American businessmen discuss Ukrainian market at conference (05/15/94)

American businessmen discuss Ukrainian market at conference

by Bohdan Hodiak

PITTSBURGH - An American venture capitalist whose company has invested in nine small companies in Ukraine and a representative of Westinghouse Electric Corp. trying to arrange a deal worth hundreds of millions of dollars spoke here about doing business in Ukraine.

Foreign investors can make money in Ukraine and get a good return on their capital if they can avoid many snares, said Thomas M. Claflin of Claflin Capital Management of Boston. With $12 million to invest in Ukraine, his Ukraine Fund has helped nine companies expand and is looking to invest in some 30 more. So far, the results have been good, Mr. Claflin said.

Gerald W. Scholand, manager of strategic programs in marketing for Westinghouse, has made 10 trips to Ukraine in the past two years, attempting to sign contracts with Ukraine's nuclear industry. A year ago Westinghouse signed a contract for $350 million with Czecho-Slovakia, and most recently contracts with Russia, to upgrade and make safer their nuclear plants.

The men participated in the Europe Business Opportunity Conference held here April 25-27 under the sponsorship of the U.S. Department of Commerce and Carnegie Mellon University. Some 150 businesspeople and others interested in investments in Europe attended the conference, where 34 countries were represented.

Stephan Wasylko, senior commercial officer for the U.S. Commerce Department, who is stationed in Kyyiv, chaired the Ukraine workshop.

Mr. Claflin described some reasons for the success of his venture firm: "We have avoided dealing with the government.

We have no patience in negotiating with government bureaucrats. We deal strictly with small, private companies.

"Our average investment in a company has been $100,000 to $300,000, which is equal to $3 to $4 million in buying power here. We only take minority positions, so we can keep a low profile. We seek companies that provide goods and services to the local population. Our capital helps them expand," Mr. Claflin said.

The company essentially buys a minority stock position in these companies, which so far has included a furniture manufacturer, a maker of surgical needles, a tea packing company, a printing plant and a fine foods distributor.

The firm's first investment was with a 23-year-old Kyyiv entrepreneur who had established 40 kiosks throughout the city. These sell candy, cigarettes and other small items. The investment enabled the kiosk firm to expand to 120 kiosks, with another 80 as franchises. Last year the firm paid a dividend of 15 percent in hard currency to its stockholders.

This is an advantage Ukrainian companies have over American start-up firms, Mr. Claflin said. To recoup in America, venture investors must wait until the company goes public and sells stock. "In Ukraine they don't have to have public offerings," Mr. Claflin said.

It also is possible to deal with Ukraine's horrendous inflation. "They've been doing it in Brazil for centuries," he said. The firm keeps its capital outside Ukraine until the day it makes the investment, when the money is transferred into a hard-currency account.

"Actually, they don't really need our money. They park it in the bank and use it as collateral to issue letters of credit," Mr. Claflin said.

Changing coupons into dollars can be done at various auctions. "Changing coupons into $10,000 is not a problem," he said.

Many small private Ukrainian companies are now able to produce goods to a standard of about 90 percent of world quality. "Getting the other 10 percent will not be that hard," Mr. Claflin added. His firm has already established ties with a tea company in London and a surgical needle company in America, with an eye toward exports.

Mr. Claflin's people have not had any trouble with organized crime. But there are always "street toughs" who try to shake down businesses. "If you're in a retail operation the solution is simple. Hire your own. Get ex-KGB people. That will solve the problem instantly," he said.

Importance of personal relationships

Mr. Claflin's final advice was: "Don't go to Ukraine with more money than you can afford to lose and don't depend on their legal process or their accounting. If you bring a lawyer you can forget it. Business there depends on personal relationships and mutual trust."

Mr. Scholand had a much different problem because he has to deal with government bureaucrat and the old "aparatchiks" who run the nuclear power industry.

He mentioned one incident where at a meeting every proposal that he brought up was knocked down. Finally a young nuclear engineer cleared his throat and said: "Mr. Scholand, the way to deal with us is to prepare l00 proposals. After we tell you why they won't work, and run out of reasons, and there is one left, we'll accept it." Everyone laughed, and the meeting went better after that, Mr. Scholand said.

"They often have grandiose plans and expect the government to pay for them. It always did. They are hampered by old equipment. Even if they run it perfectly, they can't produce the quality. "The only way to go is to have local partners. We shouldn't underestimate them. They are excellent engineers," Mr. Scholand said.

He said he believes "the world community is going to repressure Ukraine to close Chornobyl. In trade for that, it will help and encourage Ukraine to complete three other plants that have much safer technology." These are 90 percent finished and located near Khmelnytsky, Rivne and Zaporizhzhia.

Westinghouse pioneered the commercial nuclear power industry more than 30 years ago and has supplied more than half of America's 110 nuclear power plants. Of the world's 410 light water reactors, 170 are based on Westinghouse technology.

Major contracts with Ukraine would boost Westinghouse's financial conditions severely strained by bad real estate investments and the moratorium on new nuclear plants after the Chornobyl and Three Mile Island accidents. Much of this money would have to come from Western governments because of Ukraine's financial crisis.

Westinghouse essentially wants to sell its technology and expertise. The products would be built by Ukrainian companies. "We want to benefit with licensing fees and through a share of the profits," said Raymond J. Sero, general manager of Westinghouse's nuclear international business. Ukraine has been selling electricity to Western Europe and can sell much more if it can increase its output.

Meanwhile, some 150 foreign companies have offices or representatives in Kyyiv and about 150 more are in other parts of the country. While Russia has privatized about 40 percent of its companies, Ukraine has privatized about 5 percent.

Uncertainty over regulations

"The biggest problem for foreign investors is the uncertainty with the laws and regulations governing business," Mr. Wasylko said.

In a report released a year ago, two Harvard researchers for the Project on Economic Reform in Ukraine interviewed 53 foreign businesspeople in Kyyiv. They asked them to rate 14 obstacles to doing business in Ukraine. Put in first place by 73 percent of the respondents was "constantly changing laws and regulations."

This was followed by "inadequate banking system," 59 percent, and "confusing/unfavorable investment legislation," 46 percent.

At the bottom of the scale with the least problems was "finding good, local employees," with 17 percent.

The researchers concluded that, "The problems, it seems, lie at the top in the laws and policies; they do not rest at the bottom, among the Ukrainian people." The Ukrainian government has also made it very difficult for Ukrainian companies to export. They must convert about half of their hard-currency earnings into coupons and they must do it at the government rate, which is much lower than the market rate. They are then taxed on their revenues, not their profits.

"This basically has forced the surrender of any export earnings by a Ukrainian company," Mr. Wasylko said.

His office in Kyyiv provides many services for Americans who want to do business in Ukraine. There is even a "Gold Key" service for established businesspeople offering an interpreter, a car and driver, the setting of appointments and secretarial assistance. "We want to pave the way so they can deal with business and not the logistics," Mr. Wasylko said.

The commercial section of the American embassy in Kyyiv has done market research, organized trade promotions and spoken out for American business. The best way for an investor or businessperson to use these resources is to first contact the local district office of the Commerce Department. There are one or more offices in every state.

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