Investing in Ukrainian private companies, especially in existing dynamic small-to-medium-sized enterprises (SMEs), is becoming a safer bet than chasing venture-capital startups and the next unicorn à la notorious serial VC investor Marc Andreessen after the collapse of Santa Clara, California–based Silicon Valley Bank (SVB).
While shareholders and bondholders of the $200-billion-plus bank financing high-risk venture-capital investment will be all but wiped out, investors in Ukrainian companies are able to stopgap any downside through political- and war-risk insurance provided by the US International Development Finance Corporation (DFC), the European Bank for Reconstruction and Development (EBRD), and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).
Ukrainian President Volodymyr Zelensky and Finance Minister Sergii Marchenko have become almost blue in face repeating that private-sector investment is critical not only for the country’s war effort to defeat Russian aggression but also to facilitate Ukraine’s quick accession into the European Union.
Zelensky last month urged a group of major US manufacturers, the National Association of Manufacturers, to invest now in Ukraine rather than at the end of the war, repeating the same “investment not charity” appeal he made in his speech to a joint session of the US Congress in December.
Two former Ukrainian finance ministers, Ambassador to the United States Oskana Markarova, and newly appointed US-based strategic adviser to Ukraine Invest (and the savior of Puerto Rico) Natalie Jaresko, are pushing the US and UK governments to use a significant portion of $300 billion of seized Russian assets – including some £18 billion of oligarch assets seized by the UK – to be immediately transferred to the DFC, EBRD and MIGA to cover war-risk insurance.
Speaking to Capitol Intelligence, Jaresko said the United States can immediately utilize its share of the seized Russian central-bank assets, some $30 billion, to back and guarantee private-sector investment inclusive of full war-risk coverage.
Russian President Vladimir Putin’s “main goal in this war is to destroy Ukraine and the Ukrainian economy,” she said, adding that private-sector investment is needed to solidify the resilience of the Ukrainian economy, bring people back to work and boost the country’s tax rolls.
Former World Bank president Robert Zoellick and Jaresko both agree that seized Russian central-bank assets can be reutilized now under US law, while the issue of oligarchs’ frozen assets is subject to greater legal scrutiny.
During a debate on February 27 with US Treasury Secretary Larry Summers at the Atlantic Council, Zoellick said the US and its allies need to start investing in western Ukraine now and not wait until the war is over to launch a new Marshall Plan for the country.
Zoellick went on to say China should also be invited to co-invest with Western multinationals in the rebuilding of postwar Ukraine, an olive branch appealing to the more capitalist elements of the Beijing regime.
Currently, Ukraine is spending $3 billion a month on social costs, with the budget deficit covered by members of the Group of Seven and the EU. The International Monetary Fund is asking that at least 30% of Ukraine’s budget be covered by tax revenues.
Speaking to Capitol Intelligence ahead of testifying at a congressional hearing on blocking US technology transfers to China, DFC chief executive officer Scott Nathan said the US-backed agency fully guarantees political risk, including war risk, for existing and future US private-sector investment in Ukraine.
The United States was the first nation to institute war-risk insurance. President Woodrow Wilson launched such insurance with the War Risk Insurance act of 1914 to cover shipping vessels and individuals during World War I.
Jaresko said Nathan’s statement is extremely positive as small-to-medium-size companies need to know that they have full government support for their investment and that their downside risks will be covered.
EBRD and MIGA have already instituted a trust to cover war-risk insurance for investors, with the lion’s share of the trust’s $200 million donated by Japan.
UK Security Minister Tom Tugendhat and the country’s business-savvy prime minister, Rishi Sunak, have repeatedly proved the are willing to bulldoze over any bureaucratic niceties to get military and financial aid to Ukraine.
Using a speech at the Hudson Institute, Tugendhat declared the end of “Londongrad” where Russian oligarchs used ill-gotten gains to become the nouveau arriviste of London society and the financial sector, owning trophies rangint from the Evening Standard newspaper to the Chelsea Football Club.
Speaking to Capitol Intelligence, Tugendhat said he is moving on Russian companies incorporated in offshore paradises under UK control like the British Virgin Islands.
Many Russian companies are incorporated offshore because of the impossibility to register and operate foreign operations in Russia due to neo-Soviet bureaucracy in corporate governance and tax officials that make paying an invoice to a foreign supplier a Herculean task.
A UK Home Office aide to Tugendhat, Peter Backhouse, declined to comment on whether the UK government was looking to transfer Russian stolen assets to cover war-risk insurance ahead of the Ukraine Recovery Conference the government is co-hosting with Ukraine on June 21-22 in London and at the IMF World Bank Spring Meetings next month in Washington, DC.
“More than 80% of Ukraine is not subject to war and one needs to invest there today,” the leading investment banker to Ukraine, Rothschild’s Giovanni Salvetti said.
Over the past 15 years, Salvetti has done more than $10 billion in M&A transactions in Ukraine with an average deals size of $100 million and more than $50 billion in sovereign transactions.
Rothschild’s and JPMorgan Chase are the two investment banks leading efforts promoting targeted foreign direct investment to Ukraine and the future $300 billion to $500 billion reconstruction fund needed to build back industry and infrastructure in the occupied territories of Luhansk, Donetsk and southeastern Ukraine after the country wins back its pre-2014 territory.
“There is huge investor appetite in Ukraine as the country is set for a prewar economic boom surpassing the entrance of RAMs [recently acceded member states, namely Poland, Slovakia, the Czech Republic and Romania] into the European Union in early 2000,” Salvetti said. “However, Ukraine will welcome those investing today with more than open arms, and those coming after victory less so.”
Nigel Wright, an up-and-coming American producer, says he is bringing the film Leon’s Fantasy Cut, the winner of the Brooklyn Film Festival, about two Ukrainian-American Brooklynites, to the cities of Lutsk, Lviv, Odessa, Kiev and Bucha as a concrete manifestation of direct Ukrainian and American people-to-people solidarity and to connect Ukrainian business owners with their US and European counterparts.
The barber of Leon’s Fantasy Cut is real-life Ukrainian immigrant Leon Kagot, who left Ukraine in 1979 as part of a US wheat-for-refusenik deal under the late Russian leader Mikhail Gorbachev.
“The film business is about bringing people together in the same room. Leon’s Fantasy Cut brings us together as people but also future business partners,” said Wright, whose p2p initiative has even garnered interest from US-UK film and entertainment tycoon Len Blavatnik.
Blavtanik made his fortune of $25 billion by selling his stake in Russia’s TNK oil group with now sanctioned co-investors Viktor Vekselberg, Mikhail Fridman and German Khan.
Ketul Patel, whose venture-capital fund Headline just sold Axios to Cox Media for $600 million, said the VC universe is scrambling to understand whether their portfolios will be able to survive the coming weeks or months after the bankruptcy of SVB.
US Treasury Secretary Janet Yellen announced Sunday that there will be no US taxpayer bailout of SVB or rescue of unsecured debt holders but that all depositors will be made whole beyond the normal Federal Deposit Insurance Corp (FDIC) limit of $250,000.
Analysts believe one of Putin’s strategies is to prolong a stalemate in the war to the point that a major financial collapse would trigger a worldwide financial crisis and deflect attention and interest in providing financial and military support to Ukraine.
“Putin knows first hand [from] the 2008 war with Georgia [after] which Western interest in sanctioning Russia waned significantly after the great recession caused by the collapse of Lehman Brothers,” a NATO analyst said.
But as Putin and his cabal of mobsters miscalculated Ukrainian drive for democratic self-determination and Europe’s addiction to Russian oil and gas, he has also miscalculated the true impact of a relatively contained meltdown in the iffy, insular world of venture capitalism brought to light by the failure of SVB.
Ukraine, backed by G7 nations and their top companies, is destined to become one of the greatest economic miracles since West Germany once Russia is expelled and Ukraine takes its rightful and overdue membership in the European Union.
Peter K Semler is the chief executive editor and founder of Capitol Intelligence. Previously, he was the Washington, DC, bureau chief for Mergermarket (Dealreporter/Debtwire) of the Financial Times and headed political and economic coverage of the US House of Representatives and Senate.