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Thoughts On Investing In The Ukraine
Today, we are going to touch upon the topic of investment «climate» in the Ukraine, to assist those who are interested to learn about the factors, influencing or affecting investment opportunities in Ukraine.
Over the few latest years, Ukraine’s track record in attracting foreign capital has not been impressive. In absolute terms, the country has attracted only 4.9 billion USD since independence (data of the year 2003). Foreign direct investment (FDI) per capita is ten times less than its Eastern European neighbor Poland and almost thirty times less than the Czech Republic. To attract foreign direct investment, the country needs to provide a more predictable investment climate. Improvement of corporate and public governance, development of a stable and predictable legal environment, liberalization and deregulation of business activities, and elimination of corruption are necessary in the first turn.
Corporate Governance. The World Bank’s definition of corporate governance refers to that blend of law, regulation and appropriate private sector voluntary practices which enable the corporation to attract financial and human capital. This includes greater integrity, transparency, and independence and competence with in the judiciary, where shareholder interests come first. The lack of good corporate governance is the primary cause of more than 50% of joint venture failures in Ukraine.
Natalie Jaresko, the Western NIS Enterprise Fund President, describes corporate governance in Ukraine as an evolutionary process. “Ukraine has now had several years of experience with sound corporate governance and now has something very tangible that businesspeople can look at and determine whether they have the type of corporate governance that they would like. Instead of having something that is very philosophical, it now becomes real.”
Ms. Jaresko points out that “companies that are coming to us have not only adequately accepted the system but have started to implement this on their own.” This is the final step in the evolutionary process: to build a culture that respects corporate governance. This is done by introducing corporate governance concepts in almost a voluntary fashion. Ms. Jaresko sees a code of ethics developing within the Ukrainian business community. “I have insight that high-level, visible business people have interests in developing transparency in corporate governance. That is something you do not have to propagate by law, rather it is developing the culture by making people aware, knowledgeable, and offering them tools. And it has to be at a high enough level that it is respected.”
The adoption of sound corporate governance would create rights for minority shareholders. A step in the right direction is the recent adoption of the Joint Stock Fund, which is an attempt to attract portfolio investments (less than a 10% share in company stock). This law contains the basic structure to protect the rights of minority shareholder by ensuring shareholder participation, and delineating between management, board of directors, and shareholders.
 Stable Legal Environment. When a large private corporation thinks about investing in a country, the first question they ask is: ‘if I enter into agreement and a dispute arises, can I expect fair treatment in the unfortunate event that we have to go to litigation?’ According to Ms. Jaersko the answer is no, as she explains that “we have one high profile case where we think that the judicial system did not operate in a free and independent fashion.”
At the same time, there is a relatively easy three-step solution to establish an independent rule of law in Ukraine. First, judges’ salaries must be increased so that corruption doesn’t become an issue. Clearly, there is scope for corruption when a poorly paid judge presides over a multimillion dollar case. Second, judges that are found to be corrupt need to be removed. Third, Ukraine needs to develop a system where case-level judges and attorneys outside of Kyiv have access to changes in the law.
Small and Medium Sized Enterprise (SME). The role of the local entrepreneur must be promoted to diversify Ukraine’s investment climate, to increase competition, and to create a more positive feedback for investments. The Small and Medium Sized Enterprises (SMEs) are normally labor-intensive and therefore create purchasing power in the population through job creation. The development of a wealthier middle class will be an important element in attracting larger amounts of investments. Accordingly, the future growth of the Ukrainian economy will depend on a major expansion of SMEs over the next few years. This is taking place, but at a low pace.
The lack of SME’s in Ukraine is reasoned by a number of factors: the regulation; the corruption; and the cultural issue from making entrepreneurial activity illegal and criminal in the Soviet period to being something to be proud of now.
The European Bank for Reconstruction and Development (EBRD) is the largest and most diversified investor in Ukraine with a cumulative investment in the country of 1.4 billion USD through 57 projects since independence. Its SME Lending Program has provided over a 184 loans worth around 156 million USD. EBRD is also a co-founder of Ukraine Microfinance Bank, which since January of 2001 has approved 9,281 loans worth 54.2 million USD. Frank Williams, Acting Director of EBRD in Ukraine, said “I think our SME and Microfinance Programs are two of the most successful projects in the financial sector. We have now made three SME transactions the first two were sovereign guarantees. This has been very successful in bringing finance to companies that find it very difficult to achieve finances otherwise.”
Poland: Lessons Learned. Clearly the pace of economic reforms in Poland over the last ten years is the most decisive factor explaining the disparity of the amounts of FDI between Poland and Ukraine. By 1992, Poland started to experience positives rates of GDP growth and began to receive increasing amounts of foreign direct investments. In Ukraine, very few economic reforms were made during the first few years after independence, which led to economic stagnation for many years. Currently, the implementation of comprehensive measures to improve the business environment is still in the initial phases of implementation.”
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