Polish bankers cite legal landscape as 'most confusing' hurdle in operations in Ukraine

The development of cooperation with Ukraine by the Polish state-owned Bank Gospodarstwa Krajowego (BGK) began in 2021, gaining access to European Commission (EC) grants. Initially, the main focus was on COVID-19 vaccines. However, when the full-scale invasion began, BGK received the "green light" from the EC within two days to shift focus to emergency aid.

The Polish Solidarity Fund PL, already active in Ukraine, became a partner and began purchasing water, transformers, and ambulances for the frontline in April 2022. Later, school buses were bought, and psychologists were trained.

Subsequently, BGK began using another financial support tool to support micro, small, and medium enterprises in yellow and red zones. As of the end of 2023, through partner KredoBank, 82 loan agreements (loans under EU guarantee) for 11,93 mln EUR were issued, and the average check for one loan is about 150,000 EUR. KredoBank is owned by another Polish state bank – PKO Bank Polski, which is similar to Ukraine's Oschadbank.

LIGA.net spoke with BGK's Head of Geopolitical Risk Analysis, Bogdan Zawadewicz, and the International Development Instruments Department Director, Agnieszka Falkowska.

Support Ukrainian independent journalism 

Let's begin with lending to small and medium enterprises in Ukraine. What is the scale of the program and its target audience?

We planned for these loans to reach a portfolio of 170 million euros (around $180 million – ed.) over five years. The first phase was very successful. BGK and the European Commission take on the risks while KredoBank issues the loans. The weighted average collateral loan coverage in the green zone is 38%, and 74% in the yellow/red zones.

No other financial institutions, including the European Bank for Reconstruction and Development (EBRD) or the European Investment Bank (EIB), were able to provide loans in these very risky regions. We managed to do this with KredoBank thanks to the guarantee structure from the European Commission. It is important because these regions have limited resources, but some enterprises must be rebuilt to continue operating.

What were these funds spent on?

The funds are provided for liquidity support and investments, but only for new clients and new money. Not to secure the portfolio of KredoBank. No, this is for clients, for investments, for example, to restore their operations.

What kind of businesses are these?

Mainly the food industry and agriculture. Particular segments.

What is the future of this program?

We have discussed the possibility of expanding sources with the EC. The favorable decision was made at the end of the year.

We are also working on using the Ukraine Facility in the future. We are keen to apply to use this instrument – the risk-sharing component.

We are working on defining needs, on a pipeline of projects (a way to track potential beneficiaries – ed.), to have a specific pipeline of Ukrainian companies or companies that, for example, would work with Polish technology and at the same time continue to develop in Ukraine.

We are conducting discussions with business forums, with business partners from Ukraine here in Poland, who managed to relocate their business but would like to return. I also spoke with those thinking about direct investments or creating a joint venture in Ukraine.

We are also working with the Kyiv School of Economics (KSE) to define the needs and funding opportunities for communities or municipalities in Ukraine.

We want to understand what financial support we can provide – lending, risk-sharing with financial institutions, or directly supporting this segment. For now, we are collecting data and conducting due diligence (analysis – ed.) to understand how local authorities work, how public law operates, and how communities are funded and operate.

So, are you considering direct loans to municipalities?

We are at the analysis stage. These could be loans on-lended in partnership with Ukrainian banks to municipalities or municipal companies, such as transport, water supply, and sewage companies. But it's important to understand this system – how payments are collected, on what basis, and how payment flows operate in Ukraine.

If we talk about business, what kind of investments could these be?

Currently, we are establishing contact with companies and meeting directly with business people considering investments, starting a business in Ukraine, or considering the placement of logistic warehouses and planning to build a glass factory due to the massive need for glass products, windows, etc.

We are trying to cover different areas, but it should be connected to the so-called Ukraine Plan.

There is a big question between financial institutions and the Commission because war excludes lending, according to banking rules in the European Union. It's prohibited by law because the risk is so high that a banking institution is usually not allowed to operate in such a territory. The European Commission is preparing an instrument, the so-called Ukraine Facility, to be launched this year, and it is likely that the war will still be ongoing.

So, may war risk insurance be possible?

We have yet to find out. There have been discussions, and we asked our banks, as it is not just about the Polish Bank but also Germans and French – everyone asked this question.

The instrument could possibly be launched, but banks will face huge difficulties or legal restrictions. I hope we can manage this. There are solutions to this, but the Commission needs to be more cooperative.

Insurance remains a significant issue. The Polish Credit Export Agency (KUKE) provides war risk insurance, as authorized by the Polish parliament on September 28, 2023. For instance, if a Polish or international company builds a factory in Ukraine and it gets damaged by a missile, the insurance will cover 100% of the damage.

However, interest in this instrument is still very low. Of course, there is also the question of costs – how much does the export financial agency charge you for providing insurance during the war? Additionally, these agencies have specific preferences regarding regions where they want to support companies.

What are the conditions for Ukrainian businesses to participate in your programs? What must they have, or what should the companies be like to receive a loan?

Firstly, these companies must have realistic investments and financial business plans prepared. We would be very happy if there is a partnership or joint venture with Polish business.

But most importantly for us, it is to see that these enterprises can compile an investment portfolio and have viable business plans regarding financial data. There must be a possibility to verify this, ensuring they are transparent and that we can consistently check them regarding ownership, business relations, and how efficiently and transparently the business is conducted.

Is Polish business interested in this cooperation?

For us, it would be all right, as we are the Polish development bank, so we are trying to find a way in which Polish businesses can support Ukrainians. But this is a relaxed condition.

We actively engage with the Polish-Ukrainian Chamber of Commerce and other business associations here in Poland. This chamber has active Ukrainian businesses, Polish-Ukrainian businesses, and some cooperatives.

We work with various business associations directly with businesses or organizations in Ukraine. There is quite developed cooperation between Polish-Ukrainian municipalities.

But as for Polish business, it largely depends on our dialogue and interaction with them.

What sectors could be attractive for foreign investments?

You have needs and business opportunities in the service sector. Many people with disabilities are returning from the front; they need treatment and psychological support. And the number of these people is rapidly increasing. I shouldn't think about it in terms of business, but there are needs and opportunities here.

Excuse my frankness. You also have a crucial sector – the military industry. This also presents an opportunity for some Polish companies to create joint ventures with Ukrainian commercial structures.

Then, transport and logistics – everything that facilitates increasing the flow of goods and strengthening the chain supply. So this is the area where we see great potential, and there are companies with real projects that need our support.

Is there anything other than the war that is a barrier to integrating Polish business into the Ukrainian market?

The most significant concern is raised primarily by the legal environment in Ukraine, which is not perceived as stable and predictable.

Secondly, business calculations come into play. A market must exist. Without a market, there is no reason to go there. These two main reasons prevent entry into the Ukrainian market, but the market will not emerge soon.

Additionally, the question arises about the role Polish companies will play. For instance, a Polish construction company could secure a contract. Suppose we have a Ukrainian investor, whether a private business or a municipality, and the Polish company is the developer. It is one potential scenario.

But I am more focused on companies interested in greenfield investments (investments from scratch – ed.).

There is another factor I must mention concerning Polish construction companies. This year, over 70 billion euros (around $75 billion – ed.) from the European recovery fund will be pumped into the Polish economy. Part of the funds will go to construction. Therefore, Polish companies in the construction sector will be more focused on projects in Poland. From conversations with them, they are more concerned about whether they will have enough capacity to work on construction projects here in Poland. When asked about Ukraine, their response is, "Well, dude, we have safe and stable business here, although we are not sure if we will be able to deal with such a large number of construction projects in Poland". They aren't giving much thought to Ukraine at the moment.

At the same time, the human resources issue in Ukraine is also critical. Do you feel this, and if so, how critical do you believe it is?

I can give an example. Near the Moldovan-Ukrainian border, a new small bridge is being rebuilt. My colleague was at the construction site. There were groups of workers who were rotating every two weeks, working on several construction sites simultaneously. We also hear from Polish companies operating in Ukraine that there is a rising issue related to labor shortages. 

It gives an idea of what everything might look like if a larger investment cycle begins. This problem also refers to the lack of highly skilled people who can run investment projects – it is already quite visible in the Ukrainian public sector and may negatively impact the country's absorption capacities (of financial support) in the future. 

Thus, the question arises: should Ukraine consider, for lack of a better term, importing labor from Asian countries, Turkey, and Moldova? The former Prime Minister of Moldova voiced concerns that the country's working-age population might move to Ukraine for construction jobs, potentially harming Moldova's labor market.

Is investing in reconstruction during the war effective, as we see that the war will not end?

There is no breakthrough on the front, of course. But it is worth considering, not so much reconstruction as modernization. If you look at the utility companies in Ukraine, they have huge needs. Local municipalities need sewage, waste management, and better public transport systems.

But also, you have a massive need for project management skills. Again, labor. Qualified people who can develop, support, and manage projects. There is a considerable gap, evident in Ukrainian municipalities, in involving people with specific qualifications. Because the money might be there, companies might be there, but people will be needed to prepare and manage the project. It is also why our Bank has just launched the apprenticeship program, which aims to enhance the administrative capacity-building processes in Ukraine's public sector. In April this year, the first cohort of young Ukrainian professionals will join our Bank for a nine-month paid internship. During their stay, they will acquire knowledge from the various fields of development banking. In addition, they will attend the post-diploma Public Policy Design program at SWPS University. The program participants are expected to work in the Ukrainian public sector upon their return to Kyiv. 

Mykolaiv worked a lot with international partners. Unfortunately, the city is regularly shelled, so I'm unsure about investments; their needs differ. Or Odessa, the city which is also regularly bombed.

However, I know from our friends from the Ukrainian banking sector that small and medium entrepreneurs from the Mykolaiv region applied for loans. And with the help of these loans, they expanded their business. I remember a winemaking enterprise from the Mykolaiv region that is developing and thriving. They don't give up.

Firstly, as long as these companies survive and continue their business, you have stable revenues for the state budget because they pay taxes. So, we must support them. They are the foundation of the Ukrainian state's survival strategy.

Secondly, by supporting them, you create an alternative economic life that can challenge the existing oligarchic structures. That is why such great attention is paid to small and medium entrepreneurs.

How do you assess the state of corruption, and do you see progress in fighting it over the last few years?

I lived in Moscow for some time and extensively traveled to Ukraine at least a few times a year after 2016. Many of my colleagues worked in Kyiv for the EU mission. I have Ukrainian friends, so I'm well acquainted with the situation and have a comparative perspective. I'm critical of the dominant discourse on corruption in Ukraine.

It doesn't mean I'm naive and don't know how everything works—quite the opposite. But one must appreciate the positive changes. We have just published the report on the state-business report in Ukraine, explaining the ongoing anti-corruption reforms in Ukraine and trying to show a more honest picture of the country (Towards growth-enhancing state and business relations in Ukraine. (bgk.pl)

You have built up several anti-corruption agencies and introduced many digital tools such as Prozorro or Dream Platform. Digitalization is the most effective way to fight corruption. You have new, ambitious people. Ultimately, the power of oligarchs is becoming weaker.

A lot still needs to be done, but think about Poland 30 years ago and how corrupt it was. It would help if you had support for institutional reforms, public administration digitalization, and human capital investment.

I'm optimistic about Ukraine's fight against corruption for a very prosaic, apparent reason – in case of failure, it will be the end. I think that people in power, at least some of them, know that you can't afford to keep everything as it was. Otherwise, Ukraine will be destroyed. Russians are just waiting for this. So, there is no choice.