What keeps investors from putting money into Ukraine’s economy?

Valery KHOROSHKOVSKY, Minister for the Economy and European Integration:

“A major goal for the government is to create equal terms for doing business on the market. Today this is a major problem that hinders investment processes in Ukraine. Under the Soviets and in the years of independence the number of enterprises and branches of the economy that enjoy privileges has grown out of all proportion. Behind all this are people’s lives and social problems. We must offer an integrated solution and not simply revoke privileges. In any case, we are determined to continue what we have set out to do. Despite the tight budget that is yet to pass the parliament, it contains one major economic component, that is, it envisions cutting preferences and creating equal terms for doing business.”

Serhiy HRYNEVETSKY, governor of Odesa oblast:

“Creating a favorable investment climate in the region is a priority for the Odesa Oblast Administration. According to our estimates, investment in the region will reach half a billion dollars next year. To this end, we have decided to proclaim 2004 the year of attracting investment. Simultaneously, there are many problems that hinder the investment process.

“In particular, there is the factor recently mentioned by the president: despite the higher production indices the share of innovative enterprises and products is decreasing. Small businesses, which are looked upon as a motive force of economic development, spend a mere 2.4% of their disposable funds on innovation projects. Only major enterprises can afford the luxury of making investments. Under such conditions, Ukraine will find it extremely difficult to overcome its technical backwardness and catch up with developed market economies. Moreover, a major problem is the fact that most proceeds from exports are not invested in the country’s economy. Analysts believe that the root cause of these processes are unreliable Ukrainian laws that scare away domestic and foreign investors. However, much depends on the local authorities. It is up to us to do whatever it takes to make conditions for investment as favorable as possible. For example, recently a committee for the pretrial settlement of disputes between investors and the authorities was created in Odesa oblast. It is the committee’s task to prevent such disputes, determine the steps for pretrial settlement, and draft bills that would address issues in this sphere. I’m confident that such a body will help avoid many problems faced by investors.”

Anatoly KINAKH, president of the Ukrainian Union of Industrialists and Entrepreneurs:

“Above all we must understand that private capital accounts for the lion’s share of global investment. Meanwhile, private capital flows only into countries with a high level of political stability and transparency of business, into countries whose governments create conditions for equal market competition and, most importantly, which have the mechanisms of legal protection of investors and capital owners. These are the key points that need to be addressed in Ukraine. To quote our partners, ‘Even if you in Ukraine adopt an adequate Tax Code but not at the same time increase the legal protection of investors and not safeguard them from fiscal interference by the state, you can forget about investment.’ Thus, in our view, a major component of the investment climate is transparent market competition and protection of investors and owners, when their market position will not depend on their connections, but on their level of management and quality of goods and services. If the government takes an impartial attitude toward all subjects of the economy and creates reasonable and equal terms for everybody, then I’m confident that we will have an adequate supply of investment, especially considering the natural, scientific, and industrial potential of Ukraine.”

Leonid PECHERSKY, Mayor of Teplodar:

“Foreign investors are not certain that their money will be used for the purposes intended and that their investment will make a profit. Meanwhile, the government has started to issue decrees that can guarantee investment safety. For some capital holders Ukraine is a very attractive recipient of investment. We have a significant intellectual and scientific potential. With a little financial support this potential could be used to create wonderful preconditions for extensive investment projects.”

Mykhailo LINCHEVSKY, Haztranzyt Chairman of the Board:

“I can’t speak for the whole economy, but in the sector I represent everything depends on the requirements we set for our business partners in what concerns the transport of Ukrainian gas in the direction of the Balkans. Second, much depends on the economic development of the Balkan states and on their interest in our services. If there is no interest, business will not develop, investment notwithstanding.”

Volodymyr TARASHEVSKY, Naftohaz Ukrayiny:

“In my view, today there is nothing that could prevent our company from building relations with investors. As far as we are concerned, if we really need investment, we will have it. On the whole, imperfect laws are the root cause of the problem. Just imagine how many documents and guarantees must be prepared to attract investment. Moreover, we need political stability. Then there will be no problem.”

INCIDENTALLY

Representatives of seventeen countries and fifteen oblasts of Ukraine met in Lviv at the Third International Economic Forum. They presented over 200 investment projects worth over $500 million. Although at this point it is difficult to discuss any results, as it will be months or even years before contracts are signed, some breakthroughs merit special note. A major achievement of the forum was the signing of a memorandum on the project to build a new motorway that will link Lviv and Krakovets. It will be built by the Spanish construction firm, Necso, with 40% of the UAH 1.6 billion price tag to be covered by the government.

As for the total number of bilateral agreements signed in the wake of the forum, as of this writing 25 have been finalized. Five of them are interregional cooperation agreements. One agreement envisions an investment of thirty million euros in the Lviv Forklifts Plant, two more envision investment projects in the sphere of hotel and tourist business in Truskavets worth $30 million. Two more contracts envision an investment of $500,000 in Lviv-based Argentum and $510,000 in the Elektron Concern. Also contracts have been signed on the development of small power plants in the Carpathians and production of fuel from biological sources.

Would the forum have yielded greater results had Ukraine’s investment climate been more favorable? This is a question many have asked themselves. Michal Uzemblo, Consul of the Trade and Economic Section of the Polish Consulate General in Lviv (incidentally, Poland was best represented at the forum), believes that among the obstacles faced by investors in Ukraine are inadequate laws, ineffectiveness of legal regulators such as VAT returns to exporters, a shortage of information sources for investors, and inadequate protection of intellectual property and copyrights.

Within this context, the discussion with Deputy Governor for the Development of the Agroindustrial Complex Ivan Stefanyshyn is especially telling. The agroindustrial complex presented 29 interesting projects at the forum, but no major results have been announced. In general, our agriculture receives little investment. To illustrate, of the total investment in the economy of Lviv oblast last year, agriculture accounted for only 1%.

“The major problem is the uncertainty surrounding land ownership,” believes Mr. Stefanyshyn. “Investors work on leased land, which makes them feel quite insecure, as the owners might cancel the lease contract at any time. There is no qualified land ownership arbitration institution in Ukraine either. Thus, until investors have an opportunity to buy or lease land on stable terms, they will be wary of investing in Ukraine.”