step back and step forward) will solve this issue. Milk and dairy products, eggs, honey Ready-made animal feed Cacao Cereal crops • According to the revealed competitive advantage, most of the products are Vegetables Tobacco 2.1 of agricultural origin, although with a low degree of processing and Live animals predominantly raw materials. Oils and fats • Taking into account the structure and dynamics of agricultural exports, in recent years, it is raw materials and primary processing that have 0.0 experienced rapid growth, including due to the increase in concluded trade -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 87 agreements and adaptation of provisions and requirements to the existing Sugar and confectionery Revealed Comparative Advantage (RCA) system of Ukraine. • At the same time, the share of the shadow production sector creates -2.1 obstacles to the development of the sector in general. According to the Dynamics of export of agricultural activities in Ukraine, 2010-2018, billion USD experts’ assessment, grain production and land lease are the main areas of 22,1 the shadow.

17.7 18.4 3,2 • The presence of an unregulated shadow sector primarily affects the product 16.7 16.5 17.5 15.1 11% 11% 4,7 quality. Since the quality of exported products is mainly controlled by the 18% 19% 14% 14.3 12.6 11% 11% 33% customer, the overwhelming majority of products of the shadow agricultural 29% 31% 34% 9.8 23% 27% 31% 34% products sector are sold through shadow sales channels. 27% 33% 14,2 33% 53% 54% 55% 58% 56% 55% 57% 41% 44% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Label Finished products Primary processing Raw materials

Source: Centre for Economic Recovery, Comtrade, Ministry of Agriculture Note: – cultures with a pronounced competitive advantage and a significant share od exports, which is in line with global trends. State policy Infrastructure Supply Production Processing Sale

• Efficiency of State Policy • Transportation of • Cost of Chemical • Production Structure І • Interaction of Producers І • Raw Materials Orientation | Restrictions on the Products | Logistics costs Fertilizers І High cost and Focus on low-marginal Lack of cooperation І Predominance of raw implementation of state account for a significant limited access to crop production leads to between small producers materials in exports policy in the agricultural share in the cost of imported fertilizers lead to strong dependence on and low financial creates a strong sector due to reforming products the use of low-quality product exports opportunities for capital dependence on trends in the Ministry of Agrarian • Land Resources І fertilizers • Production Efficiency І investments lead to the external sales markets Policy into a Department Underdeveloped irrigation • Equipment and Significant gap in absence of a processing • Sales Volumes І DCFTA of the Ministry of and drainage Agricultural Machinery І production efficiency link provides for the same Economy infrastructure that The discrepancy between between small and large • Completed Processing volume of quotas for the • Land Market Model І requires significant the pace of renewal of producers leads to the Cycle І Full processing export of grain and Current land market investment results in poor technical equipment to formation of an oligopoly cycle exists only in the selected products, and opening model limits the land quality the pace of production in the market poultry sector due to a does not allow to fully sector development • Lack of Qualified • Volume of Certified • Shadow Market І The short payback period unleash the sales • Interaction of State Personnel І Discovered Seeds І More supply less presence of the shadow compared to cattle potential Authorities І Low level of shortage of labor in the demand in the market market blocks the • Shadow Market І • Export of Livestock cooperation between agricultural sector due to creates import development of the sector Significant shadowing of Products І Foreign trade state authorities leads to an outdated educational dependence • Organic Market І Lack of livestock and crop in livestock products in distorted communication base and emigration of • Use of Forage Crops І proper regulation reduces processing limits the live weight limits with the market players skilled labor reduces the Underdeveloped culture of potential profit margins possibility of selling marketing opportunities • State Support Programs І supply of personnel in the forage crops use leads to • Cattle Number І products at an affordable and reduces the amount Crucially low level of market very low quality of cattle Continued reduction in price of potential profit efficiency of state • Technological Potential І cattle number may lead • Educational and • Transport Costs І Low programs for subsidizing Underutilized potential of to shortages of milk and Technological Base І logistic development of the agricultural sector using the latest beef and increase import Current state of distribution chains causes irrational use of technologies due to low dependence development of small reduces the quality public spending access to financing producers significantly received by the final reduces productivity in reduce the potential consumer and reduces the sector volumes of profit the volume of exported products

Degradation of land and water Significant focus on plant-based Low involvement of producers in Raw material orientation of sales Inefficient state policy Import-dependent supply resources products processing products

Source: Centre for Economic Recovery ECONOMIC RECOVERY & DEVELOPMENT FRAMEWORK

Overcoming ongoing Radical changes in the Ukraine (2020) challenges functioning Ukraine (2030)

AS-IS RECOVERY TO BE • Unharmonized legislation on land market, quality standards and irrigation • Mechanisms and tools that determine effective activities in the land • Economic effect of an open land market, circulation of quality products and systems market, irrigation systems have been identified newly created irrigation systems have been maximized • Lack of systematic legislative support for cooperative and cluster • Determined principles of creation and ways of supporting the cooperative • A competitive advantage due to the large-scale development of clusters and Incentive state interaction of players, farmers and cluster interaction cooperatives was implemented policy • Sector shadowing due to non-transparent regulation • Introduced market mechanisms of circulation to reduce government • Significant reduction of the shadow market • Lack of comprehensive support for non-agricultural activities of sector intervention • Sustainable and comprehensive agricultural development participants (for example, green tourism) • Activities of agriculture sector representatives have been diversified

• Lack of access to the financial and insurance system • Mechanisms of state and non-state support and insurance have been • Each participant has a wide range of opportunities for financing and insurance • Low probability of receiving high quality education diversified activities Quality • Rapid land degradation • An effective advisory platform has been created to provide practical • Each member of the sector has relevant information and skills infrastructure assistance to farmers • The condition and quality of land resources meets the needs of producers • A system for achieving and maintaining high quality resources has been launched

• • • Available material Low technology penetration Latest technologies have been introduced Advanced technological solutions have been integrated into the activities of • Digital solutions only partially implemented • Stimulated digital integrations most enterprises and technological • Partially blocked access to modern resources • Legislative barriers to accessing resources have been removed • Full digitalization of processes resources • Farmers use resources most efficiently

• Considerable focus of producers on low-margin crops and overwhelming • Mechanisms to encourage the production of high-margin crops have • Supply of high-margin crops produced satisfies the demand of the domestic Balanced inefficiency in the production of high-margin crops been created processing link and is one of the export categories production • Rapid decline in the production of livestock products, as well as fish and • Healthy livestock has been restored and increased • Production of aquaculture products, meat and animal products is highly seafood • Production and catch of fish and seafood have been restored profitable activities

• Crucially small percentage of enterprises are involved in the complex • Framework conditions have been introduced to extend the value chain • The share of processed products significantly prevails over raw materials in the processing of raw materials • A well-functioning system for tracing the creation of the final product export value Full processing • Lack of traceability of origin and distribution of products along the value • Increased added value of the final product • Automated tracing system chain • Dominance of products with high added value in the market • Low added value of processed products

• Predominance of raw materials in exports to a limited list of countries • Additional types of goods and directions of sales abroad • Ukrainian recycled products are in demand abroad • Logistic and regulatory barriers to selling products abroad • Enabling environment for logistics and regulatory agencies have been • Fruitful cooperation between the supplier and the consumer of products has Sales ecosystem • Ineffective sales channels in the domestic market provided been established • Insufficient income of agricultural producers due to inefficient sales • Large-scale sales channels for the domestic market have been created channels

Source: Centre for Economic Recovery NEED FOR CHANGE Response to ongoing challenges

1. Stimulating the development of agricultural cooperatives | 1. Make changes to the existing incentives and develop a separate Procedure for the use of funds provided in the state budget for financial support of agricultural cooperatives 2. Include annually in the state budget targeted funds for financial support of agricultural cooperatives 2. Development of agricultural clusters | 1. Include the issue of development of agricultural clusters in the general concept of creating clusters in Ukraine 2. Form an effective organizational model for cluster development 3. Develop a legal and regulatory framework that will ensure the functioning of agricultural clusters 3. Farming support | 1. Adopt a concept for the development of farms containing a system for monitoring, accounting for agricultural production, mechanisms for regulating support for farms and incentives to attract young people to the agricultural sector 2. Introduce tools and mechanisms to stimulate family farming 4. Organic production support | 1. Adopt the Law on Organic Producers Support 2. Provide communication on aspects of organic production 5. Harmonization of current legislation | 1. Harmonize legislation on subsidies and wages for seasonal producers 2. Consolidate information in various registries and expand its volume 3. Simplify as much as possible the conditions for transforming personal peasant farms into family farms, including those not acquiring a corporate status 4. Optimize the structure of the Ukrainian State Fund for the Farms Support 5. Commence functioning of the State Agricultural Register (SAR) as an accounting system and simplify access to support programs for all agricultural producers, including farms. 6. Unshadowing of agricultural sectors | 1. Introduce a tracking system in the supply chains of resources for the production and sale of agricultural products. 2. Introducing of equalization of the tax burden for legal and “shadow” farmers. 7. Land market regulation | 1. Create a system for monitoring land relations, deregulate land management, digitize licensing/authorization procedures and administrative services in the field of land relations 2. Conduct land decentralization and transfer state lands outside settlements to communal ownership of communities. 3. Create a Partial Loan Guarantee Fund to reduce the cost of access to finance for small agricultural enterprises and farms. 4. Develop and adopt a bill on the consolidation of agricultural land owned and leased (including forced consolidation). 5. Create instruments for the implementation of the preemptive right. 8. Consolidating data | 1. Test European practices in the field of administration of entities engaged in agricultural production and in the field of effective electronic monitoring of accounting of entities engaged in production 9. Improving the effectiveness of regulation and policy implementation | 1. Improve institutional support in agricultural policy 2. Re-assign the State Fisheries Agency to the relevant Ministry 3. Create an institute of agrarian attachés 4. Systematize the operation of registered agricultural advisory services 5. Carry out institutional reform of the SSFS: to ensure transparent activities in terms of issuing documents, the transition of the functioning of the State Tax Service to the European principles of control.

Radical changes in the functioning

1. Stimulating the development of agricultural cooperatives | 1. Create legal, tax and financial-credit conditions for the active development of agricultural cooperation 2. Create conditions under which all operating agricultural cooperatives meet the requirements of international cooperation principles and receive government support 3. Create conditions under which the majority of small agricultural producers are united in agricultural cooperatives 2. Land market regulation | 1. Develop the national infrastructure of geospatial data (NIGD), transfer powers of state regulatory bodies in the field of land relations to local authorities 3. Consolidating data | 1. Ensure the automation of accounting procedures for entities engaged in agricultural production

Source: Centre for Economic Recovery NEED FOR CHANGE

Response to ongoing challenges

1. Creation of a credit facility for agricultural cooperatives | 1. Expand the list of financial mechanisms and instruments of state support for agricultural cooperatives 2. Create government support by making loans cheaper for agricultural producers. 2. Creation of mechanisms for land based lending and property rights to land | 1. To equate international financial institutions with commercial banks in the right to provide loans secured by land and land rights. 2. Clearly provide with the possibility and procedure of circulation (alienation) of lease and emphyteusis rights in the legislation, including the possibility of using the right of lease and emphyteusis as collateral. 3. Improve the legislative regulation pf the procedure for the circulation of the lessee’s preemptive right to purchase land. 4. To envisage in the legislation the preemptive right of the owner of the emphyteusis to acquire a land plot, the possibility and procedure of circulation of such a right. 5. Clearly provide for the right to use land as thesubject of security within the relationship of trust ownership. 3. Agricultural sector insurance | 1. Establish an effective and rational mechanism for stimulating the relevant areas of agricultural production by the state by investing subsidies to insurance payments 2. Reduce the costs of agricultural producers to pay insurance (premiums) when insuring agricultural products 3. Increase the basic level of protection of agricultural producers from the influence of production factors beyond their control (primarily natural) 4. Development of agrarian education | 1. Introduce changes in training programs at agricultural universities (dual education, cooperation with business) 5. Irrigation infrastructure development | 1. Create legal and organizational grounds for the emergence of water user organizations 2. Concede a part of facilities 3. Introduce a transparent and socially acceptable tariff setting system 4. Take an inventory of existing infrastructure, public investment in the irrigation infrastructure 5. Introduce a program of support for entities that use irrigation 6. Land resources | 1. Conduct regular observations of soil fertility indicators and their quality, introduce satellite monitoring. 2. Adjust crop cultivation technologies based on the results of GPS navigation and agricultural technology Radical changes in the functioning

1. Irrigation infrastructure development | 1. Implement an institutional reform of water resources management and land reclamation, ensure the sustainable functioning of the National Water Council, the Fund, basin councils, basin water resources administrations, OICs and their effective interaction, implement targeted investment and infrastructure projects. 2. Implement latest methods in irrigation 3. Attract international lenders 4. Transfer most of the facilities to private ownership, attract foreign partners. 2. Agricultural sector insurance | 1. Increase the level of insurance literacy among farmers

Source: Centre for Economic Recovery NEED FOR CHANGE

Response to ongoing challenges

1. Seeds | 1. Encourage plant breeders to develop new types of seeds, including public and private partnerships 2. Create a tracking system in the field of seed production and control of seed circulation. 2. Animal feed | 1. Develop advisory programs to increase public awareness of the benefits of animal feed use. 2. Establish a feed supply system to the place where animals are raised. 3. Develop shops of producers-suppliers of shellfish 3. Technologies | 1. Develop a program for introducing technologies into the agricultural sector. 2. Develop software for cooperatives (interaction between participants, standardization of processes, accounting and planning, training, use of knowledge bases) 3. Create networks of weather stations with dense coverage and data accuracy acceptable for modeling data accuracy by adding existing private sector weather stations. 4. Create programs for development and involvement of companies to open R&D centers. Radical changes in the functioning

1. Seeds | 1. Introduce a system for monitoring the licensed use of seeds 2. Effectiveness of processes | 1. Implement BlockChain (smart contracts on trading floors, forward and futures contracts for capital reading, product tokenization). 2. Develop Computer Vision algorithms, train neural networks, create training datasets. 3. To ensure the development of laboratories of cloning, microbiology and biotechnology for internal selection of seeds and fertilizers.

Source: Centre for Economic Recovery NEED FOR CHANGE

Response to ongoing challenges

1. High-margin crops | 1. Partially reimburse the costs associated with changing the products of cultivation 2. Tax incentives for producers of high-margin crops. 3. Implement digital systems for product traceability. 4. Allocate tax revenues from the sale of high-margin crops to the development of this sector. 5. Increase the knowledge of producers regarding the prospects for growing high-margin crops 6. Approve the amount of state support for horticulture and viticulture 2. Organic products | 1. Develop programs of financial and consulting support for organic producers 2. Reimburse partial costs associated with reorientation 3. Increase the volume of land with organic status 3. Number of cattle and pigs | 1. Improve ASF control and traceability systems along the pork production chain 2. Stop the decline in cattle and pigs and resume growth 3. Change the structure of production (increase the share of agricultural enterprises) by increasing livestock in the organized sector 4. Improve the qualitative composition of the livestock by making the acquisition of breeding (genetic) resources cheaper (up to 50% of the cost). 5. Attract investments by reimbursing up to 30-50% of the cost of construction and reconstruction of livestock farms and complexes 6. Increase the productivity of cows 4. Products of animal origin| 1. Increase the share of income from milk processing. 2. Develop and implement measures to prevent falsification of dairy products in Ukraine, strengthen control (supervision) by the competent authority over compliance with regulation and safety indicators in raw milk products. 5. Beekeeping | 1. Improve legal regulation in the field of beekeeping 2. Protect the rights of beekeepers and the algorithm of their observance. 3. Contribute to the prevention of violations of the legislation in the field of beekeeping by persons who use plant protection products for the treatment of honey plants during the honey collection period 4. Regulate traceability of Ukrainian honey production 6. Aquaculture products | 1. Develop and approve a fisheries code, which will include deregulation of the industry, measures to reduce corruption in fisheries. 2. Introduce a traceability system. 3. Reform pond farms, simplify the conditions for doing business. 4. Reduce shadow catches by adopting a ban on commercial fishing. 5. Bring to European standards the norms of selection of biological material for research. 6. Create clusters of farmers to reduce barriers to access to retail networks for farmers. 7. To digitize water resources, organize monitoring and accounting of biological assets, develop a platform with information on available water bodies that can be used for aquaculture production. 8. Establish a transparent process of leasing and privatization pf water resources and hydraulic structures. Radical changes in the functioning

1. Niche crops | 1. Compensate for the costs associated with focusing production on niche crops. 2. Number of cattle and pigs | 1. Improve the sustainability and efficiency of pork production in Ukraine 2. Ensure an increase in the share of production and processing of livestock products by the organized sector.

Source: Centre for Economic Recovery NEED FOR CHANGE

Response to ongoing challenges

1. Organizing cooperation | 1. Stimulate the unification of small farms, including family farms, into agricultural cooperatives in order to increase the capacity of production and processing of domestic products through partial compensation for losses on processing equipment 2. Establish a system for informing farmers about the benefits of clustering production through economies of scale. 2. Product traceability | 1. Digitalize the circulation of products to establish a product tracking system. 2. Achieve the involvement of all the market players by implementing a mandatory circulation system 3. Sale systems | 1. Establish ways of marketing the products of cooperatives and clusters by means of entering into long-term contracts 4. Product quality | 1. Create cooperation programs with international manufacturers to exchange experience. 2. Adapt international quality standards to domestic production 5. Supporting the development of high-margin crops | 1. Create a separate support program for high value-added products. Radical changes in the functioning

1. Aquaculture 1. Create clusters of farmers or industrialists, in which it will be easy for a farmer to obtain the necessary documents for sale in a retail network

Source: Centre for Economic Recovery NEED FOR CHANGE

Response to ongoing challenges

1. Promotion of Ukrainian products | 1. Ensure the promotion of the Ukrainian product brand in foreign markets. 2. State support for the participation of producers in international organizations, fairs, exhibitions, etc. 3. Promote fish consumption in Ukraine by launching marketing campaigns and informing the public about the importance of fish in the diet. 2. Sales system | 1. Establish trade links with countries in target markets. 2. Provide for state support to agricultural cooperatives and agricultural cooperative associations engaged in export activities (tax, customs benefits, direct financial support, etc.). 3. Compensate small producers, cooperatives and clusters for logistics costs at an early stage of marketing products to foreign markets 3. Export products | 1. Establish certification and harmonization of standards with importing countries 2. Improve the regulatory framework to ensure export activities of agricultural cooperatives and agricultural cooperative associations Radical changes in the functioning

1. Export | 1. Encourage the export of technologically intensive services 2. Reduce the share of logistics in the export price and reduce the time for logistics

Source: Centre for Economic Recovery Cabinet of Ministers of Ukraine VISION OF THE SECTOR: Ukraine is a cost-effective and environmentally recognized European partner with a high level of energy security

A link to strategic Direct effect — Real GDP, value added per employee, export of goods and services indicators Secondary effect — Foreign investment, budget

Strategic 1. Ensure the sector independence and its 2. Ensure functioning of a smart, updated and 3. Ensure functioning of free, efficient and competitive 4. Increase economic energy efficiency and ensure the goal integration into the European market reliable energy system that fully meets the end user markets environmental sustainability of the energy sector requirements and needs

Strategic goals • Establish and maintain reserves of crude oil • Ensure the formation of the of storage capacity to • Form free market price for all consumer categories • Reduce the carbon footprint of the fuel and energy sector and petroleum products for at least 90 days of guarantee high flexibility of the power system and implement effective mechanisms to support the • Attract USD 10 billion of investment in renewable energy average daily consumption in Ukraine • Ensure the formation of the amount of vulnerable population groups • Reduce the share of coal generation • Satisfy 30% of Ukraine’s domestic demand for maneuverability sufficient to ensure cost-effective • Attract USD 40 billion of investment into the energy • Ensure an increase in the share of biomass in thermal energy gasoline and diesel through domestic operation of all generations system development (USD 23 billion – generation, USD production up to 30% production • Reduce technological costs and energy losses in 17 billion – transfer and distribution) • Increase the share of generation from renewable energy production and supply to 8% • No debt burden among energy market players sources in the total electricity production to 25% • Introduce “smart” grids • Increase waste disposal from the fuel and energy sector • Reduce power interruption time according to SAIDI • 100% of large industrial enterprises undergo a certified energy to <175 minutes efficiency audit

Priority • Ensuring energy independence for gas and oil • Generation of target energy balance, taking into • Ensuring the financial stability of market players • Improvement of energy efficiency in the use of electricity and steps • Ensuring stable and diversified energy imports account the replacement of depreciated capacities • Liberalization and transparency of energy markets on heat and/or fuels in all sectors of the economy and households to improve energy security with new ones, in accordance with TPES (total the level playing field • Ensuring the completeness and accessibility of accounting for 1 • Formation of the minimum reserve system primary energy supply) forecast • Maintaining a healthy competitive environment, free all forms of energy and energy resources (electricity, heat, • Integration of energy markets, related • Ensuring energy system flexibility for the access to markets and existing infrastructure , etc.) transport networks into the EU energy market sustainable economic development of the country • Ensuring stable and predictable investment promotion • Limitation of the negative impact of energy on the environment, • Ensuring export of hydrogen to the EU • Ensuring efficient use of and provide incentives to policy in particular reduce emissions upgrade the existing energy system • Provision of incentives to upgrade the existing energy • Improvement of energy efficiency in energy production, • Harmonization of standards of security, system transformation, transportation and generation sector sustainability and quality of energy supply in Ukraine • Improvement of corporate governance of business • Increasing production and consumption of renewable energy, with the EU entities primarily through distributed generation • Stimulation of energy-saving at the consumer level, cultivation of energy-efficient consciousness in citizens

Source: Centre for Economic Recovery Note: 1 Total primary energy supply 15% billion UAH GDP 5% thousand people employed in the sector 16% billion UAH of tax 596 (2019) 400 (2018) 140 revenues

IMPACT OF ENERGY ON THE NATIONAL ECONOMY IMPACT OF ENERGY ON IMPACT OF ENERGY ON THE MARKET PLAYERS ECONOMY The relationship between energy consumption per capita and GDP per capita, • • 2019 Population | Development of affordable The energy sector development will and reliable energy sector will create the significantly optimize industry costs, conditions for meeting basic population ensure the competitive production demands cost and become a powerful multiplier capable of accelerating • Industry | Growth in energy demand will the growth of the Ukrainian primarily come from rapid industrial economy development. The competitiveness of industry and its products depend directly • Energy development will reduce the on the access to energy infrastructure and energy intensity of the economy, energy resource prices thus reducing energy consumption and energy dependency • Transport | Development of RES and alternative fuels will reduce the negative • Energy sector will provide a platform impact of the transport infrastructure on for changing market conditions, the environment creating new segments and industries • International investors | New energy opportunities will increase investment in • Total energy investment potential is the sector, and international companies up to USD 40 billion will start doing business in Ukraine due to • fast connectivity and reliable power supply Energy development will be a system catalyst for the creation of additional jobs • The state will be able to increase GDP, and budget revenues In 2019, Ukraine is in the group of countries with low per capita energy consumption with Thailand, Brazil, Belarus, and Bulgaria as the neighboring countries on the list Countries with higher energy consumption per capita tend to have higher GDP per capita

Source: Centre for Economic Recovery, World Bank, IEA, British Petroleum FOCUS AREA GOALS 1 NATIONAL ENERGY SECTOR POLICY 1. Ensure the sector independence and its integration into the European market 2 TRANSPORTATION, 3 GENERATION/PRODUCTI SUPPLY AND DISTRIBUTION AND MARKETS 2. Ensure the functioning of a smart, ON CONSUMPTION STORAGE/PROCESSING upgraded and reliable energy system that fully meets end user requirements GAS SECTOR and needs RENEWABLE NATURAL INFRASTRUCTURE FACILITIES WHOLESALE NATURAL RESOURCES GAS CONSUMPTION 3. Ensure the functioning of free, efficient • Gas Transmission System MARKET SEGMENTS (RETAIL MARKET) and competitive markets • Water Operator of Ukraine4 • Population • Sun • Gas distribution network • Stock trading 4. Increase economic energy efficiency • Budgetary institutions • Wind operator5 • Direct contracts • Industry and ensure environmental sustainability • Gas Storage Operator6 of the energy sector NON-RENEWABLE • Transport (FUEL AND ENERGY) • Agricultural sector • IT and telecom RESOURCES OIL SECTOR • Other sectors INFRASTRUCTURE FACILITIES WHOLESALE OIL • Natural gas MARKET SEGMENTS • Main pipeline system • Oil • Stock trading • Oil storage • Coal • 7 Direct contracts

• Uranium (nuclear fuel) • Oil refinery EXPORT TRADERS • Biomass resources SUPPLIERS

ELECTRICITY DISTRIBUTION WHOLESALE INFRASTRUCTURE ELECTRICITY MARKET ELECTRICITY GENERATION SEGMENTS • Transmission System • Nuclear energy • Bilateral contract Operator • TPP/CHPP1 market8 (TSO) • • HPP/PSPP2 Day-ahead market and • Distribution system Intraday market9 3 • RES operator • Balancing market10 (DSO) • Ancillary services market11 RESIDENTIAL SECTOR

4 ENERGY EFFICIENCY

Source: Centre for Economic Recovery Note:1Thermal power plant/Combined heat and power plant; 2Hydro and hydroelectric power plant;3Renewable energy sources; 4Gas Transmission System Operator of Ukraine;5Gas Distribution Network Operator; 6Gas Storage Operator;7Oil refinery; 8Bilateral contract market;9Day-ahead market and Intraday market; 10Balancing market;11Ancillary services market; ELECTRIC POWER SECTOR STATE COMMENTS Structure of production and installed capacity of power plants of Integrated Power System • The lack of a mechanism for adjusting "green tariff” rates in response to the (IPS)1 of Ukraine, 2000–20202, % reduction of RES-generating technologies cost has led to a rapid increase in “green” generation (RES capacity in Ukraine has quadrupled in the last three 84% TPP/CHPP HPP/PSPP RES NPP 80% years). RES capacities are characterized by low generation maneuverability and high dependence on weather conditions, which complicates forecasting of the supply and demand in the electricity market. The additional effect on the 67% 64% 53% 23% 26% 26% already insufficiently maneuverable generation system has led to technological challenges in balancing the system during certain periods, as well as limiting 48% 46% <1% 45% 47% 53% 34% 9% 10% 12% <1% 11% RES in electricity generation, which results in excess energy and prevents further 7% 7% 5% <1% <1% 8% connection of RES capacity under current conditions 2000 2010 2020 2000 2010 2020 2000 2010 2020 2000 2010 2020 • The high rate of maneuverable generating capacities wear. A significant Share of generation in the total volume of installed capacity XX% Estimated generation wear (NPP and TPP/CHPP) number of TPPs/CHPPs have been in operation for more than 50 years and will Share of generation in the total volume of energy generated be decommissioned starting from 2021 (if environmental protection measures are not implemented according to NERP4), which creates energy balancing Investment per 1 km of network and losses in distribution networks in Ukraine risks and challenges for cities where heat generation was a key employer and compared to other countries, 2018 generated significant budget revenues 3.771 • The current financial crisis in the electricity market is holding back further 1.499 985 sector development. Distorted market mechanisms and inefficient support to 696 the vulnerable have resulted in a chain of debts between market participants, 49 180 290 191 which will reach UAH 40 billion by the end of 2020 France Poland Romania Ukraine • The high rate of power grids wear results in significant energy losses and Investments per 1 km SAIDI3, duration of power interruptions: power interruptions. Owing to a lack of funding, the rate of power grids wear exceeds 70%. This creates significant interruptions in Ukraine’s electricity Electricity consumption, tWh supply which is the highest in Europe and amounts to 696 minutes in 2019, as well as large losses in electricity distribution, amounting to 10% 200.000 150.768 150.721 147.483 147.264 134.653 150.000 118.727 118.258 118.927 122.144 120.220 • Electricity consumption in Ukraine has decreased by 18% since 2010, mainly due to a 28% decline in industrial consumption (its share in consumption 100.000 decreased from 48% in 2010 to 43% in 2019) and the occupation of Crimea and -28% 50.000 some regions of Donbass 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Industry Transport Residential consumers Population Agricultural consumers Construction Other non-commercial consumers Source: Centre for Economic Recovery Note: 1 – Integrated Power System of Ukraine; 2 – Data for 8 months of 2020; 3 – The SAIDI indicator is the ratio of the total duration of long power interruptions to the total number of electricity sales points. The lower the value, the higher the reliability level; 4 – National emission reduction plan GAS SECTOR STATE COMMENTS Gas market balance, 2019, billion cubic meters • Ukraine has a significant potential for its own gas production, but for several 35 reasons (high level of field depletion, depreciation of fixed assets and lack of incentives to explore new fields) Ukraine does not cater for its own needs and 21 is forced to import gas. In 2019, imported gas accounted for more than 30% Consumption 30 14 of the total natural gas supply to Ukraine

UGS • Diversification of imports has reduced the risks of gas supply interruptions. 5 Up to and including 2011, Ukraine imported gas exclusively from the Russian 2019 Domestic production Demand for import Federation. Since 2016, Ukraine has completely eliminated gas import dependency from Russia as a result of import diversification measures. Now, Transit through the Ukrainian GTS, billion cubic meters Ukraine imports all of its gas from 3 EU countries (Hungary, Slovakia, Poland) • 150 136 -26% -38% 500 The high level of gas infrastructure development ensures the energy security 123 121 of Ukraine and the EU. On the one hand, Ukraine is a transit country and gas 99 400 100 89 86 94 87 88 82 300 transit is a significant contributor to the budget (more than 1 billion U.S. 59 62 62 67 65 dollars in 2018). At the same time, there is a risk of a significant reduction in 37 40 200 50 26 transit once the -2 pipeline is put into operation. Under the terms 15 14 15 100 2 5 6 10 11 11 of the contract signed in 2019, will reduce the volume of gas 0 0 1992 2000 2005 2010 2013 2014 2015 2016 2017 2018 2019 2020 2021– transported through Ukraine in 2020 from 90 to 65 cub. m with a subsequent 2024 reduction to 40 billion cub. m during 2021–2024 on average Transit through the Ukrainian GTS Gas imports to Ukraine from the EU • The total capacity of all UGS is about 31 billion cub. m, which is more than a Gas imports to Ukraine from Russia Weighted average price of imported gas quarter of the European-wide volume. Ukrtransgaz JSC is the operator of the Expected transit volume largest complex of 12 underground gas storage facilities (UGS) in Europe. The under the newly concluded agreement with Gazprom introduction by Ukraine of a gas storage service under the “customs warehouse” regime increased the interest of European traders in seasonal gas Consumption of , billion cubic meters storage in Ukrainian storage facilities 76 80 73 • Gas consumption in Ukraine between 2000 and 2019 was more than halved 58 60 50 (from 70 billion cub. m to 30 cub. m). Key reasons for the reduction in 42 40 33 33 31 31 30 consumption are the drop in industrial production, the transition of TPPs/CHPPs to the use of coal as fuel, the loss of control over part of the 20 territory and the introduction of energy efficiency (heating) measures 0 2000 2005 2010 2013 2014 2015 2016 2017 2018 2019 Gas flowrate for transportation, transit and production Industry Population, heat generation, non-profit organizations

Source: , Ukrtransgaz, State Statistics Service OIL REFINING SECTOR STATE COMMENTS Oil refining dynamics and the state of Ukrainian oil refineries (year of shutdown), 1991–2019, thousand tons • The decline in oil production led to Ukraine's high oil import dependence. 58.200 Ukraine has a significant oil production potential but as a result of depleted 60.000 400 fields and lack of investment in new ones, oil production has almost halved 45.000 300 since independence 30.000 17.403 200 15.000 8.500 11.508 100 • The shutdown of the refinery has led to import dependence on petroleum 4.568 2.650 2.200 products. In 1991, there were 6 refineries and 1 gas processing plant, with a 0 0 thousand 1991 2000 2005 2009 2012 2016 2019 million total capacity of over 50 million tons, which is four times Ukraine's annual tons USD consumption of oil products. The biggest decline in refining occurred between Lysychansk refinery (2012) Kherson refinery (2005) 2009 and 2012 (shutdown of the largest refineries) when the refining volume Nadvirna refinery (2008) Kremenchuk refinery decreased from 11.5 million tons to 4.5 million tons (the share of exports from Drohobych refinery (2008) Shebelynka gas processing plant the Russian Federation in the balance of the Ukrainian oil market exceeds Odesa refinery (2010) Capital investment in refining, million USD (2000–2019) 40%) • The transit of Russian oil has been extended until 2030. The Ukrainian oil Oil transportation, Ukraine, 1991–2019, million tons pipeline is highly dependent on Russian oil, and the market and political instability affect the congestion of the Ukrainian pipeline which leads to 54 59 60 43 significant budget shortfalls. Ukrtransgaz JSC and Transneft PJSC have 40 31 27 extended the oil transit contract for ten years – from January 1, 2020 to 20 15 11 15 14 13 8 2 1 2 January 1, 2030. Ukrainian company does not disclose details of oil flow 0 volume 1991 2000 2005 2009 2012 2016 2019 • Imported diesel dominates in the consumption pattern. Diesel fuel accounts Volumes of oil transit Transportation volumes of imported and domestic oil for 65% of the petroleum consumption pattern, on which Ukraine is import- dependent by 75%. Over the last 10 years, due to the difference in the cost of Consumption of petroleum products in Ukraine, 2013–2019, thousand tons diesel fuel and gasoline on the Ukrainian market, there is a trend of gradual consumers' transition from gasoline to diesel fuel and LPG1 15.000 12.558 40% 10.731 10.780 • 9.830 9.366 10.071 10.099 30% Illegal trade in petroleum products results in a shortfall of UAH 10 billion 10.000 6.704 annually. Despite a significant reduction in the grey market for petroleum 5.734 5.634 6.047 6.248 6.900 6.950 20% products since 2013 (almost by 8 times), the closure of more than 800 sales 5.000 10% points has left the volume of illegal sales significant 4.961 3.127 2.614 2.563 2.264 2.101 2.010 0 893 969 1.118 1.461 1.587 1.730 1.820 0% 2013 2014 2015 2016 2017 2018 2019 Diesel fuel Gasoline LPG1 Diesel fuel (Grey market share, %) Gasoline (Grey market share,%) Source: Ukrtransnafta, A-955 Consulting Group, Naftogaz, Liga Zakon, State Statistics Service Note: 1No data available on the volume of the grey LPG market THE STATE OF THE ENERGY EFFICIENCY SECTOR COMMENTS GDP energy intensity in Ukraine and in the world, 2019, kg o.e./$ (constant 2015) • High GDP energy intensity of 1,000 USD GDP. According to 2019 data, Ukrainian GDP energy intensity is 0.238 kg of oil equivalent per dollar of 0.23 production (based on 2015 prices). Ukrainian GDP energy intensity is more 0.21 0.20 than twice the world average and is 2–3.33 times higher than that of the neighboring countries (Poland, Romania). For example, for every USD 1,000 GDP, Ukraine consumes about twice as much energy as Poland 0.11 0.11 0.11 0.10 0.09 0.09 • The key reasons for high energy intensity are obsolete equipment and 0.07 0.07 0.06 technological processes, a high share of energy-intensive production in the country's GDP, underdeveloped areas of information technology and services • The high level of energy system's wear leads to significant energy losses. Ukraine Venezuela CIS USA World Czech United India Poland EU Germany United Republic Arab Kingdom 44% of the energy is lost in conversion and transportation to the ultimate Emirates consumer (whereas in the EU, the average is 32%): out of 92 million toe of primary energy supply, final consumption is 52 million toe Energy consumption balance in Ukraine, 2018 mln toe • Obsolete gas, electricity and district heating supply systems lead to 93,165 significant energy losses. Estimated energy transport losses are significantly higher than in most European countries, ranging from 3.99% to 14.3%. The 41 994 main reasons for this situation are the critical state of the Ukrainian energy 59 162 Production 51 171 production and transportation infrastructure, as well as the inadequacy of current economic needs, which are much lower today than in the days of the 34 003 Import • The potential for reducing energy consumption can be as high as 60%. Supply Losses Consumption According to estimates, in three sectors – residential, budgetary and energy supply (together about 63% of the energy balance of Ukraine), the energy Levelized cost of electricity depending on the source, US cents/kWh efficiency potential is equal to savings of about 19 million toe or 8.0 billion Euros annually. The International Energy Agency estimates that every dollar 12 spent on energy efficiency saves $2 in energy investments 10

6 5 3

NPP TPP/CHPP Combined- WPP Improving energy cycle plants efficiency (reducing consumption) Source: IEA, WBG, WEF, LAZARS, ACEEE THE STATE OF THE UTILITIES SECTOR COMMENTS Amount and structure of tariffs in Europe and Ukraine for the population in 2018, Eurocent/kWh • Utilities account for a significant proportion of the household budget. Utility costs account for more than 30% of total household expenditures which is one Electricity, 2018, eurocent per kWh Gas, June 2019, UAH per cub. m of the largest components of the household budget

Germany 21% 26% 53% 29.4 53% 22% 25% 20.3 • Cross-subsidization is an inefficient public support mechanism which imposes additional burden on market participants. Unlike European countries, where targeted subsidies are introduced, public support through subsidized France 34% 31% 35% 17.7 39% 32% 28% 23.9 prices imposes a burden on market participants and hinders the development of productive capacities 19% Poland 32%32% 36% 13.9 59% 13.9 • Economically unreasonable tariffs and the lack of individual metering devices 22% lead to the deterioration of the energy system and hinder the growth of energy efficiency. More than 1 million gas consumers do not have individual metering 22% 17% Ukraine 4.1 78% 7.3 devices, which makes it impossible to monitor gas consumption and does not 61% 5% create incentives for efficient gas consumption 17% • The high level of debt in the utility sector hinders its development. Debts in Generation and supply Distribution and delivery Taxes the utility sector between market participants, which have been generated as a result of the inadequate legal framework and district heating provider losses, amount to about UAH 100 billion and limit the possibilities for effective The technical condition of thermal power generating companies, 2018 privatization and modernization of public infrastructure

District heating provider boiler houses CHPP power units • The level of infrastructure deterioration is critical: 40% of heat points are in a state of disrepair (causing constant interruptions), 15.8% of the total heating 2% 6% networks length is in the state of disrepair, electrical grids deterioration is 7% estimated at 70%: out of 309 thousand km of gas distribution networks, 18.5 thousand km have exceeded their useful life and at least 15 thousand km of 38% networks are in disrepair

60%

87%

In good condition Operated beyond the economic lifetime Inefficient and obsolete boilers are in operation Operated beyond the design lifetime Completed the rated life Operated beyond the service life limit Source: Reports of district heating providers/CHPP, State Statistics Service, NEURC, Regional gas company Resource self-sufficiency and network Flexibility and efficiency of the existing Market functioning model Energy efficiency and sustainability integration energy system • Dependence on the nuclear fuel import | Due to the • Low flexibility and maneuverability of the • Inefficient mechanism to support the vulnerable • High energy conversion losses | Energy depletion of producing uranium fields and high power system | Rapid growth of RES and population groups | Cross-subsidization of the conversion losses in Ukraine reach 38,471 production costs, Ukraine mines only one-third of the high level of thermal generation wear (plants electricity market imposes a burden on market thous. toe (41% of the total energy supply) required uranium have been operating for an average of 50 participants and creates unequal prices for • Transport and distribution losses | • High gas import dependence | In 2019, imported gas years, resulting in the reduction of a large various categories of consumers Electricity – 14.8%, heat – 14.05%, and gas accounted for more than 30% of the gross number of TPP units) • Incomplete reform of the electricity market | – 3.96%, due to the critical state of the consumption of natural gas in Ukraine • Low level of DSO computerization | Lack of Since the initiation of the reform, no green transportation and distribution • High depletion of hydrocarbon wells | The lion’s share basic remote tools for monitoring auctions for RES have been introduced and no infrastructure, as well as its technological of wells is 80% depleted, creating a risk of falling transmission lines balancing capacity has been established structure, which is designed for a much production volumes and increasing energy import • Low oil pipeline congestion | resulting in • Debt crisis in the electricity market | Distorted higher volume of consumption dependence significant potential budget shortfalls market and lack of funds for electricity producers • Lack of revenue accounting for more than 1 • High dependence on petroleum products import | • Low level of refinery technological led to a debt crisis in the electricity market million consumers | Lack of individual More than 70% of the dependence on the import of equipment | Makes them uncompetitive in • Accumulated debt in the natural gas market | metering devices hinders the petroleum products and low diversification create a the domestic market The debt between market participants reaches implementation of energy efficiency measures high risk of possible interruptions in the supply of • Deteriorated utility infrastructure | A UAH 100 billion energy resources for the economy significant part of district heating provider • Illegal sale of petroleum products | As of 2019, • Lack of incentives to save energy | Lack of • Lack of minimum reserves of crude oil and petroleum infrastructure, gas transportation and gas there are more than 1,500 petroleum product information, knowledge and interest of products generated | Lack of minimum reserves of distribution networks is significantly retail facilities illegally or semi-legally selling fuel consumers in the energy-saving use of energy resources generates the risk of supply depleted and in a state of disrepair to consumers resources and the introduction of energy- saving technologies interruptions • Reduction of gas transit | Based on the new • Shutdown of refineries| The shutdown of existing agreement between Naftogaz and Gazprom • Low standards for residential premises refineries and reduction in refinery volumes creates energy efficiency | 70% of premises was energy dependency risks built from 1946 to 1990 based on low energy efficiency standards resulting in • Incomplete market integration | The integration of gas excessive energy consumption (2 to 3 times and electricity markets into the EU energy market more than in European countries) • Mine closures and transformation of coal regions | • The problem of inefficient energy Poses risks to thermal generation and endangers the consumption | Energy consumption of existence of settlements that are highly dependent on Ukrainian enterprises is 3 times higher than coal mines and TPPs in the EU and 2 times higher than in the world

High import dependence and incomplete Inefficient energy system Outdated and inefficient market model Low level of energy efficiency integration with the EU energy system

Source: Centre for Economic Recovery ECONOMIC RECOVERY & DEVELOPMENT FRAMEWORK

Drastic changes in Address current challenges Ukraine (2020) functioning Ukraine (2030)

AS-IS RECOVERY TO BE • Increased import dependence and low diversification • Imported raw materials are being gradually • gas and oil energy independence is achieved through full of energy sources substituted by domestic raw materials substitution of imported energy resources with domestic • Lack of minimum energy reserve system • Strategic energy reserves are being gradually sources and by attracting significant investment in Sector independence • Incomplete integration of gas and electricity markets accumulated exploration and production into the EU energy market • Full integration of gas and electricity markets into the • Energy, gas and oil resources are being exported within the EU energy market integrated European energy market

• Imbalance in the electricity market by type of • The Energy strategy has been revised, a system to • Energy storage capacities have been commissioned and generation forecast electricity production has been introduced, developed, renewable energy has been developed and the • High distribution and supply losses (electricity, gas) capacity replacement program has been safe operation of nuclear generation has been ensured Building a flexible and caused by obsolete fixed assets implemented • Infrastructure network losses are among the lowest in reliable energy system • Lack of a sufficient number of functioning facilities for • Smart Grids implementation plan has been Europe petroleum product production developed, its implementation started • “Smart” systems of energy metering and management have been introduced

• Excessive market restrictions and a crisis of • Electricity market restrictions have been removed • Competitive energy markets have been established to settlements between electricity and gas market • Financial recovery of electricity and gas market ensure high quality and affordable prices for consumers Optimizing the market participants participants has been carried out • Quality legal support for the work of public utilities operating model • Lack of incentives for capital improvements and • Energy infrastructure fixed assets have been investment in the energy infrastructure significantly upgraded

• One of the world’s worst GDP energy intensity values • GDP energy intensity values are reduced and close to • High environmental standards for energy production, • Low energy efficiency standards the EU average transportation, transformation and consumption are met • Significant impact on the environment (significant • Annual energy efficiency audit was held at all • Low GDP energy intensity compared to the rest of the world Improving energy environmental pollution, especially greenhouse gases) generation, transportation and distribution entities efficiency and sustainability • Investment project plan under the National emissions reduction plan has been fully implemented

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges 1. Stable uninterrupted energy import | 1. Adopt a legislative framework to ensure that the EEC reserves are consistent with its obligations and ensure minimum reserves of crude oil and petroleum products. 2. Ensure guaranteed compliance of generating capacities with the volumes and modes of electricity consumption in the IPS of Ukraine, in particular with regard to the availability of regulatory capacities. 3. Diversify petroleum product supply. 2. Network integration |1. To ensure full-fledged implementation of the provisions of the Third Energy Package, EU directives and regulations in accordance with Ukraine’s obligations under the Treaty Establishing Energy Community. 2. Implement technical measures for the integration of Ukrainian and European energy systems. 3. Develop and adopt the required regulatory framework for the possible transition to heating from electric boilers, provided that it is economically feasible and with a stable network and sufficient supply, in accordance with the conditions necessary to be met to join ENTSO-E. 4. Provide a market basis for the export and import of electricity to/from the EU countries.

Initiatives — Drastic changes in functioning

1. Stable uninterrupted energy imports | 1. Energy reserve infrastructure development. 2. Network integration |1. Integration of the Ukrainian energy system with the ENTSO-E continental Europe zone in the operating mode. 2. Full technical, institutional and legislative integration into European gas transmission networks, cooperation with countries of North-West, Southern Europe and other regions on joint implementation of gas diversification projects in Central and Eastern Europe 3. Expand the transfer capacity of energy links with ENTSO. 4. Consider exporting hydrogen to the EU countries.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges 1. Modernization and optimization of capacities | 1. Revise the energy strategy until 2035, taking into account the replacement of decommissioned generating capacities with new ones, in accordance with TPES forecast with a related increase in cumulative capacities. 2. Accelerate liability and compensation for restrictions of RES production (compensation for WPP and SPP production restriction: NEURC's approval of a scheme for compensating restrictions, taking into account production of the NPС Ukrenergo-RES working group; based on the results of restructuring, determine quotas for holding auctions (Law 2712-VIII). 3. Maintain the operating capacity of NPPs and TPPs (abolish artificial restrictions on the application for the SE “Guaranteed Buyer” day-ahead market; oblige the company to submit applications at an economically reasonable price taking into account the fulfillment of obligations under the PS; provide the amount of commodity income of the NPP in the amount that compensates for the reduction of physical output to cover costs and ensure normal operation. 4. Determine whether it is advisable to conserve TPP capacities taking into account the dynamics of the electricity market development. 5. Regulate the operation of distributed generation aggregators and balancing service providers. 6. Define planned decisions and the action plan concerning the replacement of NPP capacities to be decommissioned after 2030. 7. Establish a favorable policy for the technical upgrade and modernization of refineries and gas processing plants using modern advanced refining technologies. 2. Infrastructure development | 1. Support reconstruction and development of distribution networks in line with the distributed power generation development. 2. Develop and implement specific economically viable projects for gas distribution mechanism optimization and modernization, reconstruct relevant obsolete networks. 3. Introduce RAB-tariff on the gas market. 4. Investigate, with a view to further implementation, the most effective options for the use of UGS and the involvement of European energy companies in the storage of gas in Ukrainian UGS, the creation of conditions for the storage of natural gas in UGS in the “customs warehouse” mode. 5. Ensure that the oil transport system of Ukraine is in the proper technical condition by maintaining, surveying, repairing, reconstructing and technically upgrading equipment, systems and facilities of the oil pipeline system, as provided for in the regulatory documents. 6. Release pent-up capacities through a grid development program and projects aimed at removing internal restrictions. 7. Clearly define the purpose and limits of the mineral resource use. 3. Management system | 1. Implement a strategic management framework, including scenario modelling of markets. 2. Train the personnel to work with new models of energy market functioning, human resources and modern research and development support. 3. Introduce a public-private partnership system in energy reservation and strategic energy reserves. Initiatives — Drastic changes in functioning 1. Modernization and optimization of capacities | 1. Ensure a gradual reduction of heat generation capacity in the energy system. 2. Provide increased storage capacity for energy storage. 3. Demand optimization to stabilize the demand level within 24 hours. 4. Consider producing hydrogen using excess electricity in the system to further export hydrogen to the EU. 5. Regulate local generation of RSE that is directly connected to the consumers’ network, without additional payment for distribution and transportation of electricity. 2. Infrastructure development | 1. Update obsolete gas meters; install remote metering and automation systems for natural gas balancing automation. 2. Optimize GTS capacity and performance according to expected load scenarios. 3. Create a hub based on the Ukrainian gas storage facilities with a connection to the Polish gas LNG terminal, which is connected with Norwegian fields. 4. Attract new volumes for oil transportation to domestic refineries, as well as for transit through Ukraine 5. Consider building the infrastructure to ensure Ukraine's integration into the hydrogen economy.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges 1. Competitive markets | 1. Develop competitive markets for gas, electricity, heat energy, coal, petroleum and petroleum products; competitive conditions for their transportation within the territory of Ukraine. 2. Introduce a transparent and non-discriminatory tariff-making mechanism and allocate capacities for cross-border trade, facilitate transit procedures based on the principle of free access to transit facilities. 3. Start full-fledged functioning of all market segments: bilateral contracts market; day-ahead market; intraday market; balancing market; ancillary services market. 4. Create a Datahub to ensure a free change of service provider. 5. Ensure fulfillment of the Guaranteed Buyer's obligations to RES producers. 6. Introduce an economically justified method of calculating the tariffs for electricity supply. 2. State incentives | 1. Increased efficiency and cost-effectiveness of electrical distribution networks through the introduction of a higher voltage type.

Initiatives — Drastic changes in functioning 1. State incentives | 1. Promote local energy initiatives, including small and medium-sized enterprises in the energy sector and energy cooperatives, generate and supply electricity and heat taking into account regional characteristics, development of distributed generation.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges 1. Conscious energy efficiency | 1. Implement and ensure consistent improvement of energy management system at the state and municipal levels, as well as at enterprises, in accordance with the requirements of standards and international agreements. 2. Stimulate energy-saving at the consumer level, cultivate energy-efficient consciousness in citizens. 3. Increase efficiency and cost-effectiveness of electrical distribution networks through the introduction of a higher voltage type. 4. Assess the potential for optimizing the district heating system by switching to individual heating in regions and facilities where it is economically feasible. 5. Reduce energy consumption in the transportation and distribution systems of electricity and heat through technical, technological upgrading and conceptual revision of power supply schemes, taking into account the advances in decentralized energy supply, including through the use of RES and energy management. 2. Emission-free energy | 1. Review the National plan for emission reduction from large combustion plants (SO2, NOx and Dust) and implement measures for thermal power plants and combined heat and power plants reconstruction and modernization in line with current economic trends. 2. Implement the environmental management and audit system (EMAS). 3. Implement state-of- the-art technologies and share information on the recycling of fuel and energy sector waste.

Initiatives — Drastic changes in functioning 1. Conscious energy efficiency | 1. Develop necessary energy infrastructure for further sustainable development of the country on a competitive basis. 2. Apply energy service contracts (ESCOs) in the budgetary, utilities and residential sectors. 3. Provide instrumental metering for energy consumption and establish ownership (management) of apartment buildings, which will significantly increase the efficiency of energy use by the population, introduce permanent mechanisms of state support for associations of apartment building co-owners on a co-financing basis to implement measures on thermal modernization of buildings.

2. Emission-free energy | 1. Apply the best environmental practices. 2. Establish and enforce requirements for the quality of energy supply, in particular regarding power supply continuity (reliability); marketable quality of services and energy; and the security of their supply. 3. Complete the construction of storage facilities for spent nuclear fuel and highly radioactive waste from its reprocessing.

3. Sustainable development | 1. Encourage research organizations for energy efficiency and hydrogen technology research. 2. Address market, regulatory and technical opportunities for the production and export of hydrogen from RES and NPP at guaranteed prices in Euro and long-term contracts.

Source: Centre for Economic Recovery Cabinet of Ministers of Ukraine VISION OF THE SECTOR: Mineral resources of Ukraine – the foundation of added value for Ukraine's growing economy

Relationship Direct impact - Real GDP, value added per employee, export of goods and services with strategic Indirect impact - Foreign investment, budget indicators of the economic vision

Strategic goal 1. Ensure transparency and accessibility of the 2. Ensure effective functioning of the industry through 3. Ensure that the needs of the Ukrainian economy are 4. Ensure harmonization of the industry with the industry for foreign and domestic investment the development of innovative approaches and met by creating a reliable basis for the manufacture of environment advanced technologies products with high added value

Strategic goals • Reduce the duration and simplify the procedure for • Attract USD 100 million of foreign and private R&D • Increase the volume of extraction of strategic minerals • Ensure the functioning of the mining industry in gaining access to exploration and mining rights investment and critical raw materials to satisfy 100% of domestic compliance with environmental standards from possible 180 days to 90 days • Create a state fund for R&D growth in the mining demand in 2030 • Reduce energy consumption of the mining industry by • Attract USD 2 billion in domestic and foreign industry • Meet 100% of Ukraine's needs in natural gas and oil 30% investment in exploration and development of • Provide training of the required number of specialists through its own production • Increase recycled and reused waste in mining by 50% deposits every year for the industry development • Ensure export of Ukrainian gas to Europe in 2030 • Ensure 100% rehabilitation of the extraction site areas • Explore 100% of promising deposits in Ukraine • Involve required number of specialists in R&D projects • Increase domestic primary processing of minerals • Reduce the level of depreciation of fixed assets in the mining industry • Increase state support for geological exploration in 2021–2030

Priority steps to • Expansion of the resource potential of Ukraine due • Ensuring incentives for building up and developing R&D • Achieving Ukraine's energy independence • Reducing the negative impact of the mining industry on achieve focus to large-scale geological exploration with centers, involve the required number of highly qualified • Reducing dependence on the supply of strategically the environment area goals sustainable funding from the special budget fund specialists important minerals and critical raw materials • Develop resource-efficient extraction (reduce energy, and private investments • Introduction of production automation and optimization • Stimulating export of fuel and energy water and materials use) • Acceleration and simplification of the process of of extraction • Development of the industrial facilities for pre- gaining access to subsoil use rights by adopting a • Stimulating implementation of advanced foreign processing of raw materials to increase the added new Code of Ukraine on Bowels technologies in the industry value of Ukrainian products • Development of a clear, effective and stable regulatory and fiscal policy to stimulate investment in the industry 7% billion UAH GDP 2% thousand people employed in the 5% billion UAH in 236.5 (2018) 242.8 sector (2018) 70.3 tax revenues

DEVELOPMENT OF THE MINING INDUSTRY AND ECONOMY GROWTH IMPACT OF THE MINING INDUSTRY IMPACT OF THE MINING ON MARKET PLAYERS INDUSTRY ON THE ECONOMY The relationship between labor productivity in the mining industry sector and GDP per capita, 2019 • Industry | The mining industry is a supplier • Increased production will of raw materials for key branches of the significantly reduce Ukraine's processing industry: metallurgy, mechanical dependence on the critical raw engineering, chemical. The development of materials import production will reduce import dependence of • the industry on the supply of raw materials Provision of the processing and accelerate the development of the industry with raw materials will sector allow producing more products with high added value • Energy sector | On the one hand, the mining • industry is a significant consumer of energy, Extraction of metals of the future on the other hand — the mining industry can will allow Ukraine to develop new ensure Ukraine's energy independence by branches of the processing increasing hydrocarbon production industry (manufacture of nickel batteries) • Transport | Transportation of mining • products accounts for almost half of all The development of new freight traffic in Ukraine. The development of technologies will increase labor this sector will contribute to the expansion capacity in the sector, reduce the and modernization of transport cost of Ukrainian products infrastructure in Ukraine • The mining industry will be a • International investors | Ukraine has powerful driver for economic significant mineral deposits which, provided development and will provide that the regulatory system is improved and higher budget revenues and GDP In 2019, Ukraine was in the group of countries characterized by low labor capacity in growth, as well as the creation of the mining industry sector and low GDP per capita access to the bowels is facilitated, will be an attractive investment for large international additional jobs In addition, Ukraine is characterized by a high dependence of the economy on the players mining industry. According to the eponymous rating, Ukraine ranks 47th out of 182 countries, with such countries as Gabon, Tanzania and Ethiopia neighboring with it

Source: Centre for Economic Recovery, the World Bank, International Council of Mining and Metals 1 2 3 4 FOCUS AREA GOALS EXPLORATION AND TRANSFER FOR EXTRACTION AND PRIMARY PROCESSING SALES, ABANDONMENT AND EXPLOITATION REHABILITATION OF DISTURBED LAND 1. Ensure transparency and accessibility of STATE POLICY IN THE MINING INDUSTRY the industry for foreign and domestic investment FUEL AND ENERGY RESOURCES EXTERNAL AND DOMESTIC MINERAL RESOURCES 2. Ensure the effective functioning of the • Natural gas MARKETS (BY THE LEVEL OF SOCIAL, ECONOMIC, industry by developing innovative INDUSTRIAL SIGNIFICANCE): • Industry • Oil approaches and advanced technologies • Balance • Coal • Agricultural sector • Energy • Conditionally balance • Uranium 3. Ensure that the needs of the Ukrainian • Off-balance economy are fulfilled by creating a reliable basis for the manufacture of ORE MINERALS ABANDONMENT products with high added value • Iron ores • Waste disposal MINERAL RESOURCES AND RESERVES • Titanic ores • Purification of water, soil and 4. Ensure harmonization of the industry (BY THE DEGREE OF GEOLOGICAL SURVEY) • Manganese ores air with the environment • Undiscovered potential • Long-term monitoring • Prospective INDUSTRIAL MINERALS • Explored • REHABILITATION OF DISTURBED • Discovered Salt • Bentonite clays LAND • Planting of territories • Gypsum and anhydride • Field suspension • Sulphur DEPOSIT EXPLORATION: • Natural restoration of territories • Kaolin • • Change of territory designated Search • Graphite • Mining tests purpose • Exploration GROUNDWATER • Commercial exploitation • Mineral • Industrial • Drinking and technical

4 SUSTAINABILITY AND RESOURCE EFFICIENCY

Source: Centre for Economic Recovery STATE OF FUEL AND ENERGY RESOURCES EXTRACTION COMMENTS Balance reserves of fuel and energy minerals, Ukraine, 2013–2018, million tons • The level of Ukraine's supply with fuel and energy reserves is uneven: for hard coal, it is high (1,089 years), but for hydrocarbons, it is quite low (51 years — oil, 871 160 695 118 48 years — natural gas), which creates significant risks to the energy security of 43.200 43.198 150 the state in the long run 109 34 • The balance reserves of all combustible minerals decreased compared to 2013. 0 This indicates a lack of prospecting exploration, as well as the low growth rate 2013 2018 2013 2018 2013 2018 of these operations, which is especially critical for hydrocarbons. In addition, Coal, million tons Natural gas, billion cubic meters Oil, million tons most of the balance reserves of natural gas and oil (80–90%) are already being Balance reserves being developed developed • Extraction of almost all fuel and energy minerals decreased in the period from Production of fuel and energy minerals, Ukraine, 2013–2019 2013 to 2019. Coal production decreased by 60% because a significant number 3.1 of mines remained in the occupied territory (only 33 out of 102 mines are now 21,5 2.7 controlled by Ukraine) 20,5 2.2 2.5 2.2 2.3 2.4 • Oil and natural gas production decreased by 0.5 million tons (23%) and 19,9 20,1 64,4 20,5 21,0 20,7 1.2 billion cubic meters (4%) respectively compared to 2013. The reasons for the 45,9 30,2 31,6 24,2 26,3 25,5 decline in production are complex: both technological barriers — depletion of oil 2013 2014 2015 2016 2017 2018 2019 and gas fields (85% and 77%, respectively) – and the difficulty of extracting reserves due to the depth of deposits (75% of reserves), and regulatory — lack of Coal, million tons Oil and gas condensate, million tons control over “dormant licenses”, high rental rates (31%/16%), and economic — a Natural gas, billion cubic meters decrease in demand for oil Export and import of minerals, Ukraine, 2013–2019, million USD • High dependence on imports of all major types of combustible minerals is typical for Ukraine. With the decline in production volumes, the total volume of 737 548 57 45 106 31 33 import of hard coal (anthracite coal) increased in 2017; more than half of it was imported from Russia. Gas imports account for 45% of total consumption and -3.829 storage, imports of oil and uranium are significant, including the share of raw -6.436 -6.602 -6.617 -6.159 -7.958 materials from Russia (45% and 60.7%, respectively) • When it comes to fuel and energy minerals, Ukraine exported mainly coal, but -14.433 exports have decreased 8 times since 2014 due to the loss of territories, and 2013 2014 2015 2016 2017 2018 2019 are currently insignificant compared to imports Export Import Balance Source: Centre for Economic Recovery, the State Statistics Service, Mineral Resources of Ukraine THE STATE OF ORE MINERAL EXTRACTION COMMENTS Balance reserves of ore minerals, Ukraine, 2013–2018, million tons • Among reserves of ore minerals in Ukraine, the largest are the reserves of ferrous metal ores: iron and manganese (4% and 17% of the world's reserves), 16.969 which are the basis for the development of ferrous metallurgy. If current 14.146 12.774 12.001 extraction volumes are maintained, iron ore reserves will last for 122 years • From 2013 to 2018, the number of balance reserves of ore minerals and their 72 88 development increased only for non-ferrous metal ores (1.6 times); for ferrous 2013 2018 2013 2018 2013 2018 and other metal ores the reserves decreased (by 10% and 4%), which indicates Ferrous metals Non-ferrous metals Precious and rare metals the lack of sufficient exploration. The prospective occurrences of minerals that are recognized as metals of the future (platinum, platinoids, copper, chromium) require supplementary exploration, while silver and gold reserves require Production of ore minerals, Ukraine, 2013–2019, million tons revaluation. 3.6 3.5 3.7 2.9 3.9 3.8 • Iron ores are leaders in extraction, but since 2013 their mining has been declining by an average of 2.8% per year. Ukraine produces 3–4 million tons of manganese ores annually (Ukraine is in the top 20 countries in the world). 177,0 176,0 172,0 164,0 162,0 153,0 128,0 Extraction of titanium ores is growing; the volume of titanium concentrate production amounts to 325 thousand tons, which is more than 5% of the world production. Given its significant reserves, Ukraine has the potential to increase 2013 2014 2015 2016 2017 2018 2019 production and meet the growing global demand for this ore Iron ores Manganese ores • The low quality of some minerals (manganese ores, iron bauxites, zinc ores) and difficult conditions of their occurrence do not allow Ukrainian raw materials to Export and import of ore minerals, Ukraine, 2013–2019, million USD be competitive, so their production is economically unviable. Investments are 3.879 needed in the development of technologies for efficient extraction and primary 3.452 3.581 2.734 3.024 processing of these raw materials 2.203 1.938 • Ukraine is a net exporter of iron ore, titanium ores and concentrates (including due to the limited domestic market), which makes it a prominent player in the world market. Exports of iron ore annually account for 99% of exports of all ores and about 5% of the value of total exports -744 -519 -490 -516 -1.084 -1.051 -815 • However, Ukraine remains a net importer of manganese ores, and it is 2013 2014 2015 2016 2017 2018 2019 dependent on the import of numerous other metal minerals: nickel ores, Export Import Balance aluminum ores, which indicates the need to increase their domestic production

Source: Centre for Economic Recovery, the State Statistics Service, Mineral Resources of Ukraine THE STATE OF INDUSTRIAL MINERAL EXTRACTION COMMENTS Balance reserves of industrial minerals and their development, Ukraine, 2013–2018 • Industrial minerals are the most common in Ukraine both in terms of the number of types and the number of discovered and developed deposits (4.5 out of 8.7 thousand deposits). Given that the country has 5% of deposits of all industrial 17.959 18.114 minerals in the world, Ukraine has significant potential to increase their 11.566 10.575 extraction and exports 1.669 1.932 3.178 3.167 • Balance reserves of industrial minerals have not increased for any of the 2013 2018 2013 2018 2013 2018 2013 2018 groups since 2013 due to lack of exploration (even for certain types of minerals Mining chemical, Mining technical, Non-metallic for Non-metallic for construction, that are especially important for the production of mining products, such as million tons million tons metallurgy, million tons million cubic meters alkaline raw materials for iron-ore pellet production) • Ukraine is the world leader in the extraction of certain industrial minerals. Of Production of mineral raw materials, Ukraine, 2013–2019, million tons the three types of non-metallic minerals, Ukraine is among the top 10 countries 38.2 in terms of extraction of kaolin (sixth place in the world) and graphite (eighth 1.2 5,8 place in the world); Ukraine also accounts for 1% of the world's salt production 24.9 23.8 25.1 24.1 24.9 12,5 1.4 21.5 2.4 1.8 • Although the extraction of certain industrial minerals increased (kaolin by 50% 2.5 2.4 1.8 2.2 2.1 2.1 2.1 1.8 1.8 and sand by 12%) between 2013 and 2019, the extraction of most of them 9,4 10,0 11,9 14,3 13,7 14,1 decreased significantly. Extraction of salt, limestone/fluxed limestone, chalk 18,7 11,6 has decreased, in particular, due to the fact that a large number of deposits and 7,6 7,7 6,6 6,1 6,9 reserves are concentrated in the East and in the Crimea 2013 2014 2015 2016 2017 2018 2019 • The growth of imports during 2017–2019 indicates that domestic production is Limestone Sands Salt Kaolin increasingly less able to meet the needs of major consumers of industrial Export and import of industrial minerals, Ukraine, 2013–2019 minerals (construction, agricultural, chemical industries). In addition to very scarce raw materials, such as granular phosphorites, minerals with the deposits 712 619 and reserves available in Ukraine are also imported 443 395 328 422 413 • Extraction of other industrial minerals (sodium salt, sulfur) allows meeting the needs of the Ukrainian economy and supporting exports. At the same time, exported raw materials are much cheaper than imported ones: the average cost -284 -226 -195 -251 -293 -284 of a ton of imported raw materials in 2019 was 45% higher than the value of -389 exported raw materials 2013 2014 2015 2016 2017 2018 2019 Export Import Balance

Source: Centre for Economic Recovery, the State Statistics Service, Mineral Resources of Ukraine THE STATE OF GROUNDWATER EXTRACTION CONCLUSIONS Groundwater balance reserves, Ukraine, 2013–2018, thousand cubic meters per day • According to the results of the regional assessment conducted in 1975–1980, 33.615 projected groundwater resources of Ukraine are quite significant and amount to 33.465 61,689.2 thousand cubic meters per day; they are enough to meet the growing 16.198 needs of the population and the industry 16.138 90 95 • However, the exploration of projected groundwater resources in Ukraine as a whole is not significant — only 26%. Exploration is insufficient — from 2013 to Underground mineral waters Industrial groundwater Drinking and technical groundwater 2018, the number of balance reserves increased only for underground mineral waters 2013 2018 • During the period of 2013–2019, the total extraction of groundwater decreased Dynamics of groundwater extraction in Ukraine, 2013–2019, thousand cubic meters per day by almost 2 times (by 2,430 thousand cubic meters per day). The tendency to -48% reduce groundwater extraction is due to economic reasons, decreased number 5.029 of water consumers and the share of groundwater use in the overall balance of 4.225 water consumption in Ukraine, as well as the occupation of the Crimea, Donetsk 3.258 3.274 and Luhansk regions 2.800 2.675 2.599 • The volume of unused projected groundwater resources in Ukraine is quite significant and reaches 95.7% which indicates significant potential for expanding their use in almost all regions of Ukraine, especially for small water 2013 2014 2015 2016 2017 2018 2019 consumers with drinking water needs up to 30–50 thousand cubic meters per day Total use of groundwater in Ukraine, 2019, thousand cubic meters per day • Of the total volume of groundwater extracted in 2017, a large share was used for domestic and drinking water supply (63%). Groundwater was also used for Production and technical production and technical needs (10.3%), agricultural needs (10.2%) Agricultural 9% Irrigation 8% • A significant problem with the use of groundwater and the risk to the future 1% supply of consumers with quality resources is the high level of their pollution through municipal effluents, livestock effluents, mineral fertilizers, agricultural 17% Unused water release products, lead, manganese and petroleum products 65% 0% Domestic and drinking Bottling and beverage production

Source: Centre for Economic Recovery, the State Service for Geology and Subsoil of Ukraine, Mineral Resources of Ukraine Transparency and accessibility of the Development of innovative Meeting the needs of the Ukrainian Harmonization of the industry with industry approaches economy the environment

• Lack of accurate data | There is no • Weak scientific and educational • Lack of priorities | There is no approved list of • Groundwater pollution | Due to disordered geological information on mineral reserves support of the industry | | Lack of strategically important minerals and critical storage of industrial waste, infiltration of and a single publicly accessible state scientific developments in the mineral raw materials toxic substances into groundwater with database of electronic geological industry, lack of new technologies precipitation • Decreased mineral extraction | | Reduction of information • Shortage of professional staff in mining areas as a result of hostilities in the East • Environmental problems associated with • Outdated mineral reserve estimate | Non- the industry | Significant staff and the annexation of Crimea, depletion of the mine closures | Non-compliance with compliance with international estimation outflow, low level of staff training at most convenient reserves mine closure standards, lack of mine systems and a lack of recent estimation of higher educational institutions closure regulations • No capacities for primary processing and balance reserves • Obsolete production and technical mineral concentration | Due to the lack of • Environmental problems related to • Lack of large-scale prospecting exploration | facilities | Most of the fixed assets processing capacities, manufacturers are mineral extraction | Accumulation of large Prospecting exploration was last conducted are worn out which leads to forced to export products with lower added amounts of residual products, significant 30 years ago reduced extraction efficiency and value emissions of harmful substances into the high accident rate; there are no atmosphere • Significant challenges with access to • Limited markets | High dependence of mining customs benefits for the import of bowels | Lack of an effective mechanism product sales on the domestic market and lost • Social issues related to mine closure| equipment for acquiring information, the complexity of markets Significant dependence of the population registration of land rights, the significant • Outdated technologies | There are in coal mining regions on the functioning • Inefficiency of the mechanism of concluding duration of the process of obtaining permits, no innovative approaches and of mines production sharing agreements | Lack of the complexity of small subsoil use, technologies for more efficient results in the process of signing PSAs • High power intensity of mining | The significant fiscal burden, the impossibility of extraction and exploration of mining industry is one of the largest selling permits minerals • Significant tax burden | Taxes in the industry consumers of fuel and energy resources in are among the highest in the world and do not • Low investment attractiveness | Lack of Ukraine contribute to the competitiveness of Ukrainian ready proposals for investment-attractive products projects and guarantees for the investor

Opaque and complex bowels access Low level of innovation and Insufficient level of extraction incentives Low level of monitoring and control system tecnification ECONOMIC RECOVERY & DEVELOPMENT FRAMEWORK

Drastic changes in Address current challenges Ukraine (2020) functioning Ukraine (2030)

AS-IS RECOVERY TO BE • Lack of accurate data on mineral reserves • There is a single publicly accessible database of geological • Audit of deposits on the state register, an estimate of reserves • Lack of large-scale prospective exploration for the past 30 information and their industrial value Transparency and years • A program of evaluation and analytical activities related to • In Ukraine, all the most promising deposits have been accessibility of • Excessively regulated and complex bowels access system mineral reserves has been developed explored, new deposits have been discovered the industry for • Lack of continuous informing about investment-attractive • Geological exploration is financed to the required extent • All geological information is digitized and is available in a investment objects • There is a transparent and simple procedure to provide bowels single digital database for use • In Ukraine, the most investment-attractive objects are • Obtaining special permits is accessible prepared annually

Development of • There is almost no scientific and educational support of the • Sufficient geology specialists are involved in prospective • The number of scientific and practical developments has innovative industry exploration and extraction increased • Significant professional staff outflow • The production and technical facilities of mining enterprises is • The main exploration and extraction equipment is approaches and • High cost of extraction modernized and meets the needs of enterprises manufactured in Ukraine and meets domestic demand advanced • Lack of innovative extraction technologies • New mining technologies are involved, which reduce its cost • In Ukraine, there are public and private R&D centers for the

technologies development of mineral extraction Sector components Sector • There is no list of strategically important minerals and critical • Ukraine clearly understands the priorities in resource • Ukraine fully meets the needs of the industry and energy raw materials extraction sector with its own raw materials Meeting the • Decreased oil and gas production volumes • In Ukraine, oil and gas production is growing from existing • Domestic production of the required mineral types has been needs of the • Lack of interest of local self-government bodies in bowels use brownfields, suspended, abandoned wells created Ukrainian • High fiscal burden • Ukraine has favorable conditions for attracting investment in • Ukraine competes with European and world leading players in economy • There are no mineral primary processing facilities extraction the field of mining in terms of investment attractiveness of the • Contraction of markets • Ukraine has facilities to create products with higher added sector; global mining companies come to Ukraine value

• Lack of an effective mechanism for monitoring and controlling • Mineral resources, geological environment and groundwater • The system of state geological control provides for Harmonization of the use of Ukraine's bowels are being monitored. Databases are filled with current data. compliance with the requirements of rational use of subsoil, • Significant environmental problems associated with mineral • Mineral extraction, mine closure is carried out according to safety for people and the environment the industry with extraction and mine closures world standards with the minimum possible negative impact • Energy consumption is minimum for the efficient operation the environment on the environment and development of the industry, greenhouse gas emissions are minimized

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future CHANGES REQUIRED

Initiatives — Responding to current challenges

1. Estimating mineral reserves and keeping records | 1. Start assessing mineral reserves according to international standards. 2. Adapt all regulatory procedures in the field of bowels use to international standards for the estimation of mineral reserves. 3. Develop a program of evaluation and analytical activities by the State Service of Geology and Subsoil of Ukraine, the State Commission of Ukraine on Mineral Resources. 4. Ensure funding of evaluation and analytical activities. 2. Access to geological information | 1. Provide a procedure for determining the value of the right to use primary and secondary geological information. 2. Introduce automatic calculation of the cost of geological information. 3. Introduce modern digital technologies for data storage and use, provide free access to information for investors. 4. Provide automatic accounting of groundwater extraction. 5. Create a national bank of geological information for its preservation as state property and multipurpose use. 3. Prospecting exploration | 1. Develop a state program to stimulate exploration. 2. Complete the regional geological study of territories, mapping of territories at a scale of 1:200000 at the expense of the state. 3. Provide secure and permanent state funding for exploration and ensure control over exploration operations. 4. Informing potential investors | 1. Develop a plan for putting up plots for tender rounds and hold such tenders on a regular basis. 2. Ensure wide coverage and interest of potential investors. 5. Deregulation and simplification of access to bowels | 1. Simplify the procedure for registration of land rights within the licensed area. 2. Provide the opportunity to change lands without legal restrictions. 3. Review the licensing system to remove all administrative barriers, set clear deadlines and eliminate discretion in the procedures for issuing, extending, re-issuing and changing permits. 4. Introduce 3 types of permits: geological survey, exploration and production license, and separate license for extraction. 5. Eliminate the need to obtain a mining allotment. 6. Provide the opportunity to submit documents for reporting in the user account. 6. Liberalize the circulation of special permits. 7. Simplify the rules for small bowels use. 8. Provide fiscal incentives to obtain special permits. 9. Simplify the procedure for extracting concomitant minerals. Initiatives – Drastic change in functioning

1. Estimation of mineral reserves and balance record-keeping |1. Develop a management system for mineral reserves and resources at the national level. 2. Conduct an analysis of the condition and audit of deposits on the state register. 3. Carry out a comparative assessment of mineral reserves to identify their industrial value. 4. Introduce a comprehensive balance monitoring system. 5. Carry out a reassessment of projected and prospective resources of drinking groundwater. 2. Access to geological information | 1. Digitize all geological information in Ukraine and enter it into a single digitized database of geological information. 3. Prospecting exploration | 1. Conduct prospective exploration, re-evaluate prospective sites. 2. Prepare for further licensing, exploration and development the most promising sites at the expense of private investors. 4. Informing potential investors | 1. Develop an annual system for preparing investment-attractive sites for the long run.

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future CHANGES REQUIRED

Initiatives — Responding to current challenges

1. Scientific and educational support of the geological industry | 1. Increase the state order for specialists in geology at higher educational institutions. 2. Create grant programs for studying abroad to train specialists in the field of geology. 3. Create conditions for involving foreign specialists in geological projects in Ukraine. 4. Stimulate the development of non-formal education (internships abroad to adopt experience), as well as seminars and training sessions. 5. Ensure research aimed at increasing the mineral resource base. 6. Improve exploration techniques for all types of minerals. 2. Production and technical facilities | 1. Implement government programs to support/finance the upgrade of equipment and infrastructure. 2. Carry out radical high organizational and technological modernization of coal production, where justified. 3. Provide fiscal incentives to modernize equipment. 3. Extraction technologies | 1. Create programs to stimulate new extraction technologies, as well as scientific and practical developments in the field of extraction. 2. Simplify the procedure for purchasing innovative technologies. 3. Stimulate the implementation of extraction automation processes. 4. Provide innovative approaches, introduce the latest technologies and equipment in new and existing natural gas fields. 5. Ensure consistent implementation of scientifically sound coal mining processes, accumulation and attraction of investment resources. 6. Improve technologies for drilling and intensifying mineral extraction. Initiatives – Drastic change in functioning

1. Scientific and educational support of the geological industry | 1. Increase public funding for research and development in geology. 2. Introduce incentives for public-private cooperation for the development of innovative exploration and extraction technologies. 2. Production and technical facilities | 1. Ensure the creation of own production facilities manufacturing most of the fixed assets of drilling equipment (oil). 3. Extraction technologies | 1. Create public and private R&D centers for extraction development. 2. Attract international grants to fund R&D centers. 3. Encourage subsoil users to complete, rather than selective development of deposits.

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future CHANGES REQUIRED

Initiatives — Responding to current challenges

1. Priorities for the state | 1. Identify the demand for mineral raw materials for the next 20 years. 2. Identify a clear list of strategically important minerals and critical minerals for exploration and extraction. 2. Extraction incentives | 1. Stimulate the interest of local self-governments in subsoil use. 2. Cancel “dormant licenses”. 3. View and optimize industry taxation. 4. Develop incentives for small and medium business segments. 5. Provide preferential depreciation. 6. Improve the PSA mechanism. 7. Create extraction programs on the continental shelf. 8. Adopt regulations on the rules of resumption of suspended and abandoned wells. 3. Effective management | 1. Restructure coal industry. 2. Prepare promising mines for privatization and shut down unprofitable state mines. 3. Create full market conditions to increase the financial stability of enterprises. 4. Optimize the management of Naftogaz of Ukraine, NJSC and all state-owned oil and gas enterprises. 4. Primary processing | 1. Introduce the concept of “Integrated subsoil use facility” into the legislation and establish non-auctioned access to bowels for the owners of such facilities. 2. Provide preferential tax conditions for subsoil users building primary processing plants, including through the Industrial Parks tool. 5. Markets | 1. Stimulate redirection to new markets (use) of industrial and other minerals. 2. Redirect the coal industry to new markets (chemical industry). Initiatives – Drastic change in functioning

1. Priorities for the state | 1. Develop and implement a program to stimulate exploration and extraction of strategically important minerals and critical raw materials. 2. Extraction incentives | 1. Bring rent taxation rates for oil and gas extraction to the European average values. 2. Introduce a progressive tax scale by identifying groups of subsoil users according to different criteria and with different benefits. 3. Introduce benefits for profit that is reinvested in production. 4. Promote Ukrainian PSA tenders in the world and attract new investors. 3. Effective management | 1. Complete privatization process and shut down unprofitable state-owned mines. 4. Primary processing | 1. Attract funds for the construction of primary processing plants on the PPP terms.

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future CHANGES REQUIRED

Initiatives — Responding to current challenges

1. Rational subsoil use | 1. Adopt the procedure for state geological control over the rational subsoil use. 2. Ensure monitoring of groundwater extraction. 2. Prevention of extraction-related environmental problems | 1. Introduce systemic ecological control over the quality of the environment. 2. Adapt national legislation to the EU legal regulations in the field of waste management in the mining industry. 3. Legislatively determine the principles of efficient extraction of oil and gas reserves. 4. Forecast emergencies and potentially dangerous oil and gas facilities and develop appropriate measures to prevent them. 5. Create an accounting system for all man-made facilities of the oil and gas complex. 6. Provide monitoring of dangerous exogenous processes, geochemical condition of landscapes, as well as ecological and geological research. 3. Preventing environmental issues related to mine closure, finished extraction | 1. Develop and approve a state program for the rehabilitation of disturbed land and ecological restoration of coal mining areas. 2. Approve national norms and standards for mine closure. 3. Approve the State Targeted Environmental Program “Decommissioning of Uranium Facilities” for 2022–2026. 4. Preventing social problems related to mine closure | 1. Develop and implement social protection programs. 2. Develop and implement a staff retraining program. 3. Develop a program to promote the diversification of regional economies that are most dependent on the coal industry. Initiatives – Drastic change in functioning

1. Rational subsoil use | 1. Create a system of state geological control clearly regulated by law. 2. Create a system of state monitoring of the rational subsoil use that meets current needs. 2. Preventing environmental issues related to mine closure, finished extraction | 1. Create a special fund to ensure rehabilitation of disturbed lands after the completion of works on subsoil areas. 3. Energy efficiency | 1. Introduce mandatory energy efficiency programs for all mining companies. 2. Evaluate the energy efficiency of facilities of the oil and gas complex of Ukraine. 3. Implement an energy management system in compliance with international standards. 4. Stimulate the introduction of new technologies for oil production and preparation that ensure energy efficiency (particularly at state-owned enterprises). 5. Stimulate the introduction of new technologies for coal mining that ensure energy efficiency (particularly at state-owned enterprises).

Source: Centre for Economic Recovery, GCI 2019, Ukrainian Institute for the Future Cabinet of Ministers of Ukraine VISION OF THE SECTOR: UKRAINE is a logistics and production hub that meets the needs of the economy and allows realizing export and transit potential

Relationship with Direct impact – Real GDP, foreign investment, export of goods and services strategic indicators of the economic vision

Strategic goal 1. Meet the needs of the Ukrainian economy by means of the developed and modernized transport and infrastructure 2. Ensure efficient and fair 3. Ensure effective 4. Realize export and transit regulation management and potential of Ukraine administration Ground Water Air

Strategic goals • Repair and reconstruct 10,000 km • Increase minimum level of efficiency in • Increase the total volume of passenger • Create an independent • Ensure the • Ensure Ukraine's joining TEN-T, by 2030 (including 3,613 km during terminals up to 70%, and expand traffic at Ukrainian airports to 71.2 million transport regulator implementation of capital maps of freight flows Europe – 2 2021-2022) processing capacity to 192 million tons passengers per year • Finance socially important investment plans for the Central Asia – China, TRACECA 1 • Reduce the number of main tracks per year • Increase the number of transit flights transportation from the state development of port and the development of part of with overdue major repairs to 0 km • Increase river freight traffic to 20 million and local budgets infrastructure the Baltic – corridor • Reduce locomotive wear to 45% tons by 2025 • Increase the volume of within its territory – the Dnipro • Build new cement concrete roads • Ensure an increase in the number of attracted investment in River and the Pripyat River deep-water (from 19 m) marine terminals transport and • Increase the volume of in Ukraine to at least 5 infrastructure to USD 30 container transportation to 2 billion million tons

Priority steps to • Update of transport strategy • Development of the Inland Waterway • Creating a development strategy for • Establishment of an • Ensuring effective • Creating conditions for the achieve the • Modernization the railway Transport Strategy and update the domestic air transportation independent tariff regulator functioning of the rail development of multimodal direction goals infrastructure Maritime Transport Strategy • Modernization of regional airports and in the transport sector market transport • Development of high-speed • Modernization of port infrastructure construct new ones (including on PPP • Establishing economically • Reforming the Ukrainian • Creating preconditions for passenger rail transport (including through PPP) terms) justified tariffs and fees Sea Ports Authority Ukraine's integration into the • Modernization and development of • Eliminating bottlenecks at port railway • Creating multimodal logistics centers in based on the cost price and • Creating preconditions for international transport corridors road infrastructure (including the sections Kyiv, Kharkiv, Odesa, Dnipro, Lviv restore core assets of the greater involvement of • Development of transport and construction of concrete roads) • Restoration and development of river • Stimulating transit flights in Ukrainian industry private investment in logistics infrastructure: create a infrastructure and maintain fairway airspace following the restoration of • Implementation of the public transport and logistics hub system parameters on IWT effective control over the territories of the service contract mechanism infrastructure • Ensuring the competitive cost of • Creating conditions for the construction Autonomous Republic of Crimea and transit transport by rail of transport and logistics hubs on the regions on the east of Ukraine rivers

Source: Centre for Economic Recovery Notes: 1 – According to the Strategy for the Development of Seaports of Ukraine 2030. The indicators will be revised. 2 – According to the Strategy for the Development of the Aviation Industry. Indicators will be revised 3% 3% 3% 309 billion UAH of sales volume (2018) 29.4 billion UAH of taxes paid (2018) 488 thous. employees (2018)

TRANSPORT AND INFRASTRUCTURE DEVELOPMENT AND ECONOMIC IMPACT OF TRANSPORT AND IMPACT OF TRANSPORT AND GROWTH INFRASTRUCTURE ON MARKET INFRASTRUCTURE ON THE PLAYERS ECONOMY The relationship between transport infrastructure quality and GDP per capita, 2019 • Population | Transport and infrastructure • Transport and infrastructure development will ensure population mobility development will enable the and interregional integration. Passenger increase in GDP traffic is necessary both for transportation • of workers and ensuring consumer mobility The potential of total investment in transport and • Processing industry | Transport and infrastructure is up to USD 30 infrastructure development will contribute to billion the development of the processing industry • as one of the main suppliers of transport Developed and competitive and infrastructure (mechanical engineering, transport and infrastructure will construction materials) and a key consumer increase the export of domestic of freight traffic – the share of the industry products was 22% of the total traffic volume • High-quality transport and • Mining industry | Developed transport and infrastructure will increase labor infrastructure are necessary for the effective productivity in the economy functioning of the mining industry – the • Transport and infrastructure largest consumer of freight traffic (42% of development will be a catalyst the total traffic volume) for creating additional 20 • Agricultural sector | Transport and thousand new jobs and 80 infrastructure development will contribute to thousand adjacent jobs for USD the growth of the export-oriented agricultural 1 billion of investments sector (20% of the total traffic volume)

In 2019, Ukraine ranked 59th in the world in the transport infrastructure quality according to the Global Competitiveness Index As a rule, countries with higher infrastructure quality show higher GDP per capita

Source: The Centre for Economic Recovery, the State Statistics Service, the World Bank, the Note: industries related to the gas transmission system and postal services are excluded World Economic Forum from the calculations VALUE CHAIN WITHIN THE TRANSPORT AND INFRASTRUCTURE SECTOR FOCUS AREA GOALS

SUPPLY TRANSPORT AND INFRASTRUCTURE CONSUMERS 1. Meet the needs of the Ukrainian economy through the developed and modernized transport and 2 infrastructure STATE REGULATION POPULATION POPULATION 2. Ensure efficient and fair regulation

3 MANAGEMENT AND ADMINISTRATION 3. Ensure effective management and INDUSTRY administration in transport and infrastructure INDUSTRY TRANSPORT MINING 4. Realize export and transit potential of Ukraine RAILWAY MARITIME RIVER MOTOR AIR TRANSPORT TRANSPORT TRANSPORT TRANSPORT TRANSPORT AGRICULTURAL AGRICULTURAL SECTOR SECTOR 1 STATIONS, ROUTES, STATIONS, AIRPORTS, RAILWAY PORTS, PORTS, BUS SERVICE SECTOR UKSATSE, STATIONS, TERMINALS TERMINALS, STATIONS, SERVICES CONSTRUCTION TRACKS LOCKS ROADS SECURITY AND INFRASTRUCTURE DEFENCE SECTOR

SERVICE SECTOR 4 INTERNATIONAL TRANSPORT CORRIDORS FOREIGN MARKET

Source: Centre for Economic Recovery THE STATE OF RAILWAY TRANSPORT AND INFRASTRUCTURE CONCLUSIONS Railway cargo dispatch and UZ revenues, 2013–2019 • The railway's revenue is mostly formed by freight traffic (88% in 2019); since 2013, the revenue from freight traffic has almost doubled, despite a gradual million billion UAH decline in volumes caused by the rising cost of carriage and the economic crisis tons 377 400 325 150 294 292 • The freight traffic structure is changing: the volume of transported coal has 300 277 268 263 100 decreased by 2.5 times since 2013 while the volume of transported grain and 200 50 grinding products has doubled; these changes are primarily caused by hostilities 100 in eastern Ukraine and increased grain yields 0 0 2013 2014 2015 2016 2017 2018 2019 • However, the income from freight traffic is spent to cover losses in the Cereals, million tons Other, million tons passenger segment which is not typical for most countries. In 2019, losses Coal and coke, million tons Revenue from freight traffic, billion UAH from passenger traffic amounted to UAH 12.8 billion that were compensated by MMS products and construction materials, Revenue from passenger traffic, billion UAH income from freight traffic million tons Implementation of UZ's capital investment plans, 2016–2019 • The financial resource of UZ is additionally limited due to inappropriate 26 expenses and inefficient use of capacities. UZ pays tax on land under the tracks which is contrary to the European practice (UAH 4.2 billion in 2019). UZ also 18 16 does not use available resources to increase its revenue (leasing/sale of non- 11 core assets, sale of scrap metal) 17 7 11 (64%) 9 • The consequence of financial imbalances is consistent underperformance of (68%) (62%) (51%) capital investment plans: in 2019, the capital investment plan was implemented 2016 2017 2018 2019 only by 51%. Plan, billion UAH Actual, billion UAH • As a result, most of the railway's assets are critically worn out. This affects the The railway fixed assets' wear rate, 2018 cost, quality, speed and safety of traffic. As of the end of the first half of 2020, out of 26.7 thousand km of tracks, 6.4 thousand km require major repairs and Monopolized market Open market another 2.7 thousand km require reconstruction 2 6 7 73 • The problem of rolling stock wear (90+%) is also critical, and private enterprises 98 94 93 10 are trying to solve it at their own expense: a share of private freight cars was 27 90 58% in 2019. Private cars are in much better condition: 41% of them were Diesel locomotives Electric locomotives Passenger cars Track Freight cars Freight cars purchased in 2017–2019 (UZ) (private) Residual value, % Wear rate, % Source: Ukrzaliznytsia, the State Statistics Service, the Centre for Transport Strategies THE STATE OF MOTOR TRANSPORT AND INFRASTRUCTURE CONCLUSIONS The dynamics of passenger and cargo traffic by road, 2013–2019 • The number of passengers transported by road has almost halved since mln passengers % 2013. A significant problem is the shadowing of passenger traffic: according 4,000 3,344 150 2,913 to the Ukrainian Institute for the Future, about 40% of intercity and 3,000 2,250 100 interregional traffic is illegal. 2,025 2,019 1,907 1,805 2,000 50 • The situation in cargo traffic is better: the volume of cargo traffic by road has 1,000 increased by 30% since 2015. In particular, this growth is caused by the 0 0 2013 2014 2015 2016 2017 2018 2019 gradual transition of cargo traffic from the railway to motor transport. However, this negatively affects the quality of road infrastructure in the Number of passengers, millions Change in the volume of motor freight traffic (2013=100%), % absence of effective dimension and weight checking Motor share (passengers), % Change in the volume of freight traffic by rail (2013=100%), % • Motor transport development is hindered by the unsatisfactory state of road Ukravtodor's expenses on roadwork and road infrastructure quality indicator, 2013–2019 infrastructure: about 90% of roads are worn-out according to BRDO calculations. In particular, the share of major highways (including international, 2,1 2,2 2,4 2,4 2,4 2,7 3,0 60 national and regional roads) in need of current or major repairs was 55% in 39 2016, according to the International Roughness Index methodology 40 30 25 • State budget expenditures on road repair and construction more than 18 22 20 16 17 35 doubled from 2013 to 2019. In 2020, almost UAH 130 billion were allocated 23 17 26 15 14 13 to road construction. At the same time, the quality of road infrastructure 0 3 2 2 4 5 4 4 2013 2014 2015 2016 2017 2018 2019 remains low: according to this indicator, Ukraine ranked 119th in the Road Infrastructure Index among 141 countries neighboring to Ethiopia and Budget funds, billion UAH Road infrastructure quality index Kyrgyzstan Credit funds, billion UAH • Not just the road but also bridge infrastructure requires modernization: only 2% of 5,631 bridges examined by Ukravtodor are in good condition (35% of the Road infrastructure quality index, 2019 6,4 total number of bridges were examined, mainly state-owned); the number of 5,0 5,2 5,3 non-operable bridges has doubled since 2015 and amounted to 2.7%. 64% of 4,3 4,6 3,0 bridges do not meet modern standards in terms of dimensions and load capacity.

Ukraine Poland China Turkey Azerbaijan Germany Netherlands

Source: the State Statistics Service, Ukravtodor, the World Bank, BRDO, the Ukrainian Institute for the Future THE STATE OF AIR TRANSPORT AND INFRASTRUCTURE CONCLUSIONS Dynamics of domestic flights, 2013–2019 • In the aviation industry, there has been a trend of increasing air traffic since million -18% thous. 2000, with temporary drops in 2009–2010 and 2014–2016 due to the economic persons flights crisis and aggression of the Russian Federation. In particular, international air 3 40 2.4 2,2 2,3 transportation was developing in Ukraine at a record pace in 2016–2019 (an 1,9 2 1,6 30 increase in passenger traffic by 94%) 1.3 1.3 20 • However, the potential of domestic flights remains unrealized: the share of 1 10 domestic flights was 9.2% of the total number of flights and 10.6% of the total 0 0 2013 2014 2015 2016 2017 2018 2019 number of passengers in 2019 • Passenger traffic at Ukrainian airports has almost doubled over the past 5 The number of passengers, million persons The number of flights, thous. flights years (excluding Donetsk and Simferopol airports). However, the coronavirus pandemic affected the recovery of air transport: for 9 months of 2020, Ukrainian Dynamics of transit flights, 2013–2019 airports received by 62.9% fewer passengers compared to the same period in thous. 2019 flights -60% % 400 352 100 • As of 2013, most of the flights in Ukrainian airspace were transit ones, their share was 66%. Transit traffic provided financing for the modernization and 300 214 operation of the Ukrainian air navigation system: up to 50% of UKSATSE's 200 50 117 125 142 86 102 revenues came from transit traffic. 100 • 2013–2016 crisis led to a significant drop in transit flights: hostilities in eastern 0 0 2013 2014 2015 2016 2017 2018 2019 Ukraine and occupation of the Crimea, ban on transit flights for Russian airlines and air traffic with Russia led to a three-quarter drop in transit in 2013–2016; Transit flights, thous. flights Share of transit flights, % the volume of transit flights in 2019 is 40% of the pre-crisis level Air transport infrastructure quality index, 2019 • The development of domestic and transit air traffic is hindered by wear and obsolescence of aviation infrastructure at airports. The airfield infrastructure is 6.4 5.4 5.5 5.8 in a critical condition: according to the expert assessment, the airfield 4.6 4.8 4.0 infrastructure ware rate is 95% in 17 airports • Aviation infrastructure quality is quite low compared to other countries. In 2019, Ukraine ranked 103rd in the Aviation Infrastructure Index among 141 Ukraine China Poland Turkey Germany Azerbaijan Netherlands countries in the world

Source: the State Statistics Service, the State Aviation Administration, UKSATSE, Aviaplan THE STATE OF MARITIME TRANSPORT AND INFRASTRUCTURE CONCLUSIONS Dynamics of passenger and freight traffic by sea, 2010–2019 • Freight and transshipment volumes in seaports have significantly decreased. million million Freight volumes transported by sea decreased by 38% in 2013–2019. tons -38% persons Transshipment volume in Ukrainian seaports decreased by 10% in 2013–2018 4 3 3 8 (including due to Russian aggression) but reached a record 160 million tons in 3 3 3 2 6 2019 over the past 10 years 2 2 2 4 • The situation with passenger traffic, which almost stopped after the occupation 1 2 of the Crimean Peninsula by Russia, is even worse: in 2019, the number of 0 0 2013 2014 2015 2016 2017 2018 2019 passengers amounted to 79.4 thous. persons, while in 2013 it exceeded 6.6 million people Transported freight, million tons The number of transported passengers, million persons • A significant problem is the inefficient management of the port infrastructure: Implementation of USPA capital investment plans and port infrastructure index indicator, 2016– during 2015–2019, the USPA had high earning capacity and profitability – net 2019 3.9 income amounted to UAH 1.5–3.9 billion. Instead of investing in the 3,8 3,9 infrastructure, most of the USPA's revenue was channeled to the state in the 4 3,5 4 3,4 form of fees, taxes, and dividends. Over the past 5 years, the average annual 2.8 3 2.6 3 deductions in favor of the state exceeded the amount of capital investment by 3.5 times 2 2 • The consequence of significant contributions to the state budget is a 1 0.7 1 1,6 1,4 systematic underperformance of seaports capital investment plans (50% in 0,5 0,7 0 0 2019), and therefore, their technical level does not meet modern requirements to 2016 2017 2018 2019 service provision Port infrastructure index indicator Plan, billion UAH Actual, billion UAH • The formation of port charges in Ukraine is inefficient and opaque. Ukrainian Port infrastructure quality index, 2019 ports are among the most expensive in the Black Sea region and compared to 6,4 their world analogues. Port charge goals in Ukraine are not established by law 5,1 5,2 4,5 4,5 4,7 4,8 and their misuse leads to artificial overstatement, which hinders port 3,9 infrastructure development • As a result, company managers assess the Ukrainian port infrastructure as mediocre. In terms of port infrastructure quality, Ukraine has 3.9 points out of 7; Ukraine Poland China Turkey Egypt Azerbaijan Germany Netherlands the average value in the EU is 4.8. Points of Ukraine's direct competitors in this rating are significantly higher

Source: the State Statistics Service, USPA, the World Bank, the World Economic Forum THE STATE OF RIVER TRANSPORT AND INFRASTRUCTURE CONCLUSIONS

Freight and passenger traffic on the Dnipro river, 2016–2019 thous. • The potential of river freight traffic in Ukraine is not realized: according to the million tons persons State Statistics Service, the volume of freight transportation by rivers of Ukraine 15 600 12 reached over 60 million tons in 1991. But in 2019, the volume of traffic 10 10 8 400 amounted to 18.2 million tons 6 3 5 3 1 2 5 2 1 0 0 200 • In recent years, there has been a gradual recovery in river traffic: freight 1 0 0 3 4 5 5 transportation along the Dnipro river increased by 83.4% in 2016–2019 and 0 0 2016 2017 2018 2019 reached 11.79 million tons in 2019. In particular, the volume of cereal Cereals, million tons Building materials and other, million tons transportation has increased by 2.4 times since 2016. Instead, the Steel products, million tons The number of transported passengers, thous. persons transportation of petroleum products decreased by almost 12% Petroleum products, million tons • Passenger traffic by river is also low. In 1990, about 19.1 million passengers Financing of major repairs of locks, 2017–2020, million UAH were transported by inland waterways. While in 2019, less than 600 thousand persons used river transport. Today, such transportation is chosen to get to 126 124 108 suburban areas (the so-called “country navigation”) • River infrastructure is outdated and requires ongoing and major repairs, 39 modernization or replacement. In particular, the technical condition of Dnipro 47 5 23 locks is approaching critical as major repairs have not been carried out for a 2017 2018 2019 2020 long time. Unused funding Allocated funding in 2020 • Funds for major repairs of locks, which the state started allocating in 2017, are Completed works not being used to the full. For example, the cost of works carried out in 2019 amounted to only UAH 22.7 million out of the allocated UAH 124.3 million The operational length of river shipping routes, 1990–2018, thous. km (81.7% of the funds were not used). Most repairs are not performed on time • Reduction of river shipping routes is also a significant problem: the operational -53% length of river shipping routes has more than halved since 1990 (from about 4 4.0 thous. km to 1.9 thous. km in 2018) 2.4 • 2.2 2.2 2.1 2.1 1.9 In addition, inland waterways do not fully meet the safe navigation 1.6 1.6 1.6 requirements: only 57% of the total length of shipping routes have guaranteed depths

1990 2000 2005 2010 2013 2014 2015 2016 2017 2018 Source: the State Statistics Service, UkrRIS, Rivers of Ukraine Association, BRDO TRANSIT DYNAMICS AND INTERNATIONAL TRANSPORT CORRIDORS CONCLUSIONS Dynamics of transit freight, 2013–2019 • Ukraine's location creates a huge transit potential which has not been fully 29 32 30 realized over the past 30 years. The International Trade Administration 24 estimates that only 25–30% of the country's transit potential is currently in use. 20 20 17 16 16 14 In recent years, there has been a drop in both transit freight traffic by rail (-55% 10 12 10 11 in 2013–2019) and a drop in transit cargo transshipment in ports (-62% in 2013–2019). 2013 2014 2015 2016 2017 2018 2019 • Ukraine is located at the intersection of major international transport corridors. Transshipment in ports, million tons Railway traffic, million tons 4 out of 10 European transport corridors pass through Ukraine, so Ukraine may become a convenient hub between the EU and Asia. In particular, 2 multimodal International transport corridors corridors of the Trans-European Transport Network (TEN-T) and one route of Gdansk-Odesa route and Pan-European Potential Baltic-Black Sea the Europe-Caucasus-Asia Transport Corridor (TRACECA) pass through Ukraine transport corridors corridor Transport Corridor Europe- • Trans-European Core Transport Network. Ukraine is already included in the “One Belt – One Path” Caucasus-Asia (TRACECA) indicative maps of the Trans-European Core Transport Network (TEN-T) project.

Estimation of airspace congestion Within the TEN-T framework, Ukraine plans to attract from international - low organizations, public-private partnerships, and budget funds EUR 4.5 billion for - moderate the development of roads (960 km), railway infrastructure (530 km), ports and - high aviation until 2030. • Vyborg One Belt – One Path. Despite the fact that Ukraine has joined the cooperation Helsinki within the framework of the initiative, it does not use the project's potential to the fullest, primarily due to transit problems related to the ban on transit IX Moscow transportation from the Russian Federation and restrictions on road transport Gdansk permits from Poland and other European countries. Kyiv • Baltic-Black Sea corridor. Not only the joining of existing routes but also Berlin III Odesa creating new ones can be significantly beneficial: E-40 project provides for the Lviv V creation of a river route from the Black Sea to the Baltic Sea Trieste IX • Common aviation space. There is also low congestion of air traffic. Only 2–3% of exports and imports are carried out by air. Accession to the Common Aviation Area Agreement will be an incentive for the development of international Alexandroupoli aviation traffic

Source: USPA, the Centre for Transport Strategies, the European Business Association, the International Trade Administration, the Centre for Economic Strategy Effective management and Transport and infrastructure development Efficient and fair regulation Export and transit potential administration • The high wear rate of the railway infrastructure and • Lack of an independent regulator | The • Inefficient organization of • Decreased transit cargo volumes in Ukraine rolling stock | Almost a quarter of the total length of competition in the markets of passenger the rail transportation | The transit cargo volume has significantly operational railway tracks requires major repairs and the and freight traffic that depends on the market | The existence of the decreased over the past 7 years (from 35 rolling stock wear rate is over 90%. use of natural monopoly services is state monopoly in the rail million tons in 2012 to 11 million tons in absent or very limited transportation market, which 2019 in seaports and from 32 million tons in • High road infrastructure wear | About 90% of roads are limits the efficiency of 2012 to 14 million tons in 2019 on the worn-out; Ukraine ranks 119th in terms of road • Economically unjustified rail railway transport and railway) infrastructure quality transportation tariffs and port charges | attracting investment Unclear and opaque mechanism for tariff • Complex customs procedures| Complex • Poor quality of bridge infrastructure | 2% of 5,631 formation without the reference to • Inefficient USPA customs procedures overloaded with a bridges examined by Ukravtodor are in good condition; transportation cost; port charge goals are management |Unjustified large number of formalities 64% of bridges do not meet modern standards in terms not established by law number of personnel, lack of of dimensions and load capacity • Low containerization rate | The mandates to pursue a • Inefficient state regulation of airport fees containerization level in Ukraine was about • Mediocre state of the infrastructure in Ukrainian ports | coordinated port | Airport fees are set by the Ministry of 1% in 2018, while in Russia this indicator According to CGI, in Ukraine, the quality of port development policy, poor Infrastructure of Ukraine without regard was 5%, 15% in Belarus and about 45% in infrastructure was 3.9 out of 7 points in 2019, compared implementation of capital to the competitive situation in the market, the EU countries to the average value for EU countries – 4.8. investment plans which does not allow attracting additional • Poor development of • Outdated and worn-out river infrastructure | The flights and airlines • Investment needs intermodal/multimodal traffic| The lack of technical condition of the Dnipro locks is approaching significantly exceed the • Absence of accounting and targeting of developed infrastructure for this type of critical; reduction of the inland waterways length funding level | Even with a 7- preferential transportation | High traffic. The lack of strategy for the fold increase in capital indebtedness of local authorities for road multimodal traffic development • Significant tax burden | The application of VAT at all investment during 2013– stages of air services, tax on land under railway and rail transportation 2018, fixed assets ware was • Untapped potential for integration into the infrastructure, high import duties on equipment that do • Outdated structure of transportation 63% in 2018 international transport corridors | not allow investing in the infrastructure modernization organization | The absence of ‘local’ According to the International Trade transportation, which hinders the Administration, Ukraine uses 25–30% of its development of the transport system transit potential • Complex certification and licensing procedures | Unjustified bureaucratic restrictions and complex procedures for obtaining permits and licenses

Poor development and highly depreciated Inefficient management and Inefficient state regulation Failure to use export and transit potential infrastructure administration

Source: Centre for Economic Recovery ECONOMIC RECOVERY & DEVELOPMENT FRAMEWORK

Drastic changes in Address current challenges Ukraine (2020) functioning Ukraine (2030)

• Outdated transport infrastructure (river, rail, road, and • Financing of the infrastructure modernization from • Transport infrastructure is modern, meets the needs bridge) the state budget, through concessions and the PPP and competes with the European one Developed and • Low funding for infrastructureAS-IS upgrades mechanism RECOVERY • The infrastructure isTO modernized BE at the expense of • Significant tax burden • Major and ongoing repairs of key transport private investors, the PPP mechanism upgraded • Lack of targeted programs and strategies for the infrastructure completed • New necessary infrastructure facilities are created: transport and development of industries and individual • Service markets are liberalized and demonopolized airports, roads infrastructure infrastructure facilities • Financial situation of transport service providers is • Traffic in Ukraine (cargo and passenger) increased improved • Transport infrastructure meets safety requirements

• No independent regulator • The National Commission for effective regulation in • Passenger and cargo transportation market is • Tariffs of natural monopolies (railways, seaports) are the field of Transport is established competitive Efficient and economically unjustified • Transparent formation and regulation of tariffs for • Increased competition in related markets fair regulation • Local self-government authorities' indebtedness and transport monopoly services • Air traffic to remote regions of the state is introduced low compensation for preferential transportation • A system for ensuring expenses for socially important (railway and road transportation) transportation is implemented

Sector components Sector • USPA is a high-profit organization with the poor • USPA is an effective organization with a corporatized • The functioning and development of seaports is Effective implementation of capital investment plans structure and supervisory board, optimal staffing harmonized, a landlord port model is implemented management • UZ is a state monopoly with a regional structure and • Vertically integrated UZ management system, UZ is • There is competition within the UZ segments and financial imbalances financially and economically stable • Investment attracted through the PPP mechanism administration • Investment needs significantly exceed the funding • No. of investment attracted through the PPP level (in particular, budget funds) mechanism

• There is no strategy for multimodality development • The transportation of containers and other cargo • Ukraine is involved in international transit flows The export • The low containerization level in Ukraine through the territory of Ukraine is increased • Ukraine participates in all major transnational and transit • Reduced transit cargo in Ukraine • The Ukrainian transport system is integrated into the transport projects and has attracted investments • The untapped potential of integration into EU transport system • Revenues from transit cargo flow increased potential is international transport corridors realized

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges

1. River transport | 1. Address the issue of systemic financing of state enterprises/institutions of the river industry in the amount necessary for normal and full operation. 2. Provide financing for maintaining fairway dimensions. 3. Finalize and approve the draft Law “On inland water transport”. 4. Develop and implement a highly specialized state program for the river industry development. 5. Reduce the cost of river transportation. 6. Reduce fiscal pressure on river ports. 7. Provide state support to the shipbuilding industry. 8. Improve navigation safety. 9. Ensure the environmental safety of river transport. 2. Maritime transport | 1. Ensure the implementation of capital investment plans for seaports. 2. Eliminate bottlenecks of the port railway infrastructure. 3. Take comprehensive measures to ensure safe navigation in the territorial sea and seaport waters. 4. Ensure Ukraine's accession to and implementation of 15 international conventions and protocols in the sphere of merchant shipping. 5. Demonopolize a pilotage service market. 6. Define and legislate seaport boundaries; determine strategic and secondary ports. 6. Improve navigation safety. 7. Ensure the environmental safety of maritime transport. 3. Railway transport | 1. Ensure the financial recovery of UZ. 2. Carry out major repairs of the railway track and other railway infrastructure elements. 3. Establish a procedure for prohibiting vehicle operations, in particular, railway transport freight cars and introduce restrictions on extending the service life of certain types of cars. 4. Ensure rolling stock modernization (incl. power vehicles) with avoiding the stock deficit. 5. Solve the problems of rolling stock cannibalization and cargo theft. 6. Improve the safety of railway traffic. 7. Ensure the environmental safety of railway transport. 8. Achieving the effective duration of the rolling stock exploitation (in accordance with the best practices of US and EU) 4. Motor Transport | 1. Expand and ensure the implementation of road construction programs. 2. Provide funding and expand the “National Bridge Reconstruction Program”; Complete a full audit of the state of bridge infrastructure. 3. Regulate quality conditions and criteria for roadworks. 4. Ensure equal conditions and fair road quality control. 5. Reduce the tax burden 6. Ensure European rules for access to and works in the market. 7. Regulate the relationship between the authorities with carriers and bus stations. 8. Meet the needs of international cargo carriers with the rights to perform transport operations. 9. Provide effective dimensional and weight control. 10. Create a system of professional competence certification. 11. Create equal working conditions in the road transport market. 12. Ensure unshadowing of the passenger traffic market. 13. Improve road safety. 14. Ensure the environmental safety of motor transport. 5. Air Transport | 1. Ensure the development of regional airports. 2. Create a national carrier. 3. Reduce the tax burden. 4. Ensure efficient operation of the ground service market. 5. Ensure airport modernization. 6. Provide funding for airports and airlines. 7. Ensure the revision and full and fair implementation of the State targeted program for the development of airports in the period until 2023 and restore funding 8. Liberalize bilateral agreements on international air traffic. 9. Improve air traffic safety. 10. Ensure the environmental safety of air transport.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives – Drastic change in functioning

1. River transport | 1. Create a fund for the river transport development at the expense of the excise duty on fuel. 2. Create prerequisites for the use of PPP for investment in river berths. 3. Ensure the construction of transport and logistic hubs on the rivers. 2. Maritime transport | 1. Improve the PPP mechanism in the sphere of port infrastructure. 2. Carry out port clustering. 3. Railway transport | 1. Ensure electrification of the railway tracks at sections where it is economically feasible. 2. Encourage the rolling stock renewal by attracting private investment while opening the railway market. 3. Create transport police. 4. Reengineer the railway network in accordance with the existing economic needs and priorities. 5. Create networks for a high-speed railway. 4. Motor Transport | 1. Ensure the construction of cement-concrete roads. 2. Implement the smart roads program. 5. Air Transport | 1. Agree on the goals of the national strategy for air transport development and development strategies for regional airports based on the principles of complementarity and a unified national aviation policy. 2. Provide incentives for projects on the introduction of eco-friendly alternative energy and heat supply sources at airports. 3. Establish an enterprise for the production of aviation fuel within the territory of the state. 4. Create a national center for pilot training and proficiency maintenance. 5. Develop a new design of airlines in synergy with the country's transit location.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges

1. Creation of the National Commission | 1. Create the National Commission for State Regulation in the Field of Transport: Provide for publicity and transparency of the regulator's activities. Ensure independence through selection with the participation of representatives from various bodies and a funding mechanism that will not encourage increased tariffs for services of natural monopolies. Limit the Commission's powers to set tariffs and prices in the markets of passenger and cargo traffic to prevent their excessive regulation. 2. Formation and regulation of tariffs and fees of NCRT | 1. Create a transparent tariff setting mechanism for rail traffic and develop a new Catalogue of tariffs on freight traffic. 2. Approve the Methodology for tariff formation for mandatory services to access infrastructure and services provided by entities in a monopolistic position. 3. Create a methodology for calculating port charges. 4. Legislate the purposes of collecting port charges and ensure the use of funds for the established purposes. 5. Decentralize airport fees. 3. Socially important transportation | 1. Ensure the selection of carriers through a tender procedure. 2. Regulate the mechanism for identifying and supporting socially important air transportation and determine destinations for such transportation. 3. Ensure targeting of benefits by transportation provider. 4. Certification and licensing | 1. Eliminate unjustified bureaucratic restrictions when obtaining permits for flight operation using the UAVs. 2. Simplify certification procedures for seafarers. Initiatives – Drastic change in functioning

1. Tariff formation | 1. Ensure free tariff formation for freight rail transportation. 2. Introduce a commercial method to form port charges based on the analysis of competitors' rates which allows making a market offer based on the price, speed and quality of services.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges

1. UZ restructuring | 1. Develop and adopt up-to-date draft law “On railway transport”, as well as by-laws for the implementation of the new Law “On railway transport”. 2. Carry out organizational and preparatory activities for the financial and organizational split-up of UZ. 3. Ensure the transition of UZ to three-year financial and investment plans. 4. Ensure the financial recovery of UZ. 2. USPA reorganization | 1. Implement corporate USPA management, with following of the self-sufficiency principles, create an independent supervisory board. 2. Optimize USPA staffing. 3. Ensure a clear distribution of the MIU functions - Maritime administration -Seaport administration, with the involvement of local authorities in the port management. 4. Ensure the transition of USPA to three-year financial and investment plans. 5. Optimize the costs of USPA, consider reducing the norms of deduction of USPA dividends to the budget. 3. Airport management | 1. Carry out corporatization of state-owned airports. 2. Implement new planning processes and management structures at airports. 3. Develop and approve master plans for airport development for 20–30 years. 4. Vehicle and road infrastructure management | 1. Ensure the transition of Ukravtodor to three-year financial and investment plans. 5. Use of the PPP mechanism | 1. Approve by the government decision the list of PPP projects and concessions to be implemented in the period up to 2030. 2. Allow long-term budget planning by making changes to the Budget Code, which will enable using the PPP, the government pays concessions. 3. Improve the land withdrawal mechanism by introducing amendments to the Land Code for the construction of linear infrastructure facilities. 4. Legislate the guarantees of investors who are ready to invest in the transport infrastructure. 6. Urban / regional transport | 1. Ensure the integration of transport development plans into strategic planning plans at the city and regional levels. 2. Provide support to local authorities on decentralization of local transport infrastructure management. 3. Ensure regionalization of transport operators and traffic management. 4. Ensure the renewal of public transport fleet. 5. Ensure increase in urban mobility (network of parking areas, passenger terminals for transfer from individual transport to public transport, bicycle routes). Initiatives – Drastic change in functioning

1. UZ restructuring | 1. Financial and organizational split-up of Ukrzaliznytsia into separate segments by types of activity, with the spin-off within UZ of competing companies in each segment in the form of joint-stock companies. 2. Implement a pilot project involving private capital in the railway traction market. 3. Create a free market for private traction and freight rail traffic. 2. USPA reorganization | 1. Implement a landlord port model of administration, according to which the seaport administration controls the use of port territories, is responsible for port planning and development while port operators carry out stevedoring activities. 3. Using the PPP mechanism | 1. Increase funding for the PPP Development Agency and create a special fund for project preparation. 2. Ensure a simplified mechanism for using donor funds. 4. Urban / regional transport | 1. Ensure the replacement of modes of transport with carbon emissions, the promotion of green modes of transport.

Source: Centre for Economic Recovery CHANGES REQUIRED

Initiatives — Responding to current challenges

1. Multimodal transportation | 1. Improve the regulatory framework, define the legal and organizational framework of multimodal and intermodal transportation. 2. Create a network of regular container/multimodal/ intermodal freight train routes synchronized with EU trains. 3 Simplify, speed up and increase the transparency of customs procedures. 4. Ensure the development of transport and logistics infrastructure: expand the network of multimodal terminals, increase the number of container trains, repair highways near ports, plan multimodal nodes involving all types of transport. 5. Integrate river, railway, sea, and motor transport into multimodal chains. 6. Stimulate the development of container transportation at the legislative level. 7. Ensure uniform technological compatibility at the main transport directions at the joints between transport types. 2. Integration into the international transport corridors | 1. Reach an agreement on the construction of the Baltic-Black Sea corridor with other participants. 2. Create and provide technical support for the new transit air corridors. 3. Sign the Agreement for Ukraine's accession to the International Maritime “Blue Belt” zone around Europe. 4. Sign and implement the Common Aviation Area Agreement with the EU while conducting bilateral negotiations on the air traffic liberalization. 5. Conduct negotiations with China to join the “16+1 format” and receive significant amounts of investment. Initiatives – Drastic change in functioning

1. Multimodal transportation | 1. Implement intermodal passenger traffic in Ukraine. 2. Develop an integrated approach to airport reconstruction to ensure high-speed ground transportation between airports and settlements. 3. Ensure the development of transport and logistics infrastructure: expand the network of multimodal terminals, increase the number of container trains, repair highways near ports, plan multimodal nodes involving all types of transport. 4. Adapt transport technologies and infrastructure for different modes of transport: “air – railway – road”, “water – railway – road”. 2. Integration into the international transport corridors | 1. Construct the Baltic-Black Sea corridor. 2. Increase efficiency and improve infrastructure, including for its integration with the International and Trans-European Transport Network (TEN-T). 3. Sign the Agreement on the accession to the “16+1 format”.

Source: Centre for Economic Recovery Cabinet of Ministers of Ukraine VISION OF THE SECTOR: Industry is a catalyst for economic growth and a pillar of sustainable development of Ukraine

Relationship Direct effect: Real GDP, value added per employee, export with strategic indicators of the economic vision

Strategic goal 1. Create a stable domestic demand for 2. Ensure the integration of the Ukrainian 3. Strengthen the competitiveness of industrial 4. Create new production facilities by domestic industrial products industrial sector into global value chains, create products produced in Ukraine, introduce stimulating innovative activities of enterprises preconditions for expanding exports of resource- and energy-efficient technologies in all regions of the country to use the industrial products competitive advantages of each region

Strategic • Ensure increase in consumption of industrial • Increase the share of exports of medium • Achieve a reduction in the cost of financial • Create 3 million new jobs in the objectives products through: and high-tech processed goods in the resources to the average level of Eastern manufacturing industry • Increasing foreign direct investment in the structure of total exports to 25% European countries • Increase the share of FDI in high-tech and industrial sector to USD 10 billion per year • Ensure the growth of industrial exports to • Introduce environmental regulation ensuring medium-tech industries to 25% of total FDI • Revival of housing construction and renewal the EU by 30% preserving the achieved level sustainable business development - gradual • Attract USD 30 billion of investment through of housing and communal services (annual of exports in certain categories convergence to EU standards, considering the industrial parks mechanism the specifics of local raw materials, amount of new sq.m by 100%) • Increase Ukraine’s international Logistics • investment opportunities of Ukrainian Ensure economic development of regions - • Performance Index to 3.6 Modernization of state and municipal enterprises and the general socio-economic increase gross regional product per capita • transport infrastructure by 30% Increase industrial exports by USD 20 billion situation in Ukraine of 75% of regions with the lowest GRP to the • Reorienting public procurement of domestic by concluding new and revising existing level of TOP 25% FTAs • Increase the level of industrial waste industrial products considering economic utilization to 60% feasibility and using instruments that do not violate international agreements and are in • Ensure the modernization of 25% of fixed line with the practice of OECD countries assets • Ensure the formation of economically justified and competitive prices for electricity and transportation

Source: Centre for Economic Recovery VISION OF THE SECTOR: Industry is a catalyst for economic growth and a pillar of sustainable development of Ukraine

Relationship Direct effect: Real GDP, value added per employee, export with strategic indicators of the economic vision

Strategic goal 1. Create a stable domestic demand for 2. Ensure the integration of the Ukrainian 3. Strengthen the competitiveness of industrial 4. Create new production facilities by domestic industrial products industrial sector into global value chains, create products produced in Ukraine, introduce stimulating innovative activities of enterprises preconditions for expanding exports of resource- and energy-efficient technologies in all regions of the country to use the industrial products competitive advantages of each of them

Priority steps • Attract investments in the manufacturing • Stimulate the production and export of high • Increase in the affordability of the financial • Stimulating the implementation of R&D sector of Ukraine, the formation of value-added products capital projects and the introduction of innovative investment demand for domestic products • Update of the scientific and technical base • Introduction of the greenhouse gas technologies and services and restart of the system of training of emission allowance trading system in • Implementation of Industry 4.0 • Revival of housing construction - affordable engineering and technical personnel Ukraine • Creating incentives for the development of housing • Revision of the agreements with the EU • Introduction in Ukraine of a system of tax Ukrainian engineering (transport and railway, • Renewal of housing and communal services regarding the expansion opportunities in incentives for eco-modernization production of agricultural machinery, funds with attraction of preferential credits, export and creation of preconditions for • Developing the circular economy shipbuilding) increase of energy efficiency relocation of production to Ukraine • Stimulating the renewal of fixed assets of • Intensification of cooperation between the • Modernization of state and municipal fixed • Ensuring free access of Ukrainian industrial the processing industry defense industry and other sectors of the assets and transport infrastructure products to the global markets economy • (machinery, urban transport, tracks, bridges, Adjusting tariffs for the state monopoly • Expansion of FTA agreements, development services to an economically reasonable level • Development of regions based on smart airports, roads) of trade diplomacy (key requirement - self- specialization principles • sufficiency in premiums from agreements) Abolishment of the import duties and quotas on raw materials and materials not • Introduction of the public-private partnership produced in Ukraine in the development of private industrial parks and cluster cooperation (priority - expansion of exports and import substitution), where the state promotes access to energy and transport infrastructure • Creating preconditions for competition between local communities to attract investors

Source: Centre for Economic Recovery 22% 45% billion USD of foreign currency inflow 15% billion UAH in GDP (2018) million employed persons (2019) 791 22.7 from foreign trade in goods (2019) 2.46

THE IMPACT OF THE INDUSTRY ON THE NATIONAL ECONOMY INFLUENCE OF THE INDUSTRY ON INFLUENCE OF THE INDUSTRY The relationship between labor productivity in the industry and GDP per MARKET PLAYERS ON THE ECONOMY capita, USD, in 2010 prices • Public administration and defense | • Industrial development will Developed industry is a necessary stimulate the growth of other condition for the realization of the state's economic sectors through the functions and objectives in the regulation increased demand for their of economic and social spheres. The products. This will become the sector (in particular, mechanical main catalyst for the Ukrainian engineering) also plays a strategic role in economy development and will the formation of the defense complex of increase GDP Ukraine • The industrial sector growth will • Transport | The industry both provides for increase the competitiveness of the supply of intermediate goods for Ukrainian workers in the global transport (39% of total intermediate labor market and reduce the consumption) and creates demand for unemployment rate transportation services (transportation of • raw materials for the production and Industrial development will finished products accounts for 22% of enhance Ukraine's role in the cargo transportation) international economic arena and increase foreign exchange • Mining industry | Developed mining earnings industry, on the one hand, ensures the • efficient functioning of the mining industry Industrial modernization and and also creates demand for mining introduction of high-tech products by stimulating its growth production will increase labor capacity in the economy as a In 2019, labor productivity in the industry in Ukraine was at the level of countries in • Agricultural sector | Industrial products whole Africa and Central Asia. As a rule, countries with higher industrial productivity show amount to one-third of the intermediate higher GDP per capita consumption in the agricultural sector, the second sector of the economy in terms of The industry ensures the functioning of key sectors of the economy. The share of foreign exchange earnings in Ukraine industry in the intermediate consumption of such sectors as public administration and defense, transport, mining, trade and the agricultural sector is 21–48%

Source: Centre for Economic Recovery, the State Statistics Service, the World Bank 2

PRODUCTION OF SEMI- PRODUCTION OF FINAL PRIORITIES RAW MATERIALS 4 SALES FINISHED PRODUCTS PRODUCTS 3 1. Create a stable domestic demand for NATIONAL INDUSTRIAL POLICY domestic industrial products METALLURGY 2. Ensure the integration of the Ukrainian SMELTING OF FERROUS AND MANUFACTURE OF METAL 1 industrial sector into global value chains, NON-FERROUS METALS PRODUCTS MINING create preconditions for expanding exports of industrial products MECHANICAL ENGINEERING AGRICULTURAL SECTOR • Ore minerals MANUFACTURE OF • Ferrous metal ores MANUFACTURING OF PARTS 3. Strengthen the competitiveness of MACHINERY AND • Non-ferrous metal ores AND COMPONENTS TRANSPORT EQUIPMENT industrial products produced in Ukraine, • Ores of rare, precious introduce resource- and energy-efficient and other metals CHEMICAL ENERGY • technologies Industrial minerals BASIC CHEMICAL MANUFACTURE OF • Fossil fuels PROCESSING CHEMICAL PRODUCTS • Oil MINING 4. Create new production facilities by • Natural gas PHARMACEUTICAL stimulating innovative activities of • Coal INDUSTRY enterprises in all regions of the country to MANUFACTURE OF FINE MANUFACTURE OF use the competitive advantages of each of CHEMICALS MEDICINES them SERVICE SECTOR CONSTRUCTION MATERIALS AGRICULTURE AND MANUFACTURE OF MINERAL MANUFACTURE OF FORESTRY PRODUCTS CONSTRUCTION MATERIALS FOREIGN MARKET • Medicinal plants LIGHT • Fiber crops MANUFACTURE OF FABRICS MANUFACTURE OF CLOTHING • Leather and fur AND HIDES AND FOOTWEAR • Wood WOODWORKING

PRIMARY WOOD FURNITURE PROCESSING MANUFACTURING

SUSTAINABILITY AND ENERGY EFFICIENCY

Source: Centre for Economic Recovery STATE OF THE METALLURGICAL INDUSTRY COMMENTS The extraction and import structure of coking coal in Ukraine, 2011–2018 • The high level of coking coal import dependence since 2014. Due to the loss of control over part of the territory in where the lion's share of coking coal 30 deposits is located, the mining industry provides only one-third of the domestic 19 21 20 15 15 market needs, which is the basis for furnace coke and the main fuel for metal 13 14 15 14 6 6 4 4 5 -77% smelting (coke accounts for approximately 50% of the cost of finished metal 10 4 4 6 13 15 products). A 77% decrease in coking coal production in Ukraine during 2013– 9 10 10 10 8 10 0 2018 was accompanied by a 1.5-fold increase in its import, mainly due to 2011 2012 2013 2014 2015 2016 2017 2018 increased coal supplies from Russia. Coking coal production volumes Coking coal import from Russia, million tons with a calorific value of more than • Risks of supplying products to markets that require manufacturers to reduce 5,700 kcal/kg in Ukraine, million tons Coking coal import from other countries, million tons C02 emissions. Over the past 5 years, enterprises in the steel production sector in Ukraine, which is significant for the entire metallurgy industry, have made 1.7 Steel production and capital investment level, 2007–2019 times less capital investment than the global average. Obsolete equipment and 100 risks of non-compliance with the EU environmental regulations, which 80 presuppose halving CO2 emissions by 2030, reduce the competitiveness of 60 43 37 Ukrainian products on the global market and threaten exports to one of the 40 30 33 35 33 33 27 23 24 21 21 21 main sales markets – the EU. 20 0 • EU restrictions on imports of rolled products and pipes. The expected increase 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 in payments for imports of products to the EU based on CO2 emissions in Steel production, Investment per ton Investment per ton production will create additional fiscal pressure on steel producers estimated as million tons of steel in Ukraine, USD of steel in the world, USD 10–13%. • High price volatility in the world markets creates risks for the export-oriented Revenues from the sales of metallurgical goods and global prices, 2010–2020 -30% sector of the mining and metals complex. Since 2019, there has been a drop in 800 the world prices for steel products, which was accompanied by a significant 600 increase in protectionist measures in key markets and, accordingly, a 22% drop 30 28 25 26 in revenues from sales of metallurgical goods over the past two years. Over the 400 19 -22% 17 15 12 12 15 13 same period, exports decreased by 29% and sales in the domestic market – by 200 18% due to a drop in the production of mechanical engineering products. 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Steel price, USD Forecast, billion USD Sales of metallurgical products, billion USD Source: Centre for Economic Recovery, the State Statistics Service, the UN, GMK Center, NBU, NYMEX THE STATE OF MECHANICAL ENGINEERING INDUSTRY COMMENTS Dynamics of the production and structure of gross value added in mechanical • Over the past 10 years, production in mechanical engineering has decreased engineering, 2010–2019 by 18%, which is twice as much as in the manufacturing industry in general. 120 Computer and -18% Motor electronic products Such a drastic decline in 2013–2015 was mainly caused by Russia's armed 100 vehicles aggression in eastern Ukraine and temporary occupation of the territories of 8% Machinery and 10% the Autonomous Republic of Crimea, certain areas of Luhansk and Donetsk 80 34% equipment regions. This led to the destruction of production capacities, transport 60 Electric 20% infrastructure and the rupture of production interregional ties. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 equipment Index of industrial production 28% Other • Falling exports and the need to switch to new markets. During 2010–2018, Index of production in mechanical engineering 2018 vehicles exports of mechanical engineering goods in Ukraine decreased by 6.2% due to decreased export to Russia from USD 6.9 billion (52% of the total export Dynamics of the world trade in mechanical engineering goods and Ukraine's role in it, of mechanical engineering goods) in 2012 to USD 963 million in 2018. 2010–2018 7,173 7,728 • Changes in the production structure due to reorientation of sales markets 0.4% 6,527 6,620 6,814 7,007 6,645 6,586 5,784 42% and reduced domestic consumption. In 2014, the share of vehicles other than 67% 0.3% motor ones, decreased from 46% to 34%, mainly due to the decreased railway 0.2% 58% engineering. Over the following years, this share was gradually decreasing to 0.1% 33% 28%, which was caused by a drop in supplies to Russia that accounted for 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2018 52% of the total export of mechanical engineering products, and reduced domestic consumption of mechanical engineering products. The share of Ukrainian export in world trade, % The share of intermediate products in exports, % The total of world trade in mechanical engineering, billion USD The share of final products in exports, % • A shift from the production of finished products to the manufacture of The structure of consumption in mechanical engineering and the share of gross value components. The share of finished products in the export of mechanical added in output, 2010–2018 engineering goods decreased by 1.8 times from 58% to 33% during 2010– 40% 2018. During 2010–2018, revenues from sales of finished mechanical 32% -20% engineering products in foreign markets decreased by 65% (to USD 1.8 billion in 2018), and intermediate goods – by 6% (to USD 3.6 billion). 70% 73% 71% 70% 68% 66% 70% 72% 69%

30% 27% 29% 30% 32% 34% 30% 28% 31% Economy Mechanical engineering 2010 2011 2012 2013 2014 2015 2016 2017 2018 in general Share of value added Final products, % Intermediate goods, % in output, % Source: Centre for Economic Recovery, the State Statistics Service, the UN, UEX THE STATE OF THE CHEMICAL INDUSTRY COMMENTS The structure of chemical products supply to the domestic market, 2010–2019 • The consumption of domestic chemical products on the domestic market is 37 - 11 recovering more slowly than the consumption of imported products. After the 40% 34 34 32 2015 recession, the chemical market is gradually recovering to 2013 pre-crisis 29 28 26 30% 25 22 24 14.2 14.6 14.1 level. In addition, the increase in domestic products in consumption is 8% 11.1 11.6 11.3 11.8 20% 8.6 9.1 10.2 higher than the increase in import in 2016–2019 (35% vs. 27%). However, 9.4 9.2 9.6 10% 7.3 8.3 6.2 6.8 8.0 8.6 8.7 despite the positive trend in the structure of consumption in recent years, the 4.8 5.4 4.5 2.4 0% 3.8 3.4 2.3 2.2 2.7 3.1 share of domestic goods in the domestic market is 26%, which is 11% lower 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 than in 2012. Share of domestic products Import, billion USD Domestic products in the domestic market, % in the domestic market, billion USD • Import dependence on raw materials for the production of chemical products. The share of raw materials in the formation of the price for final chemical The manufacturing structure in the chemical industry and the corresponding labor industry products ranges from 50 to 90% which reduces the competitiveness capacity in each sector, 2018–2019 of Ukrainian manufacturers and increases their dependence on fluctuations of 150 122 60 world prices for raw materials. 100 40 64 63 67 • Labor capacity in the Ukrainian chemical industry is lower than in developed 43 42 50 30 26 28 20 countries and amounts to USD 38 thousand per 1 employee. Labor capacity in industrialized countries in Europe and East Asia varies from USD 350 to 1100 0 0 Plastic Fertilizers PM in Organic Rubber PWM3 Detergents4 Inorganic Pesticides thousand per employee, and the global average is USD 74 thousand. product primary chemical product Chemicals s 1 forms s 2 s • The Ukrainian chemical industry focuses on the production and export of The share of production in the Labor capacity, 2018, thousand USD per employee products with low added value. The major share of production is made up of structure of chemical products, 2019, % fertilizers and plastic products, which form a low added value. The share of The share of export in sales of chemical products and investments in basic means of low and medium technological products in exports is about 70%. production, 2008–2019 • Insufficient investment and high wear rate have led to a drop in the export of - 16 60% 55 55 chemical products. Insufficient investment in the sector, primarily in the 47 46 36 37 40 manufacture of basic chemicals, has led to 60% of fixed assets being used for 40% 690 636 563 -69% more than 15 years which is twice the global standard. 20% 252 142 179 175 0% 2008 2010 2012 2014 2016 2018 2019 The share of CP exports in product sales, % Investment in fixed assets, million USD Source: Centre for Economic Recovery, the State Statistics Service, the UN, NBU, Ukrainian Chemists Note: 1 – plastic; 2 – chemicals; 3 – paintwork materials; 4 – synthetic detergents Union THE STATE OF THE CONSTRUCTION INDUSTRY COMMENTS The volume of construction works completed in Ukraine, 2011–2019, billion UAH • The demand for construction is recovering and has significant potential for growth. After the decline in 2014, which was caused by the delayed demand for real estate due to the 2013–2014 crisis, construction volumes began growing in 182 +216% 2016 mainly due to commercial real estate. The share of construction in 141 Ukraine's GDP is 2.8% which is significantly lower than in the neighboring 106 countries (Germany – 5.3%, Poland – 7.9%) and indicates a large potential for 63 74 62 59 51 58 the development of construction materials production. • The decline in capital investment in construction has led to reduced production 2011 2012 2013 2014 2015 2016 2017 2018 2019 of construction materials. The manufacture of blocks of cement, artificial stone or concrete, prefabricated construction elements, mineral wool and bricks has The production of construction materials, Ukraine, million tons been showing a downward trend for several years. This situation is primarily caused by the decrease in total capital investment in construction (in 2019, CI in 3.3 2.9 2.7 3.0 2.9 2.9 3.5 4.3 4.0 3.8 construction amounted to UAH 62.3 billion, however, the volume in 2013 was 4.8 4.3 3.0 3.3 4.7 4.4 3.8 4.3 twice as high), the exit of international investors etc. 16.2 16.0 16.6 11.1 11.4 13.2 11.1 10.6 14.0 • The road construction program and measures to improve the energy efficiency 10.5 9.8 9.4 8.6 8.5 9.1 9.3 9.2 9.2 1.8 1.9 1.9 1.9 1.7 1.9 2.0 1.9 2.6 of buildings have created a demand for certain types of construction materials. 2011 2012 2013 2014 2015 2016 2017 2018 2019 Compared to 2013, the manufacture of concrete and dry building mixes has increased by 49.5% and 58% respectively. Increased manufacture of Blocks of cement, artificial stone or concrete Concrete Other construction materials to ensure thermal modernization of buildings allowed to Prefabricated construction elements Cement increase the mineral wool production by 52%. Dynamics of import and export of construction materials in Ukraine, 2011–2019 • As a result of significant fluctuations in foreign exchange rates, which affected 1.7 1.8 1.8 1.7 the prices for imported products, there was a significant decline in imports, in 1.4 1.3 1.2 1.0 1.2 addition, this was affected by significant logistics costs. However, since 2017, imports began growing again. Ukraine imports ceramic tiles, as well as lime, asbestos cement products and other products, the manufacture of which has decreased due to reduced production of raw materials with its deposits located -0.6 -0.5 -0.6 -0.9 -0.9 -1.0 -0.8 -0.9 -1.0 in Donetsk, Luhansk regions and the Crimea. 2011 2012 2013 2014 2015 2016 2017 2018 2019

Export, million USD Import, million USD Balance

Source: Centre for Economic Recovery, the State Statistics Service, the Ministry of Economy, the All- Ukrainian Union of Manufacturers of Building Materials THE STATE OF THE LIGHT INDUSTRY COMMENTS The structure of light industry product import, 2010–2018 • The dependence of import on fabrics and raw materials of primary processing. -24% Most clothing and footwear manufacturers import textiles and primary processing raw materials for their own production, domestic manufacturers 2,3 2,1 meet only 32% of the demand for these materials. 1,3 1,5 1,2 1,3 1,0 0,8 0,9 • The growth of finished product import. During the 2014–2015 crisis, imports of materials for further processing decreased by only 29%, while the import of 1,3 1,3 1,4 1,3 1,4 1,1 1,2 1,0 1,1 finished products – by 62%. Given that the cost of textiles, fabrics, and 2010 2011 2012 2013 2014 2015 2016 2017 2018 accessories may amount to 80% of the cost of finished products, the lack of Finished products, billion USD Materials for further processing, billion USD domestic production of raw materials for primary processing is a significant risk for the entire industry. The dynamics of production and investment in the light industry, 2010–2019 • Labor capacity in the clothing and footwear manufacturing is only 60% of 150 130 similar indicators in India, Pakistan, Bangladesh, and China. The main reason 100 100 88 is the inefficient arrangement of production processes, rather than the use of outdated technologies. 50 78 60 68 47 60 52 45 70 71 68 58 • Most manufacturers represent microbusiness. In 2018, 92% of Ukrainian 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 enterprises had less than 10 employees. SMEs face difficulties with accessing capital, new technologies, and have limited export opportunities. Textile manufacture index Index of footwear and 2010=100% other leather good manufacture, 2010=100% • Product certification is a challenge for Ukrainian manufacturers. During the Clothing manufacture index, 2010=100% Capital investment, million USD two years of crisis, exports of clothing and footwear decreased twice from USD 2.9 to USD 1.4 billion. Obtaining a EUR-1 certificate for duty-free export of The dynamics and structure of light industry product export, 2010–2018 products to the EU countries is the main issue currently faced by Ukrainian +42% manufacturers. Many manufacturers are in the shadows and cannot provide the 2.0 1.9 reporting required to obtain a certificate. 1.5 1.5 1.5 1.4 1.2 0.9 1.0 1.0 1.1 0.5 • As Ukrainian enterprises refocused on the production of goods that do not 0.6 0.5 0.6 0.4 0.4 0.4 require certification, exports of intermediate goods resumed over the next three 1.6 1.7 1.8 1.8 1.6 1.3 1.5 1.7 1.9 years after the crisis and are record-breaking for the last 10 years. 2010 2011 2012 2013 2014 2015 2016 2017 2018 Clothing industry, billion USD Other light industry products, billion USD Footwear and leather goods, billion USD Source: Centre for Economic Recovery, State Statistics Service, the United Nations THE STATE OF THE WOODWORKING INDUSTRY COMMENTS The manufacture of primary wood processing materials in Ukraine, • Ukraine produces approximately 20 million cubic meters of wood annually and 2011–2019, thousand of cubic meters is fully capable of meeting the demand of Ukrainian manufacturers of furniture 3.373 3.213 and other secondary products for industrial wood, except for some breeds of 2.755 wood. Despite that a part of industrial wood is imported, it is generally available 2.057 2.268 1.969 1.908 1.883 2.030 in the domestic market, and its production volumes increased during 2011– 3,183 2,575 3,036 2018. In 2019, a slight decrease (by 5%) compared to the previous year was 1,801 1,741 1,866 1,844 2,087 1,708 noticed. 168 167 175 191 186 181 180 190 177 • 2011 2012 2013 2014 2015 2016 2017 2018 2019 The furniture industry accounts for more than half of woodworking facilities in Wood Plywood Ukraine. Despite a certain stagnation of the market in 2014–2016, since 2017, the domestic furniture market has been gradually showing positive dynamics Manufacture of furniture and other wood products in Ukraine, 2011–2019, million for most positions starting and is now approaching the rates of 2013. Today, the pieces furniture market enrolls about 3,000 manufacturers, including both small 8.5 8.3 7.3 7.3 7.2 7.6 7.3 furniture workshops and large enterprises with foreign investments. 6.3 6.0 • From importer to exporter of wood and furnishing goods. Until 2011, Ukraine 5.7 6.1 5.3 5.4 5.0 5.5 5.3 4.2 4.3 was considered a pure importer of both wood and furnishing products. In 2012, the trend changed (partly due to the devaluation of hryvnia) which led to 2.8 2.0 1.9 2.2 2.1 1.7 2.1 2.0 2.2 decreased imports and increased exports. The volumes of import and export 2011 2012 2013 2014 2015 2016 2017 2018 2019 decreased after the occupation of the Crimea, however, the rates started Furniture Windows and doors recovering in 2017. • Due to the loss of the Russian market, Ukrainian manufacturers re-focused on Import and export of wood products and furniture, Ukraine, 2012–2019, million USD the EU and Asian markets. Products are mainly exported to Poland, Turkey, 1.263 1.206 626 674 1.060 1.144 1.107 1.132 1.150 1.140 509 556 531 543 Germany, and Hungary. Main import deliveries are made from Belarus, Turkey, 397 398 Romania, and Germany and are represented by the products with high value added.

-162 -213 -148 -324 -257 -324 -295 -197 -251 -295 -307 -373 -370 -416 -550 -455 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 Wood export Balance Furniture export Balance Wood import Furniture import

Source: Centre for Economic Recovery, the State Statistics Service, ITC, USAID Note: 1 – Forest industry THE STATE OF THE PHARMACEUTICAL INDUSTRY COMMENTS Pharmaceutical production, 2018, billion UAH in consumer prices • The Ukrainian market of medicines has not fully recovered after the 2014– 2015 crisis. At the same time, the market structure has changed in favor of domestic manufacturers. International pharmaceutical companies at the head 92 152 100 with German Berlin-Chemie were leading the Ukrainian market ten years ago, however, the devaluation of hryvnia in 2014 strengthened the positions of the 60% 66% Ukrainian manufacturers. The pharmaceutical market has been growing by 11% 60 152 7 1 44 per year for the past three years. The growth was facilitated by an increase in 5% >1% 40% 29% the production of more affordable Ukrainian analogs of imported medicines which are 4–16 times more expensive. Import Domestic Pharmaceutical Consumption Export Stock growth Consumption production product offer by citizens by other • industries The consumption of imported medicines outweighs the consumption of Volumes of pharmaceutical and hospital medication Ukrainian/foreign origin, Ukrainian medicines in monetary terms. In physical terms, the market is market, 2010–2019, billion USD and million packages 2019 dominated by Ukrainian medicines, but in monetary terms, more expensive foreign products have a larger share. The range of medicines offered by 3,000 4 Ukrainian manufacturers mainly consists of more affordable categories. 2.050 2.114 1.815 37% 2,000 1.687 69% 2 • 1,000 63% The pharmaceutical industry serves as the basis of the pharmaceutical market 31% 0 0 in Ukraine. There is a decrease in physical terms and an increase in monetary 2010 2013 2016 2019 Monetary Physical terms due to a higher share of foreign manufacturers. The market of pharmacy terms terms Pharmaceutical market, billion USD Hospital market, billion USD sales is highly competitive, the share of TOP-20 companies amounts to 47%, and is almost equally distributed between domestic and foreign manufacturers. Medicines Cosmetics Hospital purchases Ukrainian medicines Medical products Dietary supplements Foreign medicines • Ukraine ranks as one of the lowest in the world in terms of the number of medicines purchased per capita. The low purchasing capacity of Ukrainians, a limited list of medications for which patients receive cost reimbursement, and Consumption of medicines per capita, 2018, Ukraine, USD per person the lack of widespread health insurance constrain the consumption of medical

742 698 products. 539 438 291 260 229 188 130 82

Iceland Belgium Sweden Italy Estonia Latvia Hungary New Chile Ukraine Zealand Source: Center for Economic Recovery. APTEKA Weekly, State Statistics Service, OECD, Top Lead THE SUSTAINABILITY AND RESOURCE EFFICIENCY COMMENTS Wastes of the processing industry, % of the total amount, Ukraine, 2010–2019 • The amount of waste from the processing industry is decreasing due to falling 15% volumes of industrial production. In 2019, Ukraine produced 442 million tons of -35% waste, of which processing waste accounted for 30.7 million tons (7%).The 10% amount of garbage generated by the processing industry has been reducing in 423 444 447 445 442 absolute and percentage terms since 2014 as a result of the deteriorating 355 312 295 366 352 5% economic situation, lower production volumes due to Russia's aggression in 0% the East, and the temporary occupation of the Autonomous Republic of 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Crimea. Waste produced, million tons Waste from the processing industry, % • Low percentage of waste disposal. The share of processing waste in the total waste in Ukraine is lower than in Poland (16%) or the Czech Republic (18%), CO₂ emissions from stationary sources and their intensity, 2012–2017 although the percentage of waste disposal in Ukraine is only 29% of its total volume, while in the EU countries this rate reaches 49%. 680 670 800 690 700 676 675 6 5 • The reduction of total emissions due to falling industrial production. The 600 4 amount of CO₂ emissions from stationary sources in Ukraine is relatively small 400 3 286 281 272 276 285 301 and amounted to 124 million tons in 2017. It is less than in neighboring Poland 198 198 2 200 167 139 151 124 (301 million tons of CO₂) or Germany (670 million tons). Besides, an annual 1 reduction in CO₂ emissions is observed in Ukraine. 0 0 2012 2013 2014 2015 2016 2017 • Coal intensity of industrial production is much higher than in the EU countries. Poland (GDP per 1 emissions), USD/kg Poland (emissions, million tons) In terms of GDP per unit of energy emissions, Ukraine has much lower rates Ukraine (GDP per 1 emissions), USD/kg Germany (emissions, million tons) than most EU countries. In Ukraine, per 1 kg of CO2 emissions, there is USD Germany (GDP per 1 emissions), USD/kg Ukraine (emissions, million tons) 2.64, whereas, in Poland, this figure reaches USD 3.61. Energy production, GDP per unit of TPES, 2010–2017 • High energy consumption and low productivity reduce the competitiveness of 13,117 12,802 the Ukrainian processing industry. In 2017, the volume of GDP produced per 10,620 1 8,767 unit of TPES in Ukraine reached USD 5,054, which is close to values in the 5,199 5,054 countries of Eastern Europe, the Caucasus, and Central Asia. Although Ukraine is characterized by the annual growth of GDP per unit of TPES (on average by USD 100–200). Poland generates USD 10,620 (twice as much) per thousand Germany EU Poland Czech Republic Eastern Ukraine TNE, and in the EU countries, the average value is 2.53 times higher (USD Europe and 12,802) than in Ukraine. Central Asia Source: Center for Economic Recovery, the State Statistics Service, Eurostat, OECD, IAE Note: 1 – Total primary energy supply Consumption of Ukrainian Integration into global value chains, expansion of Creation of new capacities and innovative activity in all Competitiveness of Ukrainian industrial enterprises industrial products industrial exports regions of the country • Falling demand in the • Access to international markets | Export • High cost of lending and insurance| The lack of access to • High cost of connecting manufacturing facilities to domestic market |Falling activity of Ukrainian enterprises is limited by cheap capital in the domestic market hinders the development power grids | The cost of connection to the grid in incomes negatively lack of understanding and access to of enterprises Ukraine is several times higher than similar costs in the affected the consumption international markets in combination with EU countries. • Lack of investment resources | The implementation of of industrial products low recognition of Ukrainian brands environmental projects requires a significant increase in • Low level of research funding | Investment in low-tech • Partial loss of enterprises • Lack of financial instruments to support investment, as in the past 10 years, the industry was production and little expenses on scientific and in the East of Ukraine | exports |The activities of the export credit functioning in a shortage of investment resources research activities The breakage of agency today is focused on insurance, not • Extending the gap in technological and innovative • Lack of close cooperation between scientific production chains and the financing exports. development | Investment in the modernization of production institutions and industrial enterprises | The isolation of corresponding reduction • The difficulty in obtaining product in Ukraine is lower than in other countries, which reduces the Ukrainian science from the actual needs of the industry of production volumes due certificates | The lack of harmonized competitiveness of domestic producers and the lack of effective cooperation between the to the loss of control over legislation with the EU on industrial products science and industry sectors part of the territory in • Low level of production automation | Higher production costs Donetsk and Luhansk • Strengthening customs and tariff, technical compared to other countries due to the low level of • Growing rates of labor migration | More favorable regions, and occupation of barriers | Active protectionist policies of modernization employment conditions, in particular for highly qualified the Crimea many countries restrict sales channels for workers, outside Ukraine, have created a shortage of • Economically unreasonable tariffs for rail transportation and Ukrainian manufacturers through the staff in the domestic labor market • Import dependence | The electricity transmission, inflated port dues | Fuzzy and non- introduction of environmental taxes high level of import of transparent tariff formation mechanism without reference to • Adverse conditions for the placement of production | finished industrial • Compliance with regulatory requirements| transportation costs; port dues perform a fiscal function Imperfect regulatory basis, lack of quality sites for products High expenses for complying with regulatory production deployment, and high costs of connection • Price fluctuations on world markets| Price fluctuations on requirements to the import of components to the grid global commodity markets pose risks to the stability of the and export of finished products economic system • Smart specialization | Incomplete process of formation • Loss of main markets | The loss of a of unifying growth points and priority directions for the • Instability of extraction and supply of certain types of raw significant market, including exports of whole region in the format of Smart-specialization materials | The probability of energy supply interruption creates engineering products to Russia, and the risks for the sustainable functioning of industrial manufacturing • Inefficient industrial parks | Areas identified as IPs do need to re-focus on new markets facilities not have the necessary infrastructure in some regions, there is no analysis of the impact of the new investor on the local community

Falling consumption of Significant barriers for the export of Ukrainian Insufficient financial resources and high risks of High cost of Ukrainian industrial products Ukrainian industrial products industrial products investment projects

Source: Centre for Economic Recovery ECONOMIC RECOVERY AND DEVELOPMENT MATRIX

Addressing current Drastic changes in Ukraine (2020) challenges functioning Ukraine (2030)

AS-IS RECOVERY TO BE • Low domestic demand for industrial products • Domestic demand for industrial products is sustainable • Domestic sales of industrial products increased Creating • Existence of regulatory barriers in housing construction • Regulation of the construction industry has been revised • High level of domestic consumption of industrial products due sustainable • Lack of financial resources for the renovation of housing and • Housing reform has been completed, mechanisms for financing to intensive housing construction, renovation of housing and communal services the renovation of housing facilities have been established communal services, modernization of transport infrastructure domestic • Low level of funding for the modernization of transport • Financing of infrastructure modernization through the state demand infrastructure budget is provided including concessions, PPP mechanism, creation of railway fund

Ensuring • Low level of industry integration into global value chains, • Extended sales channels for industrial exports • Ukrainian companies are leading exporters in priority markets integration into significant share of raw materials export in total export • Growth of exports of high value-added products and increase of • The number of export-oriented projects has increased global value • Legislation on industrial products is not harmonized with the EU export opportunities of enterprises, including increased state • Domestic industrial products do not require additional • Ukraine remains unrecognized as a trading partner to most support certification for export to the EU chains, creating countries • Most industrial products do not require additional certification • Ukrainian brands are recognizable abroad preconditions for • There is no effective network to support the interests of Ukraine for export to the EU • The network of representations of exporters' interests in key export expansion and Ukrainian business abroad • Well-functioning EPO, ESA, REI that provides support to exporters countries of the world functions effectively

• High cost of financial resources • Ukraine's position in world credit ratings has improved • The cost of servicing borrowed financial resources has been • High level of CO2 emissions from stationary sources complicates • Reduced CO2 emissions reduced access to European markets • The share of industrial waste used for recycling has increased • EU requirements for CO2 emissions are met and their level is Competitive- • High level of resource and energy consumption • A national commission has been set up to carry out effective minimized ness of • Tariffs of natural monopolies (railway, seaports, electricity) are not regulation in the field of transport, and the method of calculating • Circular economy practices have been introduced Ukrainian economically justified the tariff for electricity has been revised • The services of state monopolies are economically justified industry • Import duty for raw materials not produced in Ukraine • Import duties on raw materials not produced in Ukraine have • The fair value of raw materials not produced in Ukraine has • Significant level of depreciation of fixed assets (51%) been abolished been set for industrial producers • The level of depreciation of fixed assets is close to the average • The level of depreciation of fixed assets is below the average in the EU in the EU

• Prevalence of semi-finished products production • Transition to the production with higher added value • Prevalence high-tech production with high added value New productions • Significant regional concentration of industry • Foreign technologies are implemented, and the share of high- • Ukrainian industry is competitive in the high-tech sector and innovative • Unfavorable conditions for locating production facilities in Ukraine tech production is increased • Developed regional production chains activity in all • Low level of investment in the manufacturing industry • The volume of industrial production in all regions have increased • Investment inflows into Ukrainian industry have increased regions of the • Low level of technological development of industrial production • Smart-specialization introduced, cluster cooperation in industry • Industry 4.0 is fully implemented, the industry is digitalized country and products developed, industrial parks created • Low level of digitalization of the industry • Transition to Industry 4.0 has started

Source: Centre for Economic Recovery CHANGES REQUIRED

Responding to current challenges

1. Stimulating the growth of the domestic market | 1. Ensure the revival of housing construction - implementation of the ‘affordable housing’ program. 2. Ensure renewal of housing and communal services. 3. Ensure modernization of state transport infrastructure. 2. Attracting investment | 1. Raise the level of informing potential investors. 2. Develop a package of projects and initiatives aimed at attracting investment in production. 3. Improve the system of public-private partnership in industry. 3. Growth in housing construction due to deregulation of the industry | 1. Complete the reform of the SACI (State Architectural And Construction Inspection of Ukraine). 2. Regulate issues with permits and decentralize certification procedures. 4. Renewal of housing and communal funds | 1. Ensure the implementation of state programs and measures in the housing, which allow for an increase in the share of self-government in the housing stock. 2. Encourage the process of creating condominiums and other forms of self-organization of residents of buildings by carrying out major repairs of buildings at the time of transfer from the balance sheets of housing and communal services to the balance sheets of condominiums. 5. Financing of transport infrastructure modernization | 1. Provide funding for the renewal of fixed assets in ports by reducing the rate of deduction of USPA (Ukrainian Sea Ports Authority) dividends to the Budget to 30%. 2. Create a railway fund (financed through the direction of 2% of the excise tax on diesel fuel. Provide the targeted usage of the fund for investment projects, including infrastructure). 3. Provide funding and expand the “National Bridge Rehabilitation Program”. 4. Finance infrastructure modernization through the state budget, concessions, PPP mechanism.

Drastic changes in functioning

1. Growth in housing construction due to deregulation of the industry | 1. Deregulate permitting procedures, delegate functions to individuals under state supervision with compulsory insurance of their activities. 2. Abolish the procedure for issuing a construction permit. 3. Change the order of the development of project documentation (focus on modeling the entire life cycle of the object and its valuation). 2. Financing of transport infrastructure modernization | 1. Create a fund for the development of river transport using excise duty on fuel as a revenue source.

Source: Centre for Economic Recovery CHANGES REQUIRED

Responding to current challenges

1. Harmonization of standards in the field of standardization and certification | 1. Harmonize national standards with international and regional ones, namely implement REACH and CLP regulations. 2. Create a mechanism for the transition of certification centers to EU standards. 3. Adapt industrial producers to environmental requirements. 4. Sign the ACCA agreement (Agreement on Conformity Assessment and Acceptance of Industrial Products), which allows the use of certificates of conformity issued by Ukrainian metrology centers in the EU and participate in tenders. 5. Eliminate duplication in the field of state supervision of product conformity. 2. Geographical diversification of partnerships | 1. Update existing free trade agreements. 3. Removing trade barriers and simplifying procedures | 1. Simplify the opening of branches abroad in order to support export contracts, service of goods with high added value, organization of marketing activities, participation in tenders. 2. Optimize the functioning of customs authorities. 3. Ensure coordination of processes, procedures, information flows based on electronic document flow. 4. Export support | 1. Expand the functions of the Export Credit Agency 2. Increase public funding for insurance and lending for export contracts to produce goods with high added value. 3. Provide state support for participation in industrial exhibitions. 4. Intensify the work of trade missions to stimulate export. 5. Introduce an effective system of state guarantee of foreign trade operations. 6. Improve the system of export control (in particular for military products). 7. Ensure the development of military-technical cooperation. 5. State protectionist policy | 1. Limit the application of protectionist measures to the measures applied by the OECD countries with limiting the applications of measures that may lead to an increase in the production costs of other Ukrainian producers or become a reason for the introduction of symmetrical / asymmetric measures against Ukrainian products 6. Professional training | 1. Implement the concept of dual education. 2. Promote the development of alternative forms of on-the-job training, training centers at industrial enterprises. 3. Ensure the provision of grants for education, training. 4. Provide the necessary state ordering of specialists in accordance with the needs of employers. 5. Modernize professional standards of industrial specialties. 6. Improve the system of retraining of specialists. Drastic changes in functioning

1. Harmonization of standards in the field of standardization and certification | 1. Fully adapt national standards and norms to international and regional ones. 2. Geographical diversification | 1. Conclude new trade agreements on free trade with a wider range of countries that are promising for Ukrainian exports. 2. Review agreements with the EU in the direction of expanding export opportunities. 3. Removing trade barriers | 1. To unify the legislation on trade regulation. 2. Harmonize transport and logistics infrastructure so that it has common technical parameters with the EU. 4. Export support | 1. Consider the creation of special export zones. 2. Provide branding of national production.

Source: Centre for Economic Recovery CHANGES REQUIRED

Responding to current challenges

1. Cheaper financial resources | 1. Increase Ukraine's position in world credit ratings, reduce budget expenditures on the interest costs of debt. 2. Ensure compliance with a stable and predictable monetary policy. 3. Balance public finances, reduce the drainage of resources from the private sector to the public through domestic government bonds. 2. Stimulating the modernization of fixed assets | 1. Provide the extension of the mechanism of installment or refund of VAT on imports of equipment for the modernization of industrial sectors focused on the production of high value-added goods. 2. Provide temporary benefits for the production of equipment in Ukraine. 3. Strengthen the administration of industrial production safety policy. 4. Provide a transparent and effective mechanism of state guarantees for the modernization of production in obtaining loans and borrowings. 3. Efficiency of industrial enterprises | 1. Encourage enterprises to take measures to systematically improve efficiency. 2. Promote the creation of the complete production cycle. 4. Economic feasibility of tariffs and fees of natural monopolies | 1. Reduce tariffs for state monopoly services to an economically reasonable level. 2. Create a national commission that carries out state regulation in the field of transport. 3. Ensure the economically viable formation of the tariffs for electricity by improving the electricity market regulation mechanisms with ensuring competitiveness of the industrial producers and minimizing the impact of the electricity market crises on the industrial producers. 5. Reduction of regulatory pressure | 1. Review existing permitting procedures in industry. 6. Circular economy | 1. Create transparent and competitive markets for secondary raw materials by improving and approximating the legislation of Ukraine to the relevant legislation and norms and rules of the EU. 2. Stimulate waste reduction. 3. Simplify the procedure for carrying out operations with scrap metal. 4. Form policies for a circular economy. 5. Introduce a market for quota trading. 6. Review the functions and targets of the Energy Efficiency Fund. 7. Resource efficiency | 1. Raise awareness of the introduction of resource-efficient technologies. 2. Introduce effective regulation in the field of resource conservation and use of renewable energy sources. 3. Provide grants and loans for resource-saving and energy-saving technologies. 4. Provide access to high quality energy audits. 5. Ensure the implementation of energy management programs. 6. Form a system of public green procurement. 7. Introduce a system of tax incentives for eco-modernization. 8. Fair state protectionist policy | 1. Abolishment of import duties on raw materials and materials not produced in Ukraine. 2. Limit the application of protectionist measures that may lead to an increase in the cost of other Ukrainian producers or become a reason for the introduction of symmetrical / asymmetric measures against Ukrainian products

Drastic changes in functioning

1. Achieving cheaper financial resources | 1. Implementation of programs to reduce the cost of credit resources for the industrial sector. 2. Ensure the development of the stock market and alternative sources of financing for the industrial sector. 2. Circular economy | 1. Stimulate and support waste reduction. 2. Introduce an extended producer responsibility system. 3. Introduce a set of measures for the commercial development of industrial dumps. 4. Ensure the full implementation of the circular economy.

Source: Centre for Economic Recovery CHANGES REQUIRED

Drastic changes in functioning

1. Attracting investment | 1. Raise the level of informing potential investors. 2. Develop a package of projects and initiatives aimed at attracting investment in production. 3. Improve the system of public-private partnership in industry. 2. Access to finance | 1. Form a Development Bank to support start-ups. 2. Use the funds of the regional fund to establish production infrastructure - the launch of new production. 3. Expand the powers and increase the financial volume of the Innovation Development Fund. 4. Increase the volume of financing of innovations in industry, in particular through the use of resources of financial and credit institutions, investment funds. 3. Industry 4.0 | 1. Promote the concept of "Industry 4.0" and its individual elements as a mandatory factor in increasing the competitiveness of industrial enterprises in international markets. 2. Institutionalize Industry 4.0 - synchronize strategies. 3. Involve industrial companies in the implementation of the concept of "Industry 4.0" through the EU funds, in particular the Horizon 2020 program. 4. Facilitate educational activities to transfer best practices from the information technology sector to industrial sectors. 5. Ensure the integration of innovation 4.0 in the strategy of the defense industry and security of the country. 4. Regional development | 1. Ensure the use and implementation of the smart-specialization approach. 2. Create pilot projects to develop mutual support between regions. 3. Create conditions for competition between local communities to attract investors. 5. Industrial parks | 1. Promote the development of industrial parks as investment sites with all the necessary engineering and technical infrastructure, including public-private partnerships. 2. Provide the necessary incentives for industrial parks residents. 3. Create an interdepartmental coordination commission. 4. Ensure the use of regional programs for the development of the network of industrial parks. 6. Introduction of innovative technologies | 1. Create platforms for the exchange of experience in the implementation of innovative technologies. 2. Create a single web portal for the publication of tools, information and statistics on practices for the introduction of innovative technologies. 3 Improve the mechanisms of commercialization of scientific and technical developments, research works. 4. Reduce the risks of implementing innovative projects through insurance tools for such projects. 5. Create favorable conditions for the development of clusters. 7. Development of Ukrainian machinery production (transport and railway, production of agricultural machinery, shipbuilding) | 1. Expand the financial capacity of sectors and their ability to attract investors 2. Review and adapt existing tariff policies and practices to the needs of the sector in terms of imports. 3. Eliminate over-regulation of industries. 4. Support innovation and promote best practices in sectors. 8. Development of defense industry | 1. Ensure the financial stability of defense enterprises. 2. Ensure long-term planning and state investment in innovation. 3. Provide state support for defense scientific and technical research. 4. Stimulate the introduction of modern technologies in the defense industry. 5. Provide grants for the implementation of defense technology in other areas.

Source: Centre for Economic Recovery CHANGES REQUIRED

Drastic changes in functioning

1. Attracting investment | 1. Implement public-private partnership programs in industry (priority - expansion of exports and import substitution), where the state promotes access to energy and transport infrastructure. 2. Regional development | 1. Accession of Ukraine to the European Smart Specialization Platform (S3 Platform). 3. Industrial parks | 1. Provide conditions for the creation of industrial parks as investment sites with all the necessary engineering and technical infrastructure. 2. Compensation of part of the costs of industrial parks aimed at standard connection to the power grid at the expense of the State Fund for Rural Development. 4. Industry 4.0. | 1. Form new competencies of personnel in the industry for the purpose of introduction of digital technologies. 2. Fully digitalize key industrial sectors. 3 Ensure clustering in the industry 4.0 - at the national and regional levels. 5. Introduction of innovative technologies | 1. Form relations and strengthen cooperation between higher education institutions, research centers and industry. 2. Integrate industrial clusters of Ukraine with the European platform of cluster cooperation. 3. Create scientific and technical clusters with the participation of basic enterprises. 6. Development of Ukrainian machine building (transport and railway, production of agricultural machinery, shipbuilding) | 1. Introduce incentive and compensation mechanisms at the state, regional and local levels to support priority subsectors of the machine-building that are suitable for export. 2. Involve young people in educational programs related to mechanical engineering and chemical industries; create opportunities for talented Ukrainians going abroad. 7. Development of the defense industry | 1. Ensure the integration of the defense industry with the classical sectors of the economy. 2. Ensure the integration of the defense industry with the education and science.

Source: Centre for Economic Recovery Cabinet of Ministers of Ukraine