THE FLIP SIDE OF ONE INVESTMENT

Last week Verkhovna Rada heard the report by the head of the temporary commission for investigating conditions for the foundation and bankruptcy of the venture Borshchahivka Chemical Pharmaceutical Plant owned by Yevhen Zhovtiak. The commission found violations in the parties making contributions to the statutory fund while offering tax preferences to the American side. Speaker of Parliament Oleksandr Moroz was authorized to inform the US House and Senate about pressure on the executive branch of sovereign Ukraine to solve the economic conflicts out of court to the benefit of the American businessmen...

What was the cause of the conflict?

In order to understand, how microeconomic processes grow into a real threat to the investment policy of Ukraine, it would be wise to familiarize ourselves with the persons linked to this scandal. First of all it would be wise to point out the participation of a long list of US Senators and Congressmen, the US Embassy in Ukraine, and, on the Ukrainian side, the attention of the President, Prime Minister, General Prosecutor, and the Supreme Court of Arbitration.

The Players

Meanwhile it is quite a labor of Sisyphus to list all the legislative bodies involved what might become known as Borshchahivka-gate. The main heroes of this plot were two former Ukrainian citizens, now naturalized American: Yakiv Yampel, the president of R&J Trading International, Inc. and its vice president, Rostyslav Furman, referred to from now on for convenience as the concessionaires).

On December 2, 1997, the Cabinet of Ministers received a letter written with utter respect to the Ukrainian government. The document dripped with the flattery with which the leaders of R&J requested ahead of schedule consideration by the Cabinet in the immediate future. The text of the letter contains six plain issues: "1. File... upon the article 148/8 of Criminal Regulations. 2. Provide for... 3. Cease... 4. Instruct the Head of the State Committee... 5. Instruct the Tax Administration... 6. Instruct the Ministry of Justice...

The next day a special Cabinet session took place where the issue of fulfilling the US businessmen's "wishes" were reviewed. Thus in Deputy Prime Minister Tyhypko's memorandum on Yampel's letter the Ministry's position was indicated by phrase: "Within the range of special group for quick reaction... to be considered and approved."

Meanwhile, the Ministry of Internal Affairs organs were at work on a criminal case. But the Borshchahivka pharmacists seemed to be on good terms with the law: the General Prosecutor has already closed the case three times for lack of evidence. The process entered the stage of endless investigation.

R&J Business Secrets

On June 22, 1994, the concessionaires established a joint venture with a plant in a promising sector. The joint venture became involved in the zone of preferential taxation, and two days later the concessionaires signed an agreement to lease plant equipment costing 76 billion karbovanets at July 1994 prices, about $4.5 million.

Later the concessionaires provided the plant with raw materials which they had purchased abroad. And also equipment - two Sotax and Megatron laboratory devices, costing, according to the customs declaration a total of $50,130. Upon customs verification their cost "dropped" to $30,000 (more exactly, 37,600 Swiss francs).

As agreed the concessionaires got a 50% share of stock in the joint venture, but the contracts gold vein was the lease of plant capacity provided. This allowed the concessionaires in just three days after delivery of the two devices (10% of their total investment) to claim and on November 28, 1994 receive dividends of $235,659.96. Now that's a return on investment.

On November 9, 1994, the concessionaires provided the plant with a device for filling GKF 400 gelatin capsules supposedly worth $217,500. After verification of the customs documents, it turned out that the device actually cost 214,550 DM. The machine arrived without accompanying service equipment and remained idle until August 1995. After startup the machine began to produce two brands of drugs out of the eighty then being produced at the plant. And concessionaires became silent partners accepting satisfying dividends, the sum of which for six quarters topped $1,920,480.21.

Rostyslav Furman recalls, "At the moment when we approached management of the Borshchahivka plant with our proposal on cooperation the enterprise was in a sorry state and ready to accept any terms, given that we were proposing a real investment $250,000. Our help, our guarantees to Western providers of raw materials in the West and bank loans, in which the company took part, helped the enterprise get back on its feet. But when management realized that it could do without outside help, they decided to finagle us."

On business "cleanliness"

One can also view the conflict from another angle: the concessionaires violated at least three laws.

1) Article 5 of the Decree of the Cabinet of Ministry No. 5 from May 1995 On the Regime for Foreign Investments, which prohibits delivering equipment at prices inflated over world prices.

2) Article 8 of the law On Securities and Stock Exchanges which prohibits granting preferences to shareholders without the option to buy back the shares.

3) delays in providing and installing equipment has been classified by plant lawyers as fraud according to the article 83 of the Criminal Code.

Ukrainian enterprises suffer shortages in investment, stand-by credit, as well as legislative and analytical consulting. Today Ukraine's passivity is like that of a odalisque on the slave market who expects that the first to be lured by her beauty to change her life for the better...

P. S. Recently the Writers' Union held a press conference dedicated to the Borshchahivka problems and the first action called Ukrainian Writers in Defense of the Domestic Producer. Two questions arise: "Why writers?" and "Who is leading the parade?"