As an oligarch-run, post-Soviet state, Ukraine’s legal and banking systems remain devoted to serving big businesses, even though smaller ones are the lifeblood of prosperous economies and support most of the people.
Now, in the wake of the EuroMaidan Revolution that drove President Viktor Yanukovych from power in 2014, the government says it will do an about-face and make smaller businesses its priority.
But they will find the sector is starving for credit.
According to the data from State Statistics Office, Ukraine’s small businesses employe 73 percent of the population and acount for 61 percent of the gross domestic product. Yet, they remain vulnerable to bureacracy, tax collectors and abuses by monopolies.
“The small and medium enterprises are a layer of people who are fighting for their rights,” Deputy Economy Minister Yulia Klymenko told the Kyiv Post. “By supporting them, we’re supporting our citizens.”
To do that, Ukraine has simplified taxes and the process of registering companies, while halving the number of required licenses and permits. But credit remains a problem.
Ukraine’s favorite destination for outgoing foreign direct investment is Cyprus, a global and secretive offshore tax haven. Only two European Union countries are on the top five list – Latvia and Poland – which make up only 1.9 percent of the country’s foreign direct investment.
Expensive loans
Tatiana Popova’s small business is four months old. She sells tea and honey made at her parents’ farm. When opening her shop, she relied only on funds borrowed from relatives.
But now she is looking for an investor to develop the business, as her single shop is not bringing in enough “money for a car or an apartment.”
“To familiarize people in the neighborhood with me, I need Hr 5,000 ($200) for advertising,” Popova told the Kyiv Post. “I don’t have these funds at the moment, because they’re all spent on rent, workers’ salaries and the purchase of new goods.”
Loans in Ukraine are expensive and more difficult to get. Interest rates are 24-25 percent while in the European Union they are 3.5-5.5 percent.
“The banks keep giving credits, but in smaller volumes than before,” Ruslan Sobol, the head of Kyiv Small and Medium Business Association, said. Creditors are also more cautious, as the national currency ane economy are still unstable.
High inflation and the wealth of deadbeat borrowers are also increasing the cost of credit, according to Roman Shpek, the head of the Independent Association of Banks of Ukraine.
Ukraine suffered a 43 percent inflation rate last year, forcing the central bank to hike rates to 33 percent. Although they have since been almost halved, to 18 percent, the credit is still expensive by European standards.
So when will loans become cheaper? According to Shpek, only when foreign investment returns – and that may not be soon.
While the government achieved macroeconomic stability, investors still distrust Ukraine’s financial system.
Most of the investment that Ukraine receives from abroad comes from offshore tax havens such as Cyprus, British Virgin Islands and Belize. Russia is Ukraine’s fourth largest foreign direct investor.
International support
While the state is too poor to help smaller businesses, at least 30 programs funded through the European Bank for Reconstruction and Development, the United Nations Development Program, the European Union, Canada and the United States are providing credits, grants and technical help.
But most smaller businesses are left to the mercy of private banks – or their relatives and friends – to find the credit they need.
Kyiv Post staff writer Josh Kovensky contributed this story.
