WAITING FOR INVESTMENTS

The problem of investing in the Ukrainian economy recently acquired a new dimension, which will now be discussed in the light of the transfer of power underway in Ukraine. “Government agencies are not facilitating the development of the country’s investment climate,” parliament’s Budget Committee chairman Valery Asadchev said about the outgoing government. “For the last few years, annual investments have stayed in the range of $1 — 1.2 billion, which is not nearly enough.” In his view, investment expectations are very high in the country, and everything depends on the new government’s policy. As he put it, people are hoping that it may end the practice of legitimized extortion, making it possible to invest freely in Ukraine.

With this hope, investment specialists gathered at a recent conference in Kyiv that zeroed in on the priorities of the government’s policy on the equity market. Yet most were cautious about offering any successful scenarios. “Our equity market has yet to become the locomotive of the economy, which ideally it should be. It doesn’t allow unimpeded circulation of funds in the economy, nor is it enabling our country to become a real market economy,” says Finances and Banking Committee deputy chairman Viktor Kapustin. According to State Securities and Equity Market Commission chairman Anatoly Baliuk, Ukraine has 777 securities traders, 3 depositaries, 90 asset management companies, 8 stock markets, and 2 trading systems, meaning that the equity market has a developed structure. This begs the question: What is preventing it from operating effectively?

There are several possible reasons. According to Viktor Kapustin, a major problem is that banks do not issue securities or trade in them. This prevents the development of both the banking system, which is unable to amass capital, and the equity market, which needs the participation of banks to function normally. According to Concorde Capital General Director Ihor Mazepa, the public at large underestimates the role of the equity market, which is not viewed as a source of capital.

However, most conference participants blamed these problems on Ukrainian laws that prevent equity business from developing effectively. The laws on mortgage and private retirement income have been singled out as the only positive developments in Ukrainian legislation, but their potential will not suffice to create a legislative field along European lines. Valery Asadchev believes that 90% of the Ukrainian equity market legislation needs to be reformed. Yet parliament’s current composition is preventing it from accomplishing this. In his view, to function normally parliament must undergo a radical overhaul and revise its principles. Only then will we approach the European ideal.

Conference participants did not overlook privatization problems either. According to State Property Fund deputy chairman Yevhen Hryhorenko, the fact that 50% of Ukraine’s enterprises are state owned is stalling Ukraine’s progress toward market economy status. Therefore, instead of scaling back privatization, the government must speed it up, beginning with smaller enterprises. Only in this way, he thinks, can we reduce the number of enterprises with state ownership from 1,500 to 300-400. This will result in a larger number of strong equity market participants. “Government stakes are sold at dirt cheap prices all the time. We need auctions where anybody who wants to can buy shares. This will bring us both income and prospects for growth,” said Anatoly Baliuk.

The long-suffering 2005 budget also received its share of attention. Everyone agreed that it must be made realistic. According to Valery Asadchev, “In recent years we have been living in a sort of virtual world. Macro indicators did not match real budget indicators, of which we became aware at the end of the year. If we upset the [budget] balance now, we will never be able to get out from under the debt pyramid. Of course, we cannot cut existing social benefits, but any new benefits must be postponed for a long time.”

Participants of the recent conference believe that the budget sphere will be brought in line with the passing of the Budget Code, which will allow the government to become a full-fledged player in the investment market and a trailblazer in those sectors in which private companies are still afraid of investing, for example the micro loans sector, by proposing terms and schemes and providing low interest rates. Private companies will then be able to follow in the government’s footsteps.