How to become one of Lviv investment lions?

  • How to become one of Lviv investment lions?
Issue 80, June 2015.

How to become one of Lviv investment lions?

Markian Malskyy,

Ph.D., attorney-at-law, MCIArb

Partner, Head of West Ukrainian Branch of Arzinger law office

Head of West Ukrainian Branch of European Business Association

Markian Malskyy has supported a number of major projects in Lviv region, including advising in such spheres as tax, real estate, corporate business, construction, business structuring, litigation, consulting and support of projects in public-private partnership, dispute settlement in the energy sector, trade, enforcement of foreign court judgments and arbitral awards, and M&A transactions. Mr. Malskyy is has been recognised by a number of national and international ratings, including Best Lawyers 2013, 2014, 2015, the International Who’s Who Legal 2014, "Ukrainian Law Firms. A Handbook for Foreign Clients" (2012, 2013, 2014); Top 100 Best Lawyers in Ukraine - Client’s Choice 2012-2013"; The Legal 500 - Europe, Middle East & Africa guide, Chambers Europe and Сhambers Global and others.

West Ukrainian Branch Office headed by Markian Malskyy also has been recognized as the leading law firm in the Western Ukraine region for 4 years in a row according to different ratings. Among major clients of Lviv Office are the biggest market players such as Lafarge, Dunapack, Nestle, King Cross, Halychyna-Zakhid, Leopolis, Galychfarm, AVE, EBRD, Klingspor, Schweighofer, Yarychiv, JAF, Caparol, Strabag, ara Shoes AG, and Kredobank.

In between business trips and while in Lviv, Markian Malskyy took time out of his hectic schedule to discuss Lviv’s investment opportunities with Lviv Today Publisher Peter Dickinson.

Vision for Lviv’s future development

The Lviv business community cannot remain indifferent to the EU Association process and should not miss the opportunities offered by the agreement. Today investors have a unique chance to start business in Lviv, contributing not only into own welfare but also to regional economic development.

Why Lviv is the best investment bet in Ukraine

Unquestionably Lviv is a European city in which we respect European values and are open to enlarging our cooperation with the European community. Besides its unique charm, Lviv also attracts foreign investors by its location, the rich natural resources of the region, highly educated employees, significant number of developing sectors for investment, comparably inexpensive raw materials and low costs of production.

INTERVIEW QUESTIONS:

1.    How do you assess the general investment climate in Lviv today, taking into consideration the positive impact of the EU Association Agreement and the negative impact of Russian military intervention in Crimea and the east of the country?

Lviv region is steadily ranked as one of the most investment-friendly regions of Ukraine. Even today, with armed conflict in the east of the country, Lviv is still attractive for investments in all segments. Examples of successful investment projects in the region over the past decade include Nestle (Switzerland), Carlsberg (Denmark), Leoni Wiring Systems (Germany), Kredobank (Poland), FAKRO Lviv (Poland), Danish Textiles (Denmark), AVE (Czech Republic), Halychyna-Zakhid (Denmark), Agrocultura (USA), Provimi (Poland), KingKross (Italy) and others.

Lviv is very pro-European and is situated extremely close to the EU. This has made the EU Association Agreement a long-awaited breakthrough. Even though the EU Agreement is not yet in full force, it has already brought great results, mainly for small and medium-sized businesses. There are numerous advantages and prospects offered by the Agreement to all sectors. Obviously, simplified customs regimes and reduce of customs duties are most promising for Lviv region due to the traditionally export/import oriented local economy. At the same time, the biggest benefit of Association is its contribution to the investment attractiveness of Ukraine by increasing confidence in protection of investment and compliance with European standards.

We had expected even bigger revenues from the signing of the EU Agreement and anticipated a rapid growth in investment, but obviously the conflict in east Ukraine and the occupation of Crimea have obscured the positive impact of the EU Association Agreement, serving as a barrier to greater foreign investment.

Nevertheless, volumes of cooperation are continuously increasing. We estimate that the level of investment into the Western regions of the country will increase much more, as soon as the situation in rest of Ukraine is stable.

2.    What can Lviv region offer to the investors?

Indisputably the ‘City of Lions’ welcomes foreign citizens with their business ideas and know how. Lviv uses its advantages to entice investors. In particular there is great number of economic grounds for doing business in Lviv, especially for foreigners.

The primary advantage of the region is its geographic location. Lviv’s position bordering with Poland has given rise to the development of transport and customs infrastructure which has reduced logistics expenses in trade and import/export operations. The local availability of mining, wood and water resources is also attractive. The Carpathian Mountains and natural health resorts provide plentiful ideas for business projects.

Another advantage of the region is the availability of highly qualified employees with good English language skills and competitive salary requirements. This allows investor companies to reduce employee costs while selecting a highly professional workforce.

Inexpensive production is also a decent motive to start business in the region. These low costs are related to a range of factors including low payroll expenses, a choice of favorable taxation regimes, comparably low-priced raw materials - especially those which are purchased directly from the natural producers – fuel and energy prices below European levels, plus low prices for land lease and lease of state or communal property.

Another attractive factor is the availability of vacant niches for business activity in certain sectors of the economy, which allows investors to secure virtual monopolies, at least in the short term.

What should be extremely striking for large investors is the fact that even after 24 years of independence, there are still a lot of non-operating factories and plants built in Soviet times and now owned by the state or private entities, which can as the perfect platform for starting new manufacturing operations.

In this respect we should also certainly mention the availability of vacant land plots for engaging diverse kinds of activity. This is true both in the city (available for construction, manufacture, trade and warehouses, hotels and accommodation, restaurant business, real estate, etc.) as well as in the region (agriculture, alternative energy, mining, also manufacture, etc.)

3.     Which sectors of the Lviv economy offer the brightest prospects for international investment? 

Relocating manufacture to the Lviv region appears to be one of the most auspicious investments for foreign companies as well as starting new production in Ukraine.

There are many other sectors which are attractive for foreign or local investors:

The IT sector is one of the most promising sectors for investment and we estimate that its attractiveness will continue to increase due to continuous demand for innovative IT solutions and thanks to the number of qualified software developers involved in international projects. The main goal for investors in this area should be receiving direct orders from the biggest market players and end customers by relocation of whole cycle of final software production to Ukraine instead of producing only modules or components here (component-based software engineering).

·         Thanks to its advantageous location and rich natural resources, Lviv region is also extremely attractive for investments in agriculture sector.

·         Investment in infrastructure development, including construction, is also interesting even though it will require more funds to invest. There is a lack of certain infrastructure components, such as trade centers and business parks, investments in which might be long-term but very promising - especially in instances where there are anchor tenants ready to participate in the project. Investments into the real estate sector also promise fast and significant revenues, especially into residential real estate.

·         The financial sector promises the highest revenues in the short term, although such investments may also carry the highest risk.

·         Tourism and related sectors such as leisure and hospitality are very attractive for investment due to the constant growth in the number of tourists visiting Lviv from year to year. According to statistics provided by Lviv City Council, more than 1.7 million tourists visited Lviv in 2014, compared to 780,000 tourists in 2010. This growth comes despite the conflict in east Ukraine. Given this upward trend, we estimate that the number of tourists will keep increasing from year to year, and therefore demand for related services will increase respectfully.

4.    Is now a good time to invest in Lviv?

Of course investments at present carry significant risks, given the conflict in east Ukraine and fears over a possible Ukrainian default.

However, these uncertainties create a unique opportunity to occupy new market niches. Investors who are able to identify the right niches can count on considerable revenues. There are still a lot of segments of the economy which have yet to catch up with growing domestic demand. These potentially interesting spheres for investment have grown more numerous as a result of the EU Association Agreement, but the new opportunities are still not enjoyed in full by foreign investors.

In this regard it is very important to correctly determine which sectors offer the most potential, and to choose the right local partners. Choosing a reliable bank is also a vital factor which will allow investors to mitigate the risks appearing due to the crisis in country’s banking system.  

At the same time, the current problems in the banking sector provide investors with a unique opportunity to participate in the reallocation of capital of liquidated banks and other financial institutions by purchasing of their assets (including credits and investment projects) for 70% – 90% discounts.

Another benefit for foreign investors is the devaluation of national currency, especially for production and export-oriented businesses. For those sectors, the devaluation of the hryvnia has made it possible to reduce expenses considerably while maintain foreign currency revenues.

Therefore we consider that while the risk level is currently relatively high, investment in the Lviv region remains fundamentally attractive and should lead to high revenues.

5.    What role do you see international business organizations like the EBA playing, and what role can legal advisors play in the development of Lviv as a destination for international investment?

As Chairman of the Board of the West Ukrainian branch of the EBA, I fully recognize the responsibility which lies upon public associations in addressing the challenges faced by business. Today the EBA is one of the most active business organizations, using new opportunities to foster cooperation with the government. It has also became a powerful platform protecting and lobbying the interests of European businesses in Ukraine. The EBA is a platform for cooperation and networking within the business community, and an effective instrument fostering support for new European companies or individuals entering the market.

The local legal community should also actively participate in expanding awareness among their foreign clients about investments in Lviv. For foreign investors it is very important to select a qualified law firm when entering the market in order to secure the further success of all business projects. In this regard, the reputation and experience of the lawyers in support of external clients and investment projects should be key criteria for finding the right legal guidance.

The local legal market is not yet particularly developed in this direction, as most of the leading law firms are still situated in Kyiv. Arzinger law firm is one of the biggest national law firms, and is one of the market leaders to have opened a Lviv office. As the legal partner for investors entering the Ukrainian market for over 10 years, Arzinger offers extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters, for senior international and local businesses almost everywhere in Ukraine. Speaking with clients in their native language while boasting international education, our lawyers represent one of the key competitive advantages of Arzinger.