U.S. Embassy's commercial officer sees potential for large-scale investment in Ukraine (10/20/96)

U.S. Embassy's commercial officer sees potential for large-scale investment in Ukraine

by Marta Kolomayets
Kyiv Press Bureau

KYIV - With the adoption of a new democratic Constitution and the introduction of the hryvnia in Ukraine in the last few months, Andrew Bihun, the senior commercial officer at the U.S. Embassy's Commercial Service in Kyiv, said he expects that American companies will begin truly large-scale trade and investment with Ukraine.

"Already in the first six months of this year we saw a dramatic increase of U.S. exports to Ukraine; this year we saw exports of $175 million, as compared to $75 million in the same time period last year," said Mr. Bihun, during an interview at his offices on September 11.

Although the United States is Ukraine's No. 1 investment partner, contributing 23-24 percent of foreign investment, followed by Germany with 19-20 percent, the total figure is small. Only this year - its fifth year as an independent country - did Ukraine surpass the $1 billion mark on cumulative foreign investment.

"And that is rather small, when you compare that the United States has invested $3-5 billion into neighboring Poland," said Mr. Bihun, who has worked in Kyiv for 13 months, but who has spent 20 years in the U.S. Department of Commerce, mostly conducting foreign business opportunity analysis.

According to Vice Prime Minister Viktor Pynzenyk, Ukraine needs about $40 billion in investments to bring it up to the level this country can support, given its natural resources, its well-educated population, its size.

But, Mr. Bihun estimated that Ukraine can support $80-100 billion of investments, as he measures the ripple effect of sizeable Western investments.

As an example he cites General Motors, which is currently conducting a feasibility study regarding joint auto production with the Zaporizhia-based Avtozaz (see The Weekly, September 29). Once they come in, the Bila Tserkva tire company may be looking for investments as it will want to be a supplier to that manufacturing concern, and more gas stations will open up, etc.

"The bottom line is - whether it is 40 to 1 or 80 to 1 - the gap is tremendous, and what is happening is that American companies are beginning to seriously look at that gap," said Mr. Bihun.

Among the stalwarts who have been in Ukraine for three or more years are DuPont, Monsanto and Cargill - all agro-business companies - as well as such corporations as Coca-Cola and R.J. Reynolds. They are among the biggest investors in Ukraine today.

"And when such companies come in, they also teach Ukrainians about Western business attitudes," said Mr. Bihun.

Whereas the heart of business in the United States and the West has always been the market, enterprises in the former Soviet Union just filled orders without determining the supply and demand.

"They lived to meet production targets, which were certainly not set by them and definitely not determined by their directors," explained Mr. Bihun, stating that often all the products were to be distributed to different ends of the Soviet Union, and most of the production was done at the tail end of each five-year plan.

"Now that has to drastically change, and it is slowly doing so," he added, explaining that Ukrainian manufacturers still worry about how they will create their production line instead of sitting down and asking such questions as: "Can you help me determine what the market will be for a certain product?" before going ahead with their plans.

"The major change I have noticed over this one-year period is that last year a limited number of U.S. companies would come in and probe and wait for things to happen. Right now, we have about four-five times as many companies coming in and, not only probing, but already taking concrete steps. Many come in and work independently of us and/or the central government. They come in, have conversations with regional administrations, and then seek our advice," said Mr. Bihun, who is very proud of the work the United States Commercial Service (USCS) has done since it began operating in the summer of 1992.

The USCS has a number of programs that allow Ukrainian companies to find interested American investors. One of them, called Search for Partners, is geared to matching up privatized Ukrainian companies with Americans, whether it be to form a joint venture, to buy American equipment, or to increase investment. Through two different electronic systems - the National TradeData Bank and the Economic Bulletin Board - information from Ukraine becomes available to 60 Department of Commerce offices in various U.S. cities, as well as to Internet users.

Another program that has been highly successful is the International Buyers Program, which takes Ukrainians to major trade shows and exhibitions in the United States, where they mingle with American businesspeople and develop relationships one-on-one.

A Ukrainian delegation of 35 people is scheduled to travel to San Francisco for a food industry show in October. The USCS is trying to bring more American businesspersons for such exchanges in Ukraine, but, being short-staffed, Mr. Bihun finds this process difficult at times. The very recent arrival of Mitch Larsen, a new commercial officer who will assist Mr. Bihun, adds a much-needed resource to the USCS programs in Kyiv.

One of the newer ideas developed by USCS through the "Showcase Europe" program is to have its representatives travel to Western Europe to stimulate U.S. companies and their European headquarters to focus on Ukraine also.

Mr. Bihun and his commercial officer, Michael Lally, who recently left Ukraine for the USCS in Kazakstan, traveled to London earlier this year to promote Ukraine. Mr. Bihun intends to travel to Frankfurt and Brussels to do the same next year.

"I've noticed yet another phenomenon in doing business in Ukraine," said Mr. Bihun. "Whereas in the past, business in the former Soviet Union always went through Moscow, those days are just about gone," he noted.

Now, larger U.S. companies bypass Russia and come to Ukraine either from their Eastern and Western Europe offices, or come directly from their U.S. headquarters.

"Very, very few come from Russia - about 5 percent do the Moscow to Kyiv route," said Mr. Bihun, adding that businessmen are beginning to understand that Ukraine is a separate market, and that you cannot use your contacts in Moscow to get ahead in Ukraine.

Although the U.S. Embassy does not keep an official register of American companies in Ukraine, Mr. Bihun estimates that anywhere between 250 and 300 U.S. firms have sought the help of the USCS.

"Mind you, that includes everything from one person who comes here often and keeps an in-country representative to such giants as S.C. Johnson, which has been here since the early days," said Mr. Bihun.

But many of them keep in close contact with the U.S. Commercial Service, which offers what Mr. Bihun refers to as "the comfort zone."

It offers a variety of services, including setting up business appointments and providing interpreters. The American Business Center, which opened officially in May of this year, is managed by the USCS and is located in the same building. It provides one-stop shopping for U.S. businesspersons, offering international telecommunications, secretarial, logistical and translation support, as well as rental office space and a commercial library.

"The American company should know and does know that we stand behind them and, at the same time, we give them advice on how to enter and stay in the Ukrainian economy - in a way that will also be of benefit to Ukraine's economic development, " explained Mr. Bihun.

At this point in time, Mr. Bihun said that the U.S. and Ukrainian governments have outlined the four top priority sectors targeted for U.S. investment.

The bilateral U.S.-Ukrainian Joint Commission on Trade and Investment has listed the following sectors:

Food industry: agriculture and food processing. This sector not only provides a quick return on investments, it is also one of the top industries in the U.S. that can help in not only providing high quality seed and equipment, but also in teaching Ukrainians about packaging, preserving and distributing foods.
Energy sector: Although this sector has many problems, as energy sources were once controlled by Moscow, it is an exciting investment opportunity as the electric power industry will be restructured and the development of new gas and oil fields will provide interesting challenges.
Telecommunications: There are vast possibilities for investment in both the wire and wireless communications, which offer a quicker pay-off than the energy sector. Needed improvements in urban and regional telephone services, as well as in radio/TV broadcasting, offer virtually untapped potentials for investors.
Health-care sector: With such leading U.S. pharmaceutical companies as Eli Lilly, Merck, Smith-Kline Beecham, Pfizer and Upjohn already coming into Ukraine with sales and distribution, manufacturing cannot be far behind.

Given the fact that Ukraine had an expansive military-industrial complex during Soviet times, it has always been capable of producing high-tech equipment. As defense conversion gets under way, there is no reason why several of those enterprises should not produce state-of-the-art electro-medical equipment with the help of American investors.

Three or four years down the line, Mr. Bihun added, the entire health-insurance industry will begin blossoming in Ukraine, and the United States, with its vast experience in this field, can show Ukrainians the benefits of developing such an industry.

Although these sectors are top priority for the U.S. Commercial Service, Mr. Bihun is quick to add that by no means does he discount the consumer goods industry, the construction and transport sectors, and others, as top investment venues in Ukraine.

"This country can do everything, but at the same time it needs everything," he said.

In order to attract more foreign investment, there are quite a few problems Ukraine must solve for itself. The paramount requirement is the establishment of the rule of law in the business sphere, which involves creating a proper court structure, training judges, applying "sanctity of contract" principles and building an appropriate system of implementing court rulings.

Also important is the creation of new laws and regulations in order to allow private enterprise to develop, such as a definitive law on land privatization and specific laws on oil and gas project development.

"Over all, Ukraine needs a total restructuring of the tax code, which is one of the biggest problems," admitted Mr. Bihun.

"First of all, the taxes are too high - and for domestic businesses in Ukraine, they create a shadow economy. For foreign enterprises, the high tax rates prevent further entry into the Ukrainian market.

Mr. Bihun estimates that if one were to total all the imposed taxes and fees - income, profit, infrastructure, excise and value-added taxes - a businessperson would be paying anywhere from 50 to 80 percent in some cases.

"This makes it infeasible for a lot of companies that want to come into Ukraine," said Mr. Bihun.

But, the figure he is now hearing as a target in the upcoming tax code would add up to an over-all rate of 30 percent. "And, I think if that happens, you will probably see a significant shift to the real measurable economy from the shadow economy. Whereas right now it is about 50/50 or 60/40 (real/shadow), if taxes are lowered, you will see a dramatic shift of about 25 percent into the real economy," noted Mr. Bihun.

Whereas there is a problem with the actual rate, there is also a problem with the implementation of tax collection, which is very erratic.

Some companies are literally harassed - as tax inspectors come to their door 12 to 30 times a year, often demanding disclosure of extensive financial and client records - while other companies have yet to encounter the tax inspector.

With time, Mr. Bihun said he believes Ukraine will overcome these problems. He hopes to be in Ukraine to be around to see that happen.

"Although it is rewarding to be in Ukraine as a Ukrainian American," he notes, "the primary satisfaction comes from being engaged professionally in Ukraine."

"It is very exciting from a professional point of view to be at, and contribute to, the birth - albeit a lengthy birth - of economic viability in this country," he concluded.