Western Business Shuns Risks

The fourth CIS business summit took place in London on June 24-29, traditionally attended by big business representatives from the CIS countries to discuss economic trends and foreign investment prospects in an informal atmosphere. Once again Western investors used the occasion to demonstrate their lack of understanding of what they regard as the enigmatic mechanisms operating in the former Soviet economies. The Ukrainian businessmen, for their part, turned out unprepared to discuss investments in the City of London parlance. Outwardly, however, everything looked fine and dandy, smiling faces, lively discussions, attentive eyes. The atmosphere was that of an investment forum — without any investments in the offing. The British firm LVA, in organizing the get-together, meant it as an opportunity for those in need of loans to meet with those who could provide them. Yet even the plush banquets failed to bridge the glaring gap between the CIS and Western business and how people on both sides understand the situation.

Western investors did not see Ukraine as a country in need of direct foreign investment. People in possession of big capital are accustomed to make investments via the stock market, but it is practically impossible for an outsider to buy stocks or bonds of profitable Ukrainian businesses. The reason is not only the flaws of Ukraine’s stock market, but also the reluctance of domestic businesses to do any paperwork to meet the commitments toward the investor. Business Interchange CEO Brook Horowitz noted the big difference between what the Western investor expected from the CIS and what he found himself actually faced with. He said that foreign investors do not feel support in accessing the CIS markets and that getting there single-handedly is very difficult. Also, the general atmosphere in the former Soviet economies scares off outsiders rather than make them fell welcome as a business partner in some or other projects.

In London it was not difficult to pinpoint the reason why foreign investors feel uncomfortable in Ukraine. At present, varions CIS countries witness the peak of struggle among domestic financial groups for thriving markets. These groups often have a great deal of spare capital to invest. In any case, it cannot be compared to what the Western investors could afford. This is precisely why Ukrainian capital sees the Western investor mainly as a rival. These groups use the corrupt bureaucracy and judicial authorities to bar Western capital access to Ukraine. Foreign investors, in turn, prove totally unprepared to operate in such a hostile environment. Ian Dauman, CEO of Central European Trust, pointed to the great risks generated by Ukrainian partners, saying that Ukrainian business is geared not to make the stockholders and investors profit, but to grab everything it can lay its hands on. In this situation no foreign companies will come to Ukraine.

However, all risks notwithstanding, the Ukrainian market remains among the world’s most profitable. The London business summit estimated the investment yield ratio there at 30-40%. And so the City is closely (more closely than generally believed in Kyiv) following the economic process in Ukraine. Tim Stubbs, a leading expert with Salans law firm, believes that the level of corruption in Ukraine is a major indicator of the investment climate. He adds that the Ukrainian judges and bureaucrats are too poor to show an unbiased approach. In addition, Ukrainian courts are financed by the government, offering unmatched opportunities to exert pressure. As a rule, the level of corruption is determined by polling businesspeople operating in a given country. Kyiv at present is placed 95th on a list of 100 countries, meaning that business in Ukraine is almost totally dependent on one’s ability to make friends in the right places on high. This criterion is quite correct, as a decline in corruption more often than not takes place after battles for the initial redistribution of profitable state property stop and that property passes into private hands.

In view of this, the government’s highest priority is to step up (or stop) the process of market redistribution. For example, the signing of the VR-TNK investment contract worth over $6 billion (the biggest CIS deal to date) was possible only after the Russian oil industry was conquered by private capital. The sooner the Ukrainian state parts with profitable enterprises, the quicker domestic capital gets them, the sooner it will be in a position to negotiate deals with foreign investors on equal terms. Until then the barriers of corruption in the way of direct foreign investment are not likely to be lifted. In any case, the CIS business summit in London unequivocally points to such an inference.