Successful foreign investors say that running a business in Ukraine can involve less corruption than expected and generate profits as well.
Yearning launch a venture in Ukraine but hesitant to engage in the corrupt business practices that appear to be obligatory?
Relax.
Successful foreign investors and the consultants who advise them say that running a business in Ukraine can involve less corruption than expected and generate profits as well.
Generally, foreigners can and should avoid bribes, kickbacks and association with would‑be partners who promise to ease the way by greasing palms, they claim.
It’s a view of Ukraine that differs greatly from what businesses looking at the country from outside might expect. Those that have not invested, are probably more familiar with Ukraine’s seedier image – one bolstered by Transparency International, a Berlin‑based anti‑graft watchdog, which rates the country as one of the 10 most corrupt nations in the world.
Ukraine’s grubby reputation has been blamed, at least partially, for the overall dearth of foreign direct investment during the past 10 years. The nation’s cumulative FDI of $4 billion is piddling compared to the $40 billion Poland has attracted during the same period.
Yet foreigners successfully building businesses in Ukraine say establishing a law‑abiding business free of influence‑peddlers is possible.
Avoid trouble, they say, and it won’t find you.
“Ukraine’s image as a difficult place to do business is really overblown,” said Jorge Intriago, partner in charge of the tax and legal practice at PricewaterhouseCoopers. “To my knowledge, none of our clients pay bribes. In fact, most foreign investors are running clean businesses and are making fair money.”
Intriago said it is vital that foreign investors thoroughly study the country’s complicated laws and practices ahead of time and avoid taking questionable shortcuts.
Mike Perry, owner of Perry Construction, a Kyiv‑based construction and design contractor, claims to have done well using this approach.
“You can generally run a clean business in Ukraine without paying bribes,” he said.
Perry advises small‑ and medium‑sized foreign investors not to hire middlemen or take on local partners whose only contribution is the influence they claim to exert. Like other foreigners and consultants in Kyiv, he said that cutting corners by paying bribes and kickbacks might save time initially, but it can haunt a business years later.
Bribery can lead to an endless bout with extortionists, he warned. After being paid off once, corrupt officials can return later for more.
Perry advised businesses to use a variety of techniques to discourage officials looking for cash. If you refuse to pay or stall, Perry said, officials on the take will think twice before making another approach with similar demands.
“Apart from the ethical aspect, bribes are an uncontrollable business expense that makes any business vulnerable in the longer term,” said Marco Groen, a partner at Andersen.
Myron Rabij, a lawyer at Salans Hertzfeld & Heilbronn, concurs. Rabij said that one reason his clients have been successful in Ukraine is because they won’t even consider paying bribes.
Most foreign businesses and consultants also believe the business climate has improved greatly in the last decade.
“Any investor coming into this market, local or foreign, has to appreciate that this is
| Myron Rabij – Salans, Herzfeld and Heilbronn |
not the wild East or the early 90s. And if you want to do business under that philosophy, you are going to get in trouble,” Rabij said.
Passing the buck
Rabij said some businesses may be placed in situations that can be more prone to corruption than others.
For example, retail outlets and restaurants, which require many licenses and repeated inspections, are among the business activities corrupt officials like best.
They face “a host of obscure regulations that even a lawyer may be immediately unaware of,” he said.
The first notice a business may have of a rule could come when a government inspector arrives to demand an obscure document, then threatens to assess a fine or shut the operation down when it can’t be produced. Business owners face a stark choice: close down and lose their investment, or pay a bribe to an official willing to overlook the transgression.
“Bribes or kickbacks to local officials are sometimes inevitable,” said one businessman who asked to remain anonymous.
Some cash‑strapped government agencies have gone so far as to institutionalize a form of bribery, giving preferential service to firms that make donations to them.
Perry said some builders make payments to the Interior Ministry’s fire safety department, which inspects new construction. For a fee equal to about 4 percent of the contract’s value, inspections are performed quicker and with fewer problems, he said.
PricewaterhouseCoopers’ Intriago says the complexity of the tax system, for example, often leads to disputes between those who collect taxes and those who pay them. Kickbacks to tax collectors may seem like the easiest and best way out, but they’re not, according to Intriago.
“If you believe your company did nothing wrong, you should fight the case in court,” Intriago said. “The courts are actually pretty fair, in our experience. Our clients have won a large majority of their cases against the Tax Administration.”
People who know people
Consultants generally believe that foreign entrepreneurs should avoid local partners whose sole contribution is promises of help dealing with the nation’s unfamiliar business environment.
Morten Munk recommends that his clients establish their Ukrainian ventures free of local partners.
Munk, president of Munk, Andersen and Feilberg, a Danish business‑consulting firm that has helped European companies launch small and medium manufacturing businesses in western Ukraine, says joint ventures with Ukrainian partners are generally unsuccessful.
Andersen’s Groen doesn’t entirely agree, cautioning that potential Ukrainian partners should be judged on what they have to offer. Influence alone may not be enough, he said.
“In our experience, forming a joint venture with Ukrainian partners only to secure access to a market or industry has not proven to be successful,” Groen said. “A lack of common interests and business objectives ultimately results in diverging views on the business’ development and strategy.”
Well‑connected people can be helpful as long as a business does not become dependent upon their interference.
“If there is dependency, the cost will become uncontrollable,” he said.
“Moreover,” he added, “in a politically unstable country, today’s good connections may turn out to be tomorrow’s liability.”
