Ukraine's government is slowly starting to realize the need for dialog with foreign and domestic business to have any chance of sustainable economic growth in the nation, but is still behind in acting on this form of give-and-take, as well as addressing the issues that stall investment.
This gap was especially
evident at the government’s very own first annual investor conference ABC Ukraine and Partners, which
kicked off in Kyiv on June 13. Organized by the Cabinet of Ministers as a
vehicle for communication between officials and business, it instead underlined
the endemic problems both in communication and the overall business climate.
Ukraine ranks 137th in the
World Bank’s Doing Business report in 2013. A 15-point improvement on last year,
but still very low in the ranking of 185 countries that measures practical
aspects of doing business in each economy, such as receiving construction
permits and hooking up to a power grid.
The ranking often becomes a
crucial factor for international business which always looks for potential destinations
for its capital.
“It’s hard to try to get
people to invest here with the reputation that there is,” says Morgan Williams,
director of government affairs in the Washington office of SigmaBleyzer, a
private equity investment group.
He is currently trying to get a
$400 million investment fund going for Ukraine’s agricultural sector.
Ukraine, on the other hand,
needs investment more than ever. In the first quarter of this year, the
nation’s gross domestic product declined by 1.1 percent, compared to the previous.
It has borrowed heavily on both domestic and international markets to cope with
$9.5 billion payments to creditors due this year, and to cover the gaping
budget deficit. Despite continuing negotiations with the International Monetary
Fund, a much-needed deal is nowhere in sight.
Private investors are more
inclined to exit, not invest more. The European Bank for Reconstruction and
Development predicted negative growth of foreign investment to Ukraine for this
year. To reverse that, the government should both improve conditions for
business and deliver the message that they are welcome in Ukraine.
Sevki Acuner, EBRD’s Director
for Ukraine, says that government officials should be going abroad and
promoting the country as one of their top missions on the job.
“The approach of very senior
level promotion has to be undertaken on a very regular and rigorous business,”
he told the investor conference in Kyiv.
But the ministers aren’t
listening. In their traditional style, they came to the conference to sit out
their panels, and left soon after delivering their talking points. Few used the
opportunity to network with a crowd of several thousand representatives of
foreign and Ukrainian private business and professional associations, looking
awkward and out of place outside their offices.
Many representatives of the
business community also seemed disinclined to discuss their problems in a
public forum. Graham Tiley, CEO of Shell in Ukraine, thanked the government
profusely in his speech for creating an opportunity for several major
international players in the energy sector by designing new legislation on
product sharing agreements, the signing of which earlier this year allowed
Shell to start exploration shale gas in eastern Ukraine.
He failed, however, to
identify any of the multiple challenges that his industry and business as a
whole face in Ukraine – at least in his first speech of the day.
Yevhen Kopatko, head of
Research & Branding Group, a consulting and polling company, says a May
poll of 200 foreign investors shows that corruption, reform of the judicial
system, improvement of the tax system and removal of administrative barriers
continue to top the list of problems for business.
Oleksandr Klymenko, minister
for revenues and duties, insisted that the government is addressing at least
some of them. “We’re easing the payment of taxes, we’re simplifying the payment
of taxes – this is a precondition of ease of doing business in Ukraine,” he
says.
Klymenko said the government
is putting in a systematic effort to improve the business climate. In tax
collection, for example, the time required for administration of taxes has
declined by a quarter as a result of this effort, from 650 to 491 hours per year.
“We’re not stopping, we have
all the potential to improve more,” Klymenko says.
Jacek Piechota, former Economy
Minister of Poland, says that although all the changes are right and proper,
they amount to shuffling where the government should be running to chase the
opportunity.
“I am not seeing the
systematic changes that would transform people’s thinking,” Piechota told the Kyiv
Post.
He said he has just returned
from giving a seminar to local authorities in Chernihiv Oblast on how to
attract foreign investment. In the course of it he discovered that not only do
the local administrations lack knowledge and resources to do that, they lack
motivation because the more investment the region gets, the more taxes business
pays to the central government – and the less subsidy it will get back
from the central budget.
“So, you can do many of these
events but achieve little because there is no systematic change,” Piechota
said.
Eitan Wertheimer, a cash-rich Israeli businessman who in May sold 20 percent of his metal works
company to Warren Buffett, says he has been coming to Ukraine for 11 years, but
has not invested much.
“When I look for a place to
invest if it’s sexy. Sexy means competitive,” he says.
If he is looking for competitiveness, Ukraine has a
problem. It is ranked 73 out of 144 countries in the 2012-2013 Global Competitiveness Index of World Economic Forum,
a decrease by nine points over the previous year.
Wealth and business
opportunities are often concentrated in the hands of the super-rich, leaving
out the rest of the country. The latest illustration of this monopolization was
the purchase earlier this month of landline telecoms network and 3G mobile
license monopoly Ukrtelecom by the nation’s richest man Rinat Akhmetov.
Akhmetov’s fortune this year
was estimated at $15.4 billion by Forbes magazine. He already owns major assets
in steel, energy, coal, telecommunication and other industries.
Excessive monopolization,
combined with excessive taxation and over-regulation, kills small and medium
business, or prevents it from taking off despite the good human resources
Ukraine possesses.
This is how Wertheimer
described it: “I see a lot of people, many of them immigrated to Israel and
they now work for us – they’re excellent people.”
Acunen of EBRD says that small and medium enterprises
are a vehicle for growth. “Create an environment that can support and nurture
them,” he told the government.
But it looks like the
government is not ready yet to adopt that philosophy. At the panel on the IT and
innovation sector, one where Ukraine has a lot of potential, particularly for
small business, the discussion looked more like a lecture by government
officials.
“I have a tip for them (the conference organizers in the government) for next year,” says
Yegor Anchishkin, a young serial entrepreneur who last year sold his first
startup to Google in a deal estimated to be worth more than $30 million.
“They should be less
bureaucratic, and more interactive.”
Kyiv Post editor Katya Gorchinskaya can be reached at gorchinskaya@kyivpost.com.
