Ukraine successfully hosts the EBRD (05/17/98)

Ukraine successfully hosts the EBRD

by Roman Woronowycz
Kyiv Press Bureau

KYIV - By most accounts and from various points of view, Ukraine successfully hosted its first major international business convention and its reputation as a country in which to do business finally may have risen a few notches.

Bankers and businessmen from 58 countries and more than 300 members of the international press corps gathered in Kyiv from May 9-12 for the European Bank of Reconstruction and Development (EBRD) Board of Governors Meeting and Business Forum. Many of the attendees arrived with doubts about Ukraine as a place to do business because of high taxes, Soviet-era bureaucratic infrastructure and abundant allegations of wide-spread corruption. Most of the nearly 4,500 guests, which also included representatives from the U.S. and Japan, also had heard that hotel rooms would be few and accommodations well below their expectations.

The EBRD meeting was Ukraine's first venture into the world of hosting a large-scale international event. It was viewed also by Ukraine's government as a defining moment in its attempt to reverse international business opinion about Ukraine.

"I think that the meeting was an outright success," said Charles Frank, the acting president of the EBRD, speaking on May 12, just after the formal conclusion of the convention. Defying all concerns that the convention might suffer from disorganization, Mr. Frank stated unequivocally that the meeting was "most successful in its organization."

The EBRD is an international organization that was established in 1991 with the demise of the Soviet Union to aid countries in transition from command economies and centralized planning to free markets. Its shareholders, which consist of all the countries of the European Union, the United States and Japan, provide credits, credit guarantees and invest in capital stocks in the 26 countries that were once part of the Warsaw Pact and the Soviet Union.

Ukrainian officials, who put great effort into the preparations for the EBRD convention, which was organized on a very tight budget of 3.8 million hrv ($1.9 million U.S.) and with the contribution of extensive individual sponsor support, were pleased with their effort.

"We haven't heard a single complaint or criticism," said Oleh Taranov, head of the organizing committee of the Cabinet of Ministers. He said that the two biggest areas of concern - accommodations and transportation - were complaint-free. In fact, one of the cruise boats that the organizing committee had retained to use as a floating hotel reported that it was only half full.

That may have been because the number of business guests was down from last year's conference held in Tirana, Albania, where more than 2,000 businessmen attended. Several press reports also attributed the availability of hotel space to the large number of no-shows among the business guests. Acting President Frank, however, denied that this was the case. "We knew there would be a limited amount of hotel rooms, so we had to plan accordingly," said Mr. Frank. "We planned for 1,300 or so business guests and 300-400 local Ukrainians, and that is more or less what we got."

Official participant registration reports show that 1,676 business guests attended the EBRD conference in Kyiv.

Some controversy

Not everything was controversy-free during the conference. Five Ukrainian environmentalists demonstrating before the Ukrainian Home, which was the headquarters for the conference, were arrested on May 9 by local militia for an unlawful gathering and sentenced to 3-5 days in jail. After their arrest the group claimed they had been harassed by Ukraine's Security Service in the weeks leading up to the conference, including death threats, and had declared a hunger strike.

Environmental groups from Europe and the U.S. on May 11 presented a signed statement to the EBRD meeting to demand that the EBRD take a position on the police action.

Responding to reporters' queries on the arrests at his closing press conference, Acting President Frank said, "We have made representation to the Ukrainian government and would like to see these fellas, or women if there were any among them, released as soon as possible."

The Ukrainian government, however, denied that the five were being detained. At a roundtable on Chornobyl, the secretary of Ukraine's National Security and Defense Council, Volodymyr Horbulin, said, "They were not arrested and are free." The Interior Ministry had no comment to The Weekly inquiries.

The environmentalists were protesting plans to finish construction of two nuclear power facilities at Khmelnytskyi and Rivne that the Ukrainian government says it needs on-line before it will deactivate the Chornobyl nuclear complex, which it has agreed to do by the year 2000.

Ukraine has been attempting to convince the EBRD to finance the completion of the two reactors, and although there had been speculation that the EBRD might make a surprise gift to Ukraine for hosting the conference, that gift was not given.

Acting President Frank explained that no decision should be expected on such a project for several months. "The bank has not made a decision because the bank has a number of concerns regarding the economic viability and the banking principles of the loan," explained Mr. Frank.

EBRD gifts to Ukraine

However, on May 11 the EBRD did hand Ukraine two grants worth $120 million for the Chornobyl Shelter Implementation Fund, for engineering, operations, monitoring and emergency system studies in preparation for the building of a new sarcophagus over the ruined fourth block of the Chornobyl nuclear facility. The money also is directed to the licensing of a shelter implementation plan, for emergency on-site work and for the procurement of equipment.

"The signing of these documents opens new financial resources for solving issues involved in the shelter facility at the Chornobyl nuclear power plant," said Minister of the Environment Yuri Kostenko after he signed the documents with EBRD Vice-President Joachim Jahne and Nur Nihmatulin, the president of Ukraine's nuclear power engineering company, Energoatom.

Mr. Kostenko said the funds will be aimed at implementation of short-term projects to stabilize the shelter facility.

So far Ukraine has gathered 387.5 million for the Shelter Implementation Fund, which was set up in November 1997 at a conference in New York. Ukraine has set a goal of $750 million as the sum needed to begin reconstruction of the crumbling sarcophagus over Chornobyl power unit No. 4 that was hastily erected in the weeks after the explosion at the unit in April 1996.

The EBRD also announced a $32 million deal to finance the establishment of an energy service company in Ukraine, owned by the government, but run by a private firm, that would work to revamp and make more efficient the distribution of energy for heating, which is still centrally controlled. Eventually the company would be privatized.

EBRD Acting President Charles Frank said the goal is to "develop heating energy efficiency." He said the company contracted to manage the program would earn its profit from the savings it developed.

In a meeting with President Leonid Kuchma the day after the conclusion of the convention, Mr. Frank also disclosed that the EBRD was examining the possibility of a $250 million credit to Ukraine to support pension reform.

On May 8, in Kyiv, the EBRD announced a second credit line in the amount of $130 million for Ukraine for the development of small-and medium-size businesses and disbursed the first tranche of $80 million, which also includes support for micro-businesses.

Changing the perception of Ukraine

Ukraine also attached much importance to the event as the watershed moment for turning around investor interest in Ukraine, which has been minimal since independence in 1991. After nearly seven years into a free market economy Ukraine has not yet reached the $2 billion mark in foreign investment.

Although the business world views Ukraine as a lucrative market with a well-educated workforce, businesses are wary of the high taxes, constantly changing banking and business regulations and the bureaucratic obstacles to running a business in Ukraine.

Ukraine finally may have made inroads into reversing the negative perceptions that have developed. As part of the business forum, the country put together an effective exhibition of Ukraine's economic and business potential. Representatives of Ukrainian businesses and regional governments developed presentations of their abilities and put them on display at booths in both the Ukrainian Home and the National Philharmonic Building across the street.

Ukraine's strategy to change its business image abroad was to give businesspeople the chance to meet face to face with their Ukrainian counterparts, and with high government officials and speak directly about Ukraine's problems and opportunities.

"I spent practically all my time with business delegations," said Vice Prime Minister for Economic Reforms Serhii Tyhypko. "Many were here for the first time and were amazed at what they saw."

However, Minister Tyhypko would not predict a swell of new investments right away. "I am not predicting that a revolution will take place overnight. We need to push ahead with reforms and this will take time," said Mr. Tyhypko.

There were some immediate results. Jan Ariens, president of a Dutch investment bank who was a business guest at the convention, said that he came to Ukraine with skepticism, but will now begin preparations for entering the Ukrainian market.

"I heard many comments, and these were my own as well, that we were pleasantly surprised by the organizational level. Our expectations were skeptical," said Mr. Ariens. "Now we are about to begin doing business in Ukraine. It was not a done deal, but the timing of the conference made it meaningful in our final decision."

Another very real image enhancer was the city itself, which had undergone extensive remodeling and sprucing-up in the weeks leading up to the arrival of the EBRD delegations and guests.

As EBRD Acting President Frank said at the closing press conference: "Kyiv can rest assured that it has gained many new admirers."

That Ukraine finally looked good to Europe was especially important to Ukrainians after Ukraine's failed attempt to host its first Miss Europe beauty pageant in September 1997. Then several contestants left the country complaining of sexual harassment and poor accommodations. The beauty pageant, broadcast live throughout Europe, was filled with technical problems and criticized for its lack of professional quality.

Mr. Taranov, however, distanced the Ukrainian government from the Miss Europe debacle at an earlier press conference during which he had said that the beauty pageant had been organized by private entities and that the government took no part in it.

President Kuchma addresses governors

The four-day EBRD conference, which took place under ideal weather conditions and just as Kyiv's famed chestnut tree-lined boulevards came into full bloom, opened on May 9, a holiday in Ukraine celebrating the Soviet Union's defeat of Nazi Germany.

Conference-goers just coming into the city that day were greeted with military fly-overs and an aerial show of old war planes during the day and a fireworks display in the evening, as well as demonstrations by veterans of World War II and die-hard Communists.

The first portion of the convention, the business forum and the exhibit of Ukrainian business potential, titled "Ukraine, a look to the 21st century," was opened by Ukraine's Prime Minister Valerii Pustovoitenko. The official opening of the meeting of the EBRD Board of Governors, the delegates who oversee the bank's work, occurred on May 11. President Kuchma officially welcomed the delegates and made his presentation to the governors before the actual work of the delegates began.

President Kuchma admitted to the governors that Ukraine could have done more in pursuing economic reforms and that mistakes have been made. "Sometimes we hear that economic reform in Ukraine comes too slow," said the president. "We are not satisfied either. But remember that Ukraine did not have any of the instruments of a free economy."

Mr. Kuchma mentioned that Chornobyl has used up Ukrainian resources equal to six times its projected budget for 1998. He also reminded the bankers that in addition to that legacy, Ukraine has had to live with a debilitated coal industry and with the problem of a quarter million repatriated Crimean Tatars and the related financial burdens.

He noted that Ukraine's economic decline in terms of GDP and financial markets has been stemmed and briefly described the new government economic plan he proposes to introduce to the Verkhovna Rada that he said would finally stimulate economic growth. He said that his new program includes a reduction of the budget deficit from 2.5 percent to 1.5 percent and a renewed attempt to have Ukraine's parliament approve a restructured tax law.

EBRD discusses how to direct aid

The board of governors, besides reviewing the current work of the EBRD, engaged in debate over how the EBRD should direct its limited resources. With many of the Central European countries in the final stage of transition to free market economies and well into the process of becoming members of the Economic Union, discussion revolved around whether to keep supporting them in their move towards accession or to redirect much of the financial aid further east to "early transition members" such as Ukraine and the countries of Central Asia, which have seen less EBRD aid.

Although some prominent bankers, among them Philippe Maystadt, the chairman of the board of governors, held out for continuing the accent on Central Europe, the consensus that seems to have emerged is that Ukraine and the east must become the new central focus of EBRD support.

Geoffrey Bentley, the head of the Australian delegation said, "However, while accession may be an important part of the integration of these countries into the international economy, it is separate from the transition process itself. Preparation by countries for EU accession should not be allowed to divert the bank from the undivided pursuit of its transition mandate."

The move to strengthen support for the early transition countries, which was not formally acted upon, was led by EBRD Acting President Frank and U.S. Undersecretary of State David Lipton, who headed the U.S. delegation.

Currently EBRD funds are divided up according to a ratio of 40 percent for advanced transition countries, 30 percent for Russian and 30 percent for early transition countries.

The EBRD disbursed $2 billion in credits in 1997, of which Ukraine qualified for $130 million.