The Fish Rots from the Head

Occasionally something still happens here that by virtue of its outrageousness, stupidity, and/or gross venality, still surprises me. At a time when international financial institutions are in a quandary about whether to keep Ukraine afloat with loans, which (given current economic policies) no one has more than the slimmest hope can ever be repaid, and when most foreign investors (in the face of a business climate drawing parallels with the meteorology of Antarctica) have long moved on to warmer climes, President Kuchma has issued a directive to ban 37 firms with foreign investment from engaging in “international economic activity.” These firms have been operating under a special privileged customs regime allowing them to make a great deal of money and giving them advantages over other firms. Unfair? Probably, but then what else is new in Ukraine?

The first problem is that the privileges were granted foreign investors (in order to try to attract much-needed foreign investment) by none other than Prime Minister Leonid Kuchma. Although many Ukrainian politicians and their cronies in “business” may be unaware of it, in most of the world there is such a thing as business ethics, one tenet of which is that people keep their word; otherwise you simply cannot do business with them. The recent decision is vivid demonstration to one and all that neither Ukraine nor its current President can be trusted to keep their word, at least when it comes to a situation likely to impact on the bank accounts of the politically connected. Even the most reckless investor will never consider doing business with that kind of partner, which means investment will not come; without investment, new wealth will not be created locally, which means the country will ultimately wind up even poorer than it is. The most common comment from Ukraine’s business community is “no comment.”

The second big problem is that what the President signed is not just a removal of privileges but a hit list. To paraphrase one Western study, the Ukraine, like Russia, is a world where virtually nobody pays anybody on time, where significant obligations are never met at all, and where most settlements are in the form of barter or mutual write-offs. Thus, many firms get paid for only a fraction of what they provide and that fraction in the form of goods that maybe they can sell or trade to somebody else. For anyone to get money, they need to sell some of what they get from barter, and that usually means selling someplace with more disposable cash in the economy than here. Banning a firm from “foreign economic activity” means cutting them off from cash, and in business this means a death sentence.

The interview with Kyiv World Bank representative Gregory Jedrzejczak in this issue predated the latest decree, but it shows some of the frustration those who are committing to helping Ukraine face. Consider his words: “It is practically impossible to start a private business in Ukraine. If you don’t go underground, you either get killed or start paying endless bribes. And your tax inspectorates are the key weapon to destroy one’s business rival.” Well, if one fails to count the President.