Ukraine: What Crisis?

Despite political turmoil, economic growth is roaring and foreign investment is pouring in

by Jason Bush

Stroll around downtown Kiev these days, and it's hard to miss the signs of growing prosperity. The Ukrainian capital's golden-domed cathedrals share the skyline with towering cranes and snazzy apartment complexes. Giant billboards plug the latest Samsung (SSNKF) MP3 players and Nokia (NOK) phones. Diners spill onto the street from posh new eateries on Independence Square, where three years ago hundreds of thousands of Ukrainians staged the so-called Orange Revolution that propelled President Viktor Yushchenko to power.

To look at the scene, you'd never know that Yushchenko and his bitter rival, Prime Minister Viktor Yanukovych, remain locked in a fierce power struggle that is unlikely to be resolved even after parliamentary elections on Sept. 30.

The lesson: Political instability and economic crisis don't always go hand in hand, at least not in the former Soviet Union. Despite the standoff among Ukraine's politicians, the economy is booming and foreign investments continue to pour in.

Politics Stays Out of Business

Gross domestic product powered ahead by an impressive 8% during the first half of 2007, and economists expect the strength to continue, boosted by a surprisingly diverse economy of services, manufacturing, and raw materials. Metals, mainly steel, account for 40% of exports, but most of the growth is coming from manufacturing and services. Production of heavy equipment rose 22% in 2006. And Ukraine's software houses saw their exports jump by 50% last year, to some $250 million.

Investors see promise in the growth. The Kiev stock exchange has more than doubled in size this year, and now boasts a market capitalization of $76 billion—a sixfold increase since late 2004. And a real estate boom has pushed up housing prices by 60% in 12 months. "We joke that as long as all these disputes are going on, [politicians] don't have time to interfere in business," says Taras Kutovyy, chief financial officer at XXI Century Investments, a leading developer that in May raised $175 million in Eurobonds to finance new apartments, hotels, and hypermarkets.

The boom is being fueled by Ukraine's 46 million consumers, who are opening their wallets for everything from houses to washing machines to big screen TVs. Consumption has been growing by double digits since 2003, as roughly 70% of Ukrainians can now afford new cars, furniture, and other big-ticket items, up from 40% in 2003, according to market researcher GfK Group (GFKG.DE).

Luxury Mall

"It's clear that there is a growing Ukrainian middle class," says Tetiana Sytnik, GfK's senior researcher in Kiev. That has attracted multinationals seeking to sell to them. In June, PepsiCo (PEP) plunked down $542 million for Ukrainian fruit juice maker Sandora, which has 50% of the local juice market. Two months earlier, French supermarket chain Auchan entered the country via a joint venture with local retailer Furshet, with a view to constructing 10 hypermarkets over the next two years.

Ukraine's new wealth is on display at Arena City, a six-story shopping and entertainment complex that opened in 2005. The mall's 60 boutiques stock expensive French and Italian clothing, furniture, and jewelry, and it features dealers for Porsche (PSHG_P.DE), Bentley, and Mercedes (DAI). "People are earning more money, and demand for exclusive cars and real estate is rising.