New York City looks to Ukraine as new emerging market for U.S. investment (11/17/96)

New York City looks to Ukraine as new emerging market for U.S. investment

by Khristina Lew

NEW YORK - The City of New York and the Big 6 accounting firm of Arthur Andersen are turning their attention to Ukraine as a new emerging market for U.S. trade and investment.

On October 29, in conjunction with Ukraine's Consulate General in New York, the U.S. Department of Commerce and the New York City Commission for International Business and United Nations, the City Council held a conference at City Hall on Ukraine and its potential as a U.S. investment partner. On October 30 a roundtable forum at the Ukrainian Institute of America provided a more intimate setting for Ukrainian and American companies to talk business.

The two-day trade and information mission brought together 25 representatives of Ukrainian banks, investment agencies, district chambers of commerce, telecommunications and mining equipment companies with two dozen potential investors from U.S. insurance, mineral technology, exporting and legal firms.

City Hall was also the site of a parade honoring world baseball champions the Yankees on October 29, and the bedlam that accompanies any parade in Manhattan limited the number of attendees to the late-afternoon conference. As parade traffic held up the Ukrainian delegation's translator, New York lawyer Walentyn Polywko volunteered to provide Ukrainian-language translation. When the translator arrived, she could translate only into the Russian language, so the conference continued in three languages.

City Hall conference

Bruce Gelb, New York City commissioner for international business and the United Nations, opened the conference by extending greetings from Mayor Rudolph Giuliani and emphasizing New York City's desire to increase trade between the United States and Ukraine. He pointed out that the average New Yorker knows little about Ukraine and suggested that "Ukraine take some of its hard-earned money and put up a Ukraine Information Building right in the middle of Manhattan."

Joel Barkan, district director for the U.S. Commerce Department, encouraged U.S. importers and investors to look to the Ukrainian market, emphasizing that the U.S. government is "committed to make an economic success in Ukraine."

Conference participants were also greeted by Consul General Viktor Kryzhanivsky and U.N. Ambassador Anatoliy Zlenko, who encouraged his countrymen to "go find investment partners."

The tone of the conference was set by Dr. Vladimir Kvint, director of emerging markets at Arthur Andersen, who highlighted Ukraine's potential as an emerging market for U.S. business.

In its five years of independence, Ukraine has seen only $1.2 billion in foreign investments. U.S. investment accounts for 22.8 percent of total foreign capital, followed by Germany (17.3 percent), Britain (6.3 percent), the Netherlands (6 percent), Cyprus (5.1 percent) and Russia (5 percent). Foreign capital would be greater if investors felt confident that Ukraine's transition to a stable democracy and market-driven economy was more secure.

In early 1996, Arthur Andersen recognized Ukraine as an emerging market. No other financial publication or major multilateral institution has recognized Ukraine as an emerging market, and without that designation, Dr. Kvint said, no major Western company will invest in Ukraine.

In order to be recognized as an emerging market, Ukraine had to satisfy political, economic, business and technological risk of investment indicators set by Arthur Andersen. "When evaluating Ukraine on the basis of those four indicators, we agreed that Ukraine is an emerging market, but it will take time for other major firms to agree with Arthur Andersen and invest in Ukraine," he said.

Serhiy Berezovenko, president of Biznex, Center for Business Analyses and Marketing Research in Kyiv, chastised American investors for their cautious approach toward investing in Ukraine. "American investors rely too much on laws. They must recognize that Ukraine still has strong government involvement in enterprises. Americans are too impatient, they should have more perseverance. ... European companies are far ahead of U.S. firms in investing in Ukraine" he said.

He noted that Ukraine has vast potential as a trading partner with U.S. firms, citing Ukraine's agriculture, steel, coal and cement industries. Mr. Berezovenko also pointed out that Ukraine's primary stock market is developing "pretty fast" and that a secondary stock market is being formed.

Other conference participants discussed Ukraine's current laws on foreign investment as impeding the influx of foreign capital. Serhiy Voytovych of Grischenko & Partners, a law firm in Kyiv, said that while Ukraine's legal code on foreign investment is being formulated to provide incentives, existing laws limit foreign investors to a 49 percent joint venture in the insurance and banking industries. In addition, he said, foreign banking capital cannot exceed 15 percent of banking capital in Ukraine.

Ukraine's banking environment in particular was addressed by conference participants both from Ukraine and the West. Tatyana Vazhyjevska, department director at the National Bank of Ukraine, outlined the potential for foreign investment in Ukrainian banks, while Luba Labunka, vice-president of Raiffeisen Zentralbank Österreich AG (RZB-Austria), provided an overview of the banking climate in Ukraine from a Western perspective.

According to Ms. Vazhyjevska, 230 commercial banks currently operate in Ukraine. Most foreign capital is invested in Ukrainian banks, with France, Germany and Hungary leading the pack. Foreign investors must invest in foreign currency, not in the Ukrainian currency, and shareholders can be any entity except off-shore companies. Ukrainian legislation does not permit affiliate banks in Ukraine.

Ms. Labunka pointed out that 30 of Ukraine's 230 commercial banks are financially troubled. In 1995, 20 troubled banks were closed; in 1996, 11 banks were closed. Twenty commercial banks have international auditors, including Arthur Andersen, and 15 banks issue Visa and MasterCard. Ms. Labunka noted the improving political and economic environment in Ukraine and said RZB-Austria offered investors credit in some transactions.

UIA roundtable forum

A roundtable forum at the Ukrainian Institute of America the following day provided Ukrainian and American investors a more informal setting to establish contacts. In show-and-tell fashion, exporters, investment bankers and lawyers from New York, New Jersey and Pennsylvania took turns with businessmen and government officials from Kyiv, Dnipropetrovsk, Sevastopol, Sumy and Zaporizhia describing their products.

Peter Charchalis, product change manager at Philip Morris International, opened the day's proceedings on behalf of the UIA. Mr. Barkan again addressed potential U.S. investors, detailing the workings of the Commerce Department. With large commercial offices worldwide and weekly updates on the business climate in Ukraine, Mr. Barkan said his office can provide U.S. investors with a business plan on how to work overseas, target key areas of investment, and locate business partners in Ukraine.

He said the U.S. government is anxious to expand into Eastern Europe and that the U.S. Export-Import Bank will help U.S. companies finance exports with loans of up to $1 million.

The New York district director encouraged American investors to get into Ukraine early, before the tax system "gels," and cited several U.S. firms that had gotten into Poland early and today "enjoy great success, great profits."

Mr. Barkan also announced that his office will lead a large trade mission to Ukraine in the spring.