The obstacles for foreign investors to do business in Ukraine seem to be insurmountable. Why do they and their investments stay in Ukraine?
For example, until this year, private foreign companies didn’t have to obtain permission before they purchased or leased any property, including apartments.
In contrast, foreign diplomatic representations and international public organizations are obliged to obtain permission before they finalize their real estate purchase.
Suddenly, without any warning, at the beginning of this year foreign private companies discovered that they too had to obtain permission.
The permission for property purchases is granted by the office in Kyiv dealing with foreign non-diplomatic representatives, the HDIP (Heneralna Dyrektsia po obsluhovuvanniu inozemnykh predstavnytsv). Its head is Volodymyr Melnychenko.
This unexpected change in the law brought an outcry from the foreign community in Ukraine. The British and American Chambers of Commerce organized an ad-hoc committee to fight the decision.
Even Jesse Helms of the U.S. Senate Foreign Relations Committee was roped in to protest to the Ukrainian government.
On April 14, 1998, the British-Ukrainian Chamber of Commerce, in a letter to President Leonid Kuchma, said that the decision by the HDIP was discriminatory, and a misinterpretation of Regulation No. 670, issued by the Cabinet of Ministers of Ukraine on June 28, 1997.
The letter warned that “This new restriction on real estate transactions by foreign companies could discourage foreign investment in projects for refurbishment and new buildings. It also risks interfering with other types of foreign investments, like investment in new manufacturing facilities, as there are usually some real estate aspects to most important transactions.”
The letter went on to say that Regulation No. 670 applies only to foreign diplomatic and international representations and not to private foreign companies. The petitioners understood that the Ministry of Justice had decided to back the view that the regulation applies to foreign private companies and had advised senior notaries in Kyiv not to conclude any further real estate transactions for foreign companies without the HDIP’s permission.
The practical effect of this regulation would be devastating for foreign companies. It would cripple their decision making.
Native purchasers, not bound by the same regulation, could buy a property while their foreign counter-part waits for weeks for a bureaucrat’s permission. Even worse, the regulation might be applied retrospectively.
All foreign businesses which purchased or leased property after June 28, 1997 might have to obtain permission for their previous purchases. What happens if permission is denied for a property which is already purchased?
The HDIP has the power to confiscate the property of those who fail to comply with the regulation. This should be enough for a foreign entrepreneur to take the first airplane home. If the regulation is applied (for the moment it has not been enforced against foreign private businesses) then the Ukrainian government would be breaking its own laws. The law on investment activities states clearly that foreign investors in Ukraine are to be treated equally with their native counterparts.
This attempt to strangle private foreign businesses is similar to the retrospective canceling by the Ukrainian Parliament of tax holidays for foreign investors. Until the autumn of 1996, Ukrainian tax laws provided a 10-year tax holiday to qualified investments made before January 1, 1995.
The Ukrainian Parliament on March 19, 1996, retrospectively canceled the tax holidays. The affected investors are fighting in the courts for compensation.
It is surprising that there are any foreign investors left in Ukraine.
Alex Frishberg, managing partner of Kyiv law firm Frishberg & Partners, explains why they stay.
|Interestingly, the lack of special privileges to foreign investors has proven disruptive only to foreign investors’ moral, but not to the overall business climate in Ukraine.”
The reason why foreign investors haven’t fled Ukraine is because they are making real money and lots of it. That might also be the reason why some people in the Ukrainian government want to control their business activities.
There is even a case for saying that the economic climate is improving as seen by the hryvna’s relative stability in the last year.
Last year’s economic turmoil in Asia, which caused a melt-down of the Tiger currencies, saw the hryvna decrease by on;y 6 percent against the dollar. During the May 1998 Russian financial crisis, the hryvna hardly moved.
Also during May, the hryvnia stood firm as the Parliament of Ukraine failed to elect a speaker, the miners demanded their back wages on the streets of Kyiv, Dnipropetrovsk and Luhansk, the government of President Kuchma occupied Odessa, and foreign investors lost all their money on the Odessa city bond, including the promised 50 percent annual interest.
Some forecasters think that the relative stability of the hryvna is just the calm before the storm. The former deputy economy minister and now a parliamentary deputy, Serhy Terokhin, says in a recent issue of the newspaper Delo that within a few weeks there will be a sudden flight of foreign and native money from Ukraine to Russia to take advantage of the higher interest rates there, and that might cause the hryvna to collapse. He predicted that by June 20 the hryvnia will fall to 2.1-2.2 hryvnas to the dollar.
Viktor Pynzenyk, the former deputy premier in charge of economic reforms, and likewise now a parliamentary deputy, said in the same issue of Delo that over the next four months the state must repay for previous loans a total of 5.2 billion hryvnas, of which 3.2 billion will go to non-residents. However, he added, the government does not have any money, since in the last five months it collected 626 million hyrvnas less than it spent.
Pynzenyk does not see any way for the government to avoid a financial crash. He added that if the IMF refuses to give the Ukrainian government credit soon, there will be a massive flight of capital from Ukraine and converting of hryvnas to hard currencies. The consequence will be the return of hyperinflation to Ukraine. All these scary stories might prove to be true. The reality, for the moment, is that the hryvnia hasn’t collapsed under great external and internal pressure. The government of Ukraine might be bust, but the private sector is booming. Foreigners agree, and that is why they are staying in order to make even more money.
Jaroslav Koshiw is an author on Ukrainian history and has made several documentaries on Ukrainian politics and Chernobyl for British television.
