Investment at the very edge

Investment managers in emerging markets are a bit like tourists. When one new location begins to look played out or crowded they simply move on in search of the next lush unspoiled territory. For tourists the next prospect is Lombok, for fund managers it is the Ukraine.

The Ukraine? Yes, the Ukraine. Its very name means at the edge, and it is certainly at the very edge of the investment universe, beyond Poland, the Czech Republic and even Russia. Not so long ago it was experiencing a rate of inflation which made Russia look stable, and at 177,000 to the dollar last week the Ukrainian coupon or karbovanets was worth less than one-thirtieth of a rouble.

Ukraine was also in dispute with Russia over ownership of the Crimea and the Russian Black Sea fleet, and its main claims to world fame were the Chernobyl nuclear reactor, which blew up a decade ago, and its equally dangerous status as a nuclear power by virtue of the ageing former Soviet missiles on its soil.

Some of these problems are fading away but none of them has disappeared, and there are plenty of other issues to worry would-be investors. A quarter of the population are Russians, economic reform has made even less progress than in Russia, and President Kuchma and his cabinet are still at loggerheads with the parliament. But at least the Ukrainian president looks fit enough to last out his term and push through long-delayed reforms to benefit the long-neglected economy.

A new currency is being introduced this week, by knocking five noughts off the existing unit and calling it a hryvna. Tougher monetary policies have been introduced at the behest of the IMF and inflation could be down to just 28 per cent next year.

The Ukraine has no oil or gas and relies heavily on nuclear and coal- fired power, but potentially it is richer than Russia. It produces 10 per cent of the world's steel, it is big in chemicals. and with proper management it could regain its 19th-century status as the breadbasket of Europe. It also has a large pool of cheap but well educated labour. It has attracted only a tenth of the inward investment won by Poland, but the total could treble next year.

So far there are just four companies listed on the Kiev stock market and another 100 companies are traded on an over-the-counter market, but a big step towards privatisation is due before the end of the year, with 208 more companies lined up. The main sectors are energy production and distribution, steel, telecommunications, food processing and consumer goods. The current market capitalisation is barely $1bn and current prices average just one times earnings. Quoted companies include the Lisichansknefteorgsyntez oil refinery, the Niznnyodniprovsky tube rolling plant and ZAZ, the maker of the Zaporozhets, one of the less successful cars of the Soviet era.

Tough decisions will still be needed to close down industries with no competitive future. But if independent registrars can sort out the ownership of assets and establish a proper clearing system, the Ukraine could follow the trail blazed by Thailand, the Philippines, India, Poland and Russia itself. There is also a substantial bond market. Regent Pacific Group, based in Hong Kong, intends to raise $50m this autumn and inject $5m of its own money to launch the first commercial investment fund specialising in the country. But the minimum investment is likely to be $100,000, so smaller investors will have to find a private client broker willing to syndicate an investment.