European Business Association reports on Ukraine's business climate (05/02/04)

European Business Association reports on Ukraine's business climate

by Roman Woronowycz
Kyiv Press Bureau

KYIV - While there are still some problems with murky and contradictory legislation, as well as a need for more land ownership rights the country's business climate in Ukraine has improved markedly in the last two years, reported a representative of the European Business Association on April 27.

The remarks came as the EBA released its second investment report on Ukraine, titled "Barriers to Investment in Ukraine." The report analyzes the current investment climate in Ukraine, with an accent on weaknesses in Ukrainian legislation. It includes chapters on the general problems facing investors and specific problems within certain industries.

The report and its recommendations come at a critical time for Ukraine, inasmuch as 10 new countries were to enter the European Union on May 1 - most of them trading partners of Ukraine and several of them located along its western borders. Kyiv is concerned that EU membership will destroy the extensive trade relations it has with those countries.

Jorge Intriago, vice-president of the EBA, said he views matters more optimistically. He explained that, indeed, European standards and quotas could adversely affect relations in certain economic sectors between Ukraine and trading partners such as Poland, Hungary, the Czech Republic, Lithuania and Estonia. However, as he asserted, many other investors would be ready to sink their money into Ukraine to forego the problems associated with doing business in the highly regulated and labor-expensive European Union market.

"This is a very crucial moment for Ukraine. This is opportunity," explained Mr. Intriago. "This is the time that things could start happening."

Ukraine has managed to attract a paltry $6.6 billion in foreign investment since 1992 - a dismal figure that barely approaches the numbers claimed by Ukraine's western neighbor, Poland, which has taken in more than $60 million in the same period. Foreign businesses may finally have begun to understand where Ukraine lies on the investment map, however. Last year the rate of annual capital investment increased by 1.3 times to nearly $1.2 billion.

Ukraine's economy has grown dramatically in the last five years, including 9.4 percent growth in 2003, lifting the country from the economic morass of the 1990s. However, it is only within the last two years that strategic changes have taken place that should make the country alluring to individual and corporate investors from abroad.

Mr. Intriago, who is associated with PriceWaterhouseCoopers in Ukraine, said that tax reform, anti-trust reform and new civil and commercial codes had greatly improved the stability, predictability and transparency of the Ukrainian market. He explained that he considers these three elements essential for a healthy business environment.

Mr. Intriago added, however, that more needs to be done. First, Ukrainian lawmakers must be more careful in how they develop legislation. The investment expert noted that too often new laws had to be amended immediately after their passage because of legal inadequacies that should have been identified during the law-making process. "You can't make laws and then immediately change them. It is better not to have passed the law in the first place," explained Mr. Intriago.

He said that the business community needs to see more predictability as well. Businesses need to understand in advance what plans the executive and the legislative branches of the government have in store for the business sector and the economy in the form of new laws, regulations or intrusions into the financial and banking sectors.

Finally, he noted the importance of transparency, a way to ensure that laws and policies that had been agreed upon were implemented and that the courts upheld them.

Assistant Minister of the Economy Serhii Romaniuk underscored another deficiency: the need for additional corporate governance laws. He noted, however, that it was in the area of property rights that extensive legislative and policy problems remain.

"We understand that businesses want to own their property," explained Mr. Romaniuk. "We need to develop better property rights. We need to resolve questions on the privatization of land and the privatization of government property."

Mr. Intriago said that, nonetheless, he was pleased with how much the business environment had improved. He said he was also impressed by the fact that foreign capital investment in goods and services had gone beyond the textile and light industry sectors. He noted that the Zakarpattia and Lviv oblasts had seen a considerable increase in investments in the manufacture of automobile parts, particularly of wire harnesses for Europe. He said agriculture is another area of the Ukrainian economy that could soon see a considerable infusion of foreign investment.

The investment report issued by the EBA addresses a whole array of inadequacies and contradictions in Ukrainian business investment policy that create obstacles for foreign investment in Ukraine. In addition to property rights, it analyzes weaknesses in taxation, competition and labor law, and the certification process of manufactured goods.

It also looks at problems in specific Ukrainian industries, including the pharmaceutical, energy, transportation, and tobacco and alcohol sectors.

Mr. Intriago emphasized that the report was structured not as a critique but as a series of recommendations. Therefore, after each problem was identified and analyzed, the EBA came up with proposed measures to overcome the problem, which are presented at the end of the each section of the report.

While optimistic about Ukraine's economic future, Mr. Intriago said that a critical problem remains unaddressed. He noted that, even if the remaining problems are resolved, Ukraine still has to overcome a serious public relations obstacle because foreign businesses would continue to consider Ukraine non-user friendly.

"Today your economy looks very stable. It looks very attractive with double-digit growth, but who knows about that?" explained Mr. Intriago. "There is now rule of law and new commercial and tax codes, but who knows about that? They only know what happened in the past."

He explained that most private and corporate investors only remember the horror stories of the 1990s, when Ukrainian partners in joint ventures with naive and unsuspecting foreign investors would bribe courts to legalize improper transfers of business assets or stock holdings; when domestic business competitors would get court rulings against foreign firms to stifle competition; and when the tax police were used to intimidate foreign business people and even to get them out of the Ukrainian market.

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