Keeping business in the shadow is bad for business and good for bureaucrats

The State Commission for Securities and the Stock Market (SCSSM) announced that it will make Ukrainian joint stock companies’ financial reports public knowledge. “Such openness will benefit the companies and their potential investors,” declared SCSSM member Serhiy Biriuk, adding that free access to companies’ books and records is standard international practice. In this case it is data relating to the business’ performance and lists of major stockholders, top managers, and creditors – although most Ukrainian companies prefer to submit carefully edited versions of such reports and company-related data.

The SCSSM is expected to hand over all information concerning the First Stock Trade System, as well as other agencies and associations with powerful financial resources. “We plan to complete the negotiations before the end of October,” says FSTS President Iryna Zaria. In her own words, FSTS has a web site with links to 5,000 limited companies. After getting SCSSM data, it will contain information relating to 11,000 such businesses.

At present, few Ukrainian joint stock companies favor openness. The most successful Ukrainian businesses, as a rule, prefer to have commercial secret status granted even to their top manager lists – and there is little small-time stockholders, let alone journalists, can learn about the big-time ones. All investments are kept secret, meaning that even the leading steel, chemical, and food industries can disclose limited information.

Yet there are examples of the opposite. Exceptions to the rule, to be precise. Ukrainian companies that have made up their mind to access foreign markets to attract open foreign investment currently display a degree of openness envied even by large Western businesses. They simply have to provide as much publicly accessible information about themselves as possible, to play the game by the international market rules and thus attract Western investors’ attention.

Naturally, by doing so, they also attract the unwelcome attention of various Ukrainian controlling authorities. This is apparently what most domestic businesses fear the most. The current tax burden and competition on high-yielding markets do not leave such businesses inclined to advertise their results. President Leonid Kuchma said, addressing a convention of managers of the mining and metallurgical complex in Dnipropetrovsk, that his own statistics point to mostly offshore companies holding controlling interests in privatized Ukrainian enterprises, meaning that the state budget receives no tax returns.

The cabinet tried to show how Ukrainian businesses should operate in the open, instructing the SCSSM to make all state-run enterprises in Ukraine submit financial and other detailed reports to the commission. Strangely, this has not made them more attractive to foreign investors. Such detailed reports from businesses with government interests turned out to contain little information of essence. A potential foreign investor trying to figure out the financial pattern of any such government-run company ends up convinced that, Cabinet/SPF control or not, the music is ordered by some strange intermediary firms, handling all commodity and financial resources. Considering that most such small inconspicuous firms operate under the guardianship of local authorities and other influential protection, there is nothing law enforcement people can do about it, not as long as such protection is provided the “right” way.

However, assuming that the SCSSM was supplied with the most detailed reports by such companies, such data has not been fully accessible to potential investors. Originally, the SCSSM resolved that the right to disclose such information must be monopolized in Ukraine. Accordingly, this right was vested in a bureaucratic structure known as the Stock Market Infrastructure Development Agency. In other words, all the other stock market operators and other business entities could not obtain such data directly from the SCSSM. But then it transpired that the interested investors had to pay for information regarding public corporations [public joint stock companies] and the whole affair smacked of big-time corruption. The SCSSM was quick on the uptake and resolved to monopolize the data supply.

Now everything depends on whether Ukrainian companies will really want to attract foreign investments by disclosing information about themselves. No special enthusiasm has been registered to date. Too bad. After all, such openness affects the costs of bank loans, for those risking lending money to closed business structures require matching compensations. However, the most obvious consequence of keeping information about large business classified is the actual absence of a public business elite in Ukraine. All international business summits held in this country lack managers of Ukrainian enterprises. The latter prefer to keep behind the Association of Ukrainian Businessmen and Industrialists, thus spreading the liability burden. Businesses operating on behalf of the national interests must keep in the open, otherwise their voices may be lost when discussing important issues, such as customs regulation, tax reform, and WTO membership – but they will continue being heard in quiet bureaucratic offices upstairs.