When Canada’s Prime Minister Stephen Harper visited Ukraine late in October, potential investors and businesses already in Ukraine were absent from the visiting Canadian delegation.
To Canada’s press, which has long heard horror stories of what it’s like to do business in Ukraine, this was a signal that domestic businesses were starting to write off the former Soviet republic, including those backed by Canada’s large Ukrainian diaspora community with its soft heart for the “homeland.”
Two decades of trade deals, Team Canada missions, government-subsidized investments and public-private projects in Ukraine amounted to nothing: most of the investments and aid funds, officials and diplomats say, have disappeared through corruption, bribery, incompetence or outright theft in a country whose business and political culture is no longer trusted”
– The Globe and Mail, one of Canada’s top newspapers.
The problems are clearly deep when such prominent and respected Canadian investors as James Temerty, named this year by Ernst & Young as ‘Entrepreneur Of The Year’ in Ontario province, get bogged down in Ukraine’s muddy business environment.
What did investing in Ukraine cost Temerty, a Canadian with Ukrainian roots? An estimated $100 million in losses, insiders say.
Northland Power, Temerty’s Canadian energy group, leaped into Ukraine more than a decade ago. Through an investment venture, it acquired a majority stake in Kyiv-based Darnytsia Heat and Power Plant. The simple plan was to modernize the plant, turning it into a leading and efficient player on the domestic market. But instead, Northland’s domestic subsidiary, UkrCanPower, spent much of the past decade defending its basic ownership rights over the investment.
Northland eventually lost the battle to an influential domestic group.
In a Kyiv Post interview, Canada’s ambassador to Ukraine, Daniel Caron, stressed that the problems Canadian investors are facing in Ukraine are also hitting investors from other countries.
He is 100 percent right.
Experts say that law-abiding investors – big and small – far too often find themselves struggling to preserve control over their investments in Ukraine. If they pass over this hurdle, they often face a notoriously complex and corrupt tax system, and unruly regulators. If they are lucky and influential enough to get past these first two hurdles, the next barrier in line is often blatant corruption or unfair competitive advantages given to companies that have the ear of top officials in government and parliament.
Recent examples include the plight of leading grain traders such as Cargill, Toepfer International and Bunge, which have invested billions of dollars over the years into Ukraine’s promising yet far underdeveloped agriculture sector. In a double whammy this year, Ukraine’s government first squeezed their businesses by restricting grain exports to keep domestic food prices low, then issued a disproportional grain export quotas to three domestic companies in a process deemed unfair and nontransparent.
The entire affair has been “unjustified, untransparent, and unfair” according to the American Chamber of Commerce in Ukraine.
According to the Chamber, while down from that collected in previous years, this year’s harvest is the third largest in Ukrainian history. The business advocacy said forecasts do not envisage a food shortage and government grain stocks are ample to avoid food security threats.
While a select group of grain companies that received the lion’s share of export quotas will profit greatly amid record global grain prices, over, the quotas in place until June 30 will cause up to $2.6 billion damages to Ukraine’s agricultural sector, according to the Chamber. Moreover, the export restrictions utilized by Ukraine appear to violate World Trade Organization rules, according to the Chamber.
Like global grain traders, leading energy giants investing and operating in Ukraine, such as Shell and TNK-BP, are also fair game. They are seeing new murky deals that dent their business and Ukraine’s budget deeply under the leadership of President Viktor Yanukovych.
Despite pledging to clean up Ukraine’s notoriously corrupt economy and boost investment, Yanukovych’s administration did nothing – until pressured by international energy companies – to stop obscure companies from importing more than 1 million tons of oil and motor fuels free of duties and taxes through a nontransparent loophole. The suspect trade took place in recent months, accounting for 60 percent of all oil imported into the country and robbing the national budget of hundreds of millions of dollars in lost revenue.
Experts say that if Ukrainian officials had the will to close such budget-bleeding and corrupt schemes, the nation would not be so dependent on the International Monetary Fund. This summer, the IMF granted a $15 billion standby loan to help keep Kyiv financially afloat. The assistance hangs on steps aimed at improving fiscal prudence by cutting down on corruption in which budget revenues are bilked as well as the adoption of unpopular austerity measures, such as increases on natural gas prices for households.
But as the recent activity on the grain and energy market shows, corruption seems to be flourishing, possibly with the blessing and for the personal gain of high government officials.
In September, the American Chamber of Commerce in Ukraine addressed the IMF in a letter about the activities of murky oil importers which operated freely under Yanukovych’s government despite repeated complaints and obvious losses to the budget. The letter reads: “At a time when the government takes such difficult and unpopular decisions, the [duty and tax free import privileges exploited by some companies] not only allows certain companies to evade paying taxes, but also distorts free competition on the Ukrainian fuel market, threatening investment in this sector.”
Kyiv Post staff writers Olga Gnativ and Mark Rachkevych can be reached at[email protected] and [email protected]
