Investors see opportunities in Ukraine’s defence, construction and energy sectors

Family offices have not been slow to invest in Ukraine, and returns should only accelerate should an acceptable peace deal be secured.

At the same time as Volodymyr Zelenskyy was being publicly berated at the White House by Donald Trump and JD Vance for refusing to concede territory on terms dictated by Russia’s Vladimir Putin, the Ukrainian president’s foreign investment envoy was busy meeting key political and financial players in London.

Her task was attracting investment to the war-torn country, with the prospect of fast and extensive reconstruction, once peace with Moscow is eventually secured.

“Currently, I focus on the defence industry, starting with weapons and ending with dual-use software, defence co-operation and exchange of technologies,” Halyna Yanchenko, secretary of Ukraine’s National Investment Council told PWM during her visit.

“Defence is one of three key sectors that have attracted attention, and a lot of funds from domestic and foreign investors,” she said, adding that since the latest invasion by Russian forces in February 2022, Ukraine’s defence industry has grown sixfold, boosting “the most experienced and most motivated army in Europe”.

Her message to Europe’s private investors is that not only will they achieve healthy investment returns, but they are also backing “a social type of entrepreneurship, because you are investing in security and the future of your children”.

The other two key sectors are construction materials — to rebuild residential housing, commercial and municipal buildings destroyed by Russian bombs — and energy, including wind and solar power, as well as extraction of minerals.

The Ukrainian authorities are keen to encourage investment in clean energy hubs, providing a much trickier target for Russian aerial assaults which have regularly disabled power supply leading to regular rationing of electricity.

“Defence is one of three key sectors that have attracted attention, and a lot of funds from domestic and foreign investors” — Halyna Yanchenko, Ukraine’s National Investment Council

Early doors

This long-term story is an ideal one for family offices, fund managers and portfolio investors, believes Ms Yanchenko. “My message to them is to start earlier, because even for conservative investors who would like to start building up their industrial capacity after the end of the war, it takes time to find partners, information, conduct market research, develop the project and make calculations,” she said.

“The preparation work takes much more time than actual construction,” she said, with bureaucracy and due diligence taking up to 18 months to clear, while industrial facilities can be constructed within three months. The first port of call in Ukraine should be the American Chamber of Commerce, the British Ukrainian Chamber of Commerce, or the state promotion agency, UkraineInvest.

Despite continued bombing and drone attacks, family offices have not been slow to invest. One prominent European family PWM spoke to is buying up city centre apartments in Kyiv, preparing for return of refugees once reconstruction begins.

Others have been investing in western regions — “they are safe, production has been relocated there from the east and it’s a good time to start,” believes Ms Yanchenko — more easily connected with EU nations, due to shorter distances.

Families in the Czech Republic and Poland have been among early investors. Successful wartime projects have included the construction of the WF Oriv wind power plant, with an investment of more than €60m ($73m) by MND, a Czech company belonging to the KKCG group in a joint project with Ukrainian company Eco-Optima. This features 10 turbines in the Carpathian foothills of the Lviv region, sufficient to power 50,000 households, in an initiative which KKCG’s controlling family says bolsters Ukraine’s energy independence and expands its renewable energy portfolio.

“We’ve operated in Ukraine for over a decade and successfully navigated the challenges following the Russian invasion, though it has made investment more complex,” said Karel Komarek, Founder of KKCG. “The completion of our wind park was delayed due to the war, with cross-border logistics a major hurdle. Still, we adapted, overcame obstacles, and opened the plant last year.”

Infrastructure and renewables

With the right expertise, strong partnerships, and commitment, investment in Ukraine remains viable, he believes. “Western Ukraine, in particular, continues to see economic activity and investment potential, especially in critical infrastructure and renewables – key to the country’s long-term stability and independence,” he said, anticipating further growth will add to his 1,000 employees across the energy and tech sectors in Ukraine.

The family’s foundation has also been keen to preserve Ukraine’s cultural heritage – “a target since day one of the invasion” — which it feels is as much under threat as energy infrastructure. “Over 1,700 cultural sites, including libraries and museums, have already been severely damaged or destroyed — one of the war’s most devastating but often overlooked consequences,” said Lubos Vesely, director of the Karel Komarek Family Foundation.

The family has worked together with partners including the Czech and Ukrainian ministries of culture, the Czech National Museum and the Kyiv-Pechersk Lavra National Preserve, in the Ark for Ukraine project, aiming to protect, restore and evacuate national artefacts, through a fleet of fast-response mobile units. Mr Vesely wants to make sure the artefacts survive the war “and remain a vital part of Ukraine’s identity and future”.

While investors are most concerned about what is happening in Ukraine, the majority are increasingly keeping an eye on developments in the US.

One family office which PWM spoke to claimed “the US authorities are moving faster than markets are used to”, with a 95 per cent chance of creating a “lasting peace settlement”, including “the whole war theatre” and defence industries, benefiting Turkey, central Asia and China. The European family referred to fast-paced developments having a positive impact on asset managers, forced to move away from conservative central scenarios to “enrich their decision process and be prepared with a broader diversification”. This trend, said the family, would ultimately create “a solid and broader momentum beyond the US tech leaders”.

Ever-changing moods

A senior leader at a global private bank, with clients in the US and Europe added: “Whatever they think of Trump, the mood amongst our clients is now very ‘risk on’. The situation has been unchanged for a long time in Ukraine, China and the Middle East. As soon as Trump was elected, they feel there was movement.”

The fear in Ukraine is now that the US are freezing weapons aid and intelligence sharing, Russia’s greater military weapons will give them battlefield advantage. “Time and again, urban warfare is attritive and resource-intensive, with the outcome dependent on which side can maintain its supply lines, whilst denying their adversary’s,” said Louise Tumchewics, visiting fellow in the Department of War Studies, Kings College London, who advises banks and companies on international trade and technology.  “We have seen this play out in Ukraine. Russia has pummelled population centres with airstrikes, and in Eastern parts of the country, targeted the towns and villages that are significant logistics hubs.”

That said, Ukraine’s development of unmanned aerial vehicles (UAVs) and first-person view drones (FPVs), have led to establishment of a domestic drone industry, emphasising “adaptability and affordability in its designs, rather than crafting exquisite, expensive, sophisticated systems”.

Ukrainian innovation

Western investors have been attracted to public-private partnerships, working with Ukrainian start-ups to expedite development and deployment of new technologies. “This model of defence innovation has proven faster than relying solely on a traditional, government-directed, centralised system,” said Ms Tumchewics.

The Ukrainian government has also incentivised defence start-ups, through tax breaks and streamlining bureaucratic processes that might otherwise thwart fledgling companies and stall innovation.

“While the technology attracts interest from investors, the flexible and adaptable system for promoting defence innovation is something Ukraine’s European partners will be paying attention to.”

Recent commitments from European leaders to significantly increases defence funding will further boost Ukraine’s start-up ecosystem, believes Ms Tumchewics.

“European nations need to re-arm, and quickly,” she said, with an “atmosphere of urgency” creating opportunity for Ukrainian defence start-ups to attract wider European investment for battle-tested technologies. “This could be an important growth area for Ukraine, and for Europe.”

“Just a few months into the Trump presidency and the awful truth has surely been revealed now about Trump. That he is firmly in the Putin camp” — Timothy Ash, BlueBay Asset Management

The strength of Ukraine’s innovation should not be underestimated, bearing in mind the recent redrawing of the geopolitical map, with the US position now much closer to that of Russia than Europe, wrote Timothy Ash, senior sovereign strategist at BlueBay Asset Management, in his blog.

“Ukraine currently has the second-largest military in Europe, with 800,000 plus under arms, and it has proven able to hold back Russia, against overwhelming odds,” wrote Mr Ash. “It has, meanwhile, developed a large-scale arms industry — now producing around 40 per cent of its own kit. And it is innovating fast. Ukraine could not only hold the line against Russia, to allow Europe to rearm over the medium term, but could also help supply kit to the European rearmament project. The longer Ukraine holds out against Russia, the better for Europe.”

The key threat, believes Mr Ash, is coming from US policy, which “seems now to be to gift Ukraine to Putin”, ceding vast swathes of the Donbas, Kherson and Zaporizhzhia regions, demilitarising and submitting to a Kyiv “regime change” amenable to Russian interests, leading to “an end to Ukrainian sovereignty, and its economic, social and political collapse”. This poses an “existential threat” to Europe, he said.

“Whatever the Trump sycophants are going to offer, Ukraine cannot accept, he said, ahead of a Washington delegation’s visit to Saudi Arabia to meet Kyiv counterparts. Mr Ash describes a fast realisation among Ukrainians about Mr Trump’s loyalties and priorities.

“The feeling was surely that Trump would not want to deliver a second Afghanistan style debacle for which he would surely get the blame,” wrote Mr Ash, describing the feeling in Kyiv soon after the US elections.

“Just a few months into the Trump presidency and the awful truth has surely been revealed now about Trump. That he is firmly in the Putin camp.”

Trade versus truth

There is also increasing belief among analysts that trade will triumph over truth following the US policy switch.

Mr Trump sees a peace deal through the eyes of a businessman, while Mr Zelenskyy “wants the US, like Europe, to fully commit to Ukraine’s side — recognising the country’s sacrifices as the final barrier between Europe and Putin’s imperial ambitions”, said Sharmila Whelan, economist at Westbourne Research.

Despite Europe rallying round the Ukrainian president with an alternative peace deal, the eventual agreement will be almost dictated by the US, she believes.

“The unfortunate reality is that the US have the leverage, not Ukraine. Zelenskyy is buckling as Trump ups the pressure by pausing military aid, the sharing of intelligence and by threating to revoke the temporary legal status of Ukrainians that fled to US during the war.”

A compromise might be reached, she feels, allowing Ukraine to join the EU along the same lines as Austria and to put European peacekeepers on the ground in Ukraine. “But expect Russia to keep control of Donetsk and Luhansk and Putin to demand faster integration. A Russia-US mineral deal aside, Putin appears to be pushing for a restarting of Nord Stream 2 gas pipeline to Europe with the backing of US investors.”

Like most global portfolio managers, Chris Iggo, chief investment officer for core investments at Axa Investment Managers, is convinced that a revival in European markets will be further spurred by peace in Ukraine. “If Europe is successful in securing an acceptable peace deal in Ukraine, this should boost European corporate confidence.”