Business--Investment--Why should I invest (do business) in Ukraine?

Why should I invest in Ukraine?

The biggest reason is that Ukraine presents investors with a lot of growth potential. In a number of countries, growth has stagnated, competition is up and margins are low. But things are different in Ukraine. Wages are increasing which means more buying power and, even though new and diverse products have just begun to appear in the market, competition is low in many sectors. This means maximal gains with minimal relative investment and makes all industries in Ukraine growth industries.

Ukraine is a country of 48 million, on a par with France, and the largest country of any in Europe (excepting Russia.) The people are highly educated and work long hours and extended days-- sometimes six days per week. Though growth has slowed this year from a high of about 13% (the highest of any country) last year to around 3% this year, analysts conclude that a growth rate of 8% is possible and sustainable long-term. And last years high rate shows at what level the economy can perform, given the right kinds of incentives.

But what about the re-privatization talk? Doesn’t that mean that any investment in any business in Ukraine might be re-privatized by the government? Why would anyone invest under those circumstances?

It is true that the government has been a bit schizophrenic in the past on the signals it has sent out about what will be re-privatized and what won’t be. Originally there was talk of close to 3000 businesses that would be investigated for potential re-privatization. That was the figure floated by the Prime Minister. But Yuschenko, the president, who has the authority right now, says that it would not be more than 29. Other reports suggest that 40 are being investigated at this point. To be perfectly honest, this back and forth by the government made investors nervous. And rightly so. To invest in a business just to have it taken out from under you in a government bid to get a fair market value is not going to breed confidence. And, in what is the bigger problem, it undermines confidence that the government will ever really respect private property rights. Will title ever be good in a country that can re-privatize when it feels it should and feels it can?

The reality has been different than what was proposed. The administration saw what it was doing and reeled in the rhetoric and lowered the number of businesses to be privatized. There has been only one to date. Kryvorizhstahl, the largest steel mill in Ukraine was re-privatized and sold to a European company. And there is some indication that nickel company might also be sold. But that is the extent of it.

The re-privatization issue, however, only affects those who are looking to invest in a company here in Ukraine. It does not affect those who are looking to establish a company presence and to market their products in Ukraine and the surrounding region. All of these efforts are not affected by re-privatization at all.

What about corruption? Isn’t Ukraine considered one of the most corrupt countries on the Transparency International’s Corruption Perception Index, higher even than Russia and some of the countries of Africa? If it is that corrupt, how then can we possibly do business in Ukraine?

It is true that Ukraine has been marred by corruption both in the government and in business. As a matter of fact, there has been little distinction between government and business in Ukraine in the past. Many who have been involved in business have sought the patronage of someone powerful enough to ease their way on the one hand or who could let them to buy up government assets at “fire sale” prices on the other. A lot of wealth in Ukraine has been acquired in these ways.

Corruption was the major reason for the Orange Revolution. Though a lot of people have been involved with it, they have become tired of it. And Yuschenko has made it a high priority with his new government. He has instituted some important reforms in this area and is working on others. A lot more needs to be done to deal with it but the important point is that something is being done about it for the first time ever.

But saying that corruption is a problem in Ukraine is really a bit misleading. The corruption has to be put in context to understand just what the problem is and what a company might face when it deals in Ukraine. The fact is that corruption is a problem in many of the countries of the world. And it is in many of these countries that investors routinely invest and companies routinely set up to do business. Investors and companies find out that in doing business in other areas of the world, areas such as Latin America, the Middle East, Asia and Africa, and in specific countries like Mexico, India and China, for starters, corruption is an issue. The fact that corruption is an issue in these countries and areas means that it must be planned for by company management and dealt with when it comes up for a company to be able to succeed. And, by and large, companies and investors do this in these countries and regions.

Ukraine is not any different. Corruption is an issue and must be planned for and dealt with the same way. That it might be more or less than one country or another will not affect that planning or the company approach.

Ukraine is ranked pretty high on the Corruption Perceptions Index of Transparency International. This is true. And a lot is made of the fact that, of 146 countries rated by Transparency International in its Corruption Perceptions Index of 2004, Ukraine comes is ranked number 128. (Mexico, on the other hand, comes in at number 67, China at 71, and India at 91.) Some find it significant that this is near the likes of Zimbabwe, Sudan and Bolivia.

And this Corruption Perceptions Index is taken seriously by any number of institutions and people. This is also true. The problem with it, though, is in taking it too seriously, that is, taking it as anything more than an attempt at a ballpark determination about countries and corruption.

In the first place, it must be understood that though there is every attempt in the world to base these rankings on objective criteria, they are not. It is not called the Corruption Perception Index for nothing. It is on the perceptions of those who do business or deal in a given country or countries that these rankings are based. And these are not the same people doing business in each country, something that would give at least a kind of benchmark to that subjectivity if it were the case. They are different people with different perceptions about things. So there is a problem with taking this as a real precise measurement of actual corruption in the Ukraine for this reason alone.

As the report itself says

Why is the CPI based only on perceptions?

It is difficult to base comparative statements on the levels of corruption in different countries on hard empirical data, e.g. by comparing the number of prosecutions or court cases. Such cross-country data does not reflect actual levels of corruption; rather it highlights the quality of prosecutors, courts and/or the media in exposing corruption. The only method of compiling comparative data is therefore to build on the experience and perceptions of those who are most directly confronted with the realities of corruption. (Transparency International Corruption Perception Index 2004, p. 6.)

In other words, they do not rely on empirical data because they do not have any empirical data to rely on that would be of any use. So they settle for what they can get-- the opinions of those who work and do business in these countries.

In the second place, Transparency International could not take these rankings all that seriously either as a reliable indication of the degree of corruption in a given country. They themselves have made this case:

Is it right to conclude that the country with the lowest score is the world’s most corrupt country?

No. The country with the lowest score is the one perceived to be the most corrupt of those included in the index. There are almost 200 sovereign nations in the world, and the latest CPI ranks 146 of them. [1] (Transparency International Corruption Perception Index 2004, p. 6.)

The fact is that corruption is corruption wherever it is found and it means increased difficulty in doing business in any country where it is found. This is true no matter where the country is located on the index (except, of course, in countries at the top where all are agreed that corruption is an insignificant problem.) Companies need to plan for the inevitability of corruption whether they deal in China, India, Greece, Saudi Arabia, Mexico, -- or Ukraine.

And, it can be dealt with.

____________________

[1] The Corruption Perceptions Index for 2003 was more candid:

Is it right to conclude that the country with the lowest score is the world's most corrupt country?

No. The country with the lowest score is the one perceived to be the most corrupt of those included in the index. The CPI is based on polls that are snapshots in time and reflect both opinions and experience. Furthermore, there are almost 200 sovereign nations in the world, and the CPI 2003 ranks only 133.

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A beginning

It looks like Ukraine won the revolution but still needs to win the war. Hundreds of thousands took to Independence Square more than a year ago to protest the corrupt election of a hand-picked successor to President Kuchma, a president who ruled with an iron fist, an iron fist, that is, encased in velvet. (It left no bruises.) The people won a new round of elections and Victor Yuschenko, the opposition's candidate poisoned to keep him out (or as a sick and cynical attempt to reduce the appeal his good looks represented--can't tell at this point and it almost killed him) by person or person's unknown, won. And Ukraine has been struggling ever since to free itself from the grip of the prior regime and its corruption. There have been some successes and those successes continue.

All of this affects business. Ukraine needs more investment and there is tremendous opportunity here. With an economy that started on the ground floor, so to speak, as this has, growth can be phenomenal and we are seeing that kind of growth right now in retail, for one example. But there needs to be more information out there for potential businesses and investors on Ukraine and the Ukrainian market as well as on the environment for business here. That is the purpose of this blog. We will seek to provide that information and in doing so provide the context that is needed for investment and business to come to Ukraine.