Financial Markets Conference in Boston is bullish on Ukraine (05/14/06)

Financial Markets Conference in Boston is bullish on Ukraine

by Peter T. Woloschuk
Special to The Ukrainian Weekly

BOSTON - "The investment environment in Ukraine is still not straightforward," said Roger Zulliger co-founder and CEO of the Zurich-based financial Group Accuro and major investor of institutional monies in Ukraine since 1996. "It is more like a winding country road with many twists, turns and surprises. However, it gets better as it goes, and it is leading to higher levels."

Mr. Zulliger's remarks came as part of a seminar titled "Investing in Ukraine: Private Equity, IPOs, Public Equity" that drew more than 70 representatives of New England's leading brokerage houses, international law offices and investment firms, including Boston-based Fidelity Investments, the nation's largest portfolio management company.

The session was part of the fourth annual Financial Markets Conference, which was co-sponsored by the U.S.-Russia Chamber of Commerce of New England and the Ukrainian New England Chamber of Commerce, and held in the Wyndham Hotel in the heart of Boston's financial district on Thursday, May 4.

The Ukrainian session was preceded by a similar session dealing with markets in Russia and marked the first time in the city that the financial climates in both countries were treated to equal evaluations. It was notable that more favorable treatment was afforded opportunities that currently exist in Ukraine.

The session lasted almost two hours and was moderated by Lyubov Rudyuk, a senior manager with Ernst and Young in Boston and founder and president of the Ukrainian New England Chamber of Commerce. As a member of Ernst and Young's banking and asset management group, she manages multiple audit projects of private equity and venture capital funds in New England.

Before coming to the Boston office, Ms. Rudyuk spent six years at the Kyiv office, conducting due diligence on projects in the natural resources, chemical, and manufacturing industries. She also was a manager of Momentum Enterprises, which invested in oil and gas developments in Ukraine. A graduate of the Kyiv State Economics University, Ms. Rudyuk is a member of the Women's Association of Venture and Equity, a committee member of the Springboard Enterprises Venture Forum, and Ernst and Young's Capital Advisory Group.

Speaking at the session were Alex Schay, partner of Frishberg and Partners commercial law firm of Kyiv, Dmytro Tarabakin, director and head of sales and trading at Dragon Capital of Kyiv; and Roger Zulliger of the Accuro Group of Zurich, Switzerland. After the three men made their presentations, they opened up the session to a fairly extensive question and answer period.

Mr. Schay began the formal presentation by saying that he had been in Kyiv since 1993 and has actively assisted numerous Western investors with their projects in Ukraine. As a non-lawyer he has concentrated on firm management, public relations and new client development, and, in this context, has been involved in every direct foreign investment matter handled by his firm in the past five years. Because of this he is regarded by many as an accurate barometer of foreign investment in Ukraine.

Looking at current problems and potential, Mr. Schay said: "The post-Orange Revolution honeymoon is over and there is a slowdown in the economy and the growth of the GNP. This has been caused by political concerns and the realization that the same group of thieves is still in power; by the introduction of a number of reforms without any advance warning or preparation, by the removal of the ability to make tax-free, in-kind investments, and by the 'white noise' surrounding various governmental re-privatization efforts."

"Although the United States is currently listed as Ukraine's chief trading partner, and Russia has been relegated to fifth place, the reality is somewhat different," Mr. Schay indicated. "Cyprus is currently listed as Ukraine's second trading partner and the British Virgin Islands as fourth. This is patently absurd. It is clear that these figures reflect off-shore Russian interests and, when taken together, it is also clear that Russia still accounts for a lion's share of Ukraine's foreign trade."

"Adding to these concerns," Mr. Schay continued, "is the fact that Ukraine is dependent on Russia for oil and it is clear that, after doubling prices a short time ago, Russia is intent on raising them again and may even force Ukraine to pay world market prices by the end of this summer. At the same time the hugely inefficient Ukrainian steel industry, which consumes vast quantities of energy and accounts for a quarter of the country's GNP, is faced with falling world prices and a lessening of demand and, as a result, may face some hard times in the near future."

"In spite of this there has been a change in attitude toward Ukraine in the international investing community, and this bodes well for Ukraine," Mr. Schay said. "A good indicator of this is the fact that most international investment companies are dealing with three to four new clients per week. Real estate prices continue to rise dramatically - and not only in Kyiv - and the country's security market nearly doubled in 2005. Finally, costs are low in Ukraine and many companies are moving their manufacturing operations into Ukraine because they are much lower than those almost anywhere else on the continent, including Poland and the Czech Republic."

"There are still risks," Mr. Schay concluded, "but the early bird gets the cheapest worm."

The second presenter, Mr. Tarabakin, also expressed optimism. He holds an economics degree from the National University of Kyiv Mohyla Academy, and he completed a special program in economics and finance at Chicago's Roosevelt University. After graduation he joined a team of professionals who set up the PFTS (First Securities Trading System, or Persha Fondova Tophovelna Systema) stock trading system that has become Ukraine's primary securities exchange.

He then served as a senior stock trader in Kyiv and Warsaw with Wood and Co., the region's leading brokerage firm, and then in 2000, working with Ukrainian and Czech colleagues, set up Dragon Capital, which has become the country's leader by trading volume on the Ukrainian stock market. In 2004 he received Biznes' annual "Personality of the Ukrainian Stock Market" award.

"The Orange Revolution was a catalyst that began to change the stereotypic perceptions of Ukraine that were held both by foreign investors and foreign journalists. It also caused some political changes but, most importantly, it changed the attitudes and expectations of the people themselves." Mr. Tarabakin said. "During the recent elections for the Verkhovna Rada it became apparent for all that the country had a truly free press for the first time."

"The Orange Revolution was also a stimulus for a number of processes that were already under way. The diminution of off-shore business is one of the most dramatic of these changes," Mr. Tarabakin explained. "Although some of the impetus came from a desire to legalize what had been obtained illegally, little by little, the off-shore way of doing business is slowly fading away."

"The pipe industry, which is one of the largest in the country, is a good example of this," he continued. "As recently as two years ago more than 80 percent of transactions were conducted off-shore. In the past year this changed and the industry registered a 175 percent growth in sales, which benefits both the country and the economy."

"At the same time many businessmen have begun to do business normally, and this is most clearly seen in their spreadsheets and balance sheets," Mr. Tarabakin said. "People are afraid of making illegal money, and they have begun to pay real taxes on their profits."

"One of the most significant changes was actually unintentionally caused by President [Leonid] Kuchma when he allowed Ukrainian banks to be bought by outside institutions," he pointed out. "Although the legislation was intended to help Russian banks and investors, few took advantage of the opportunity while Austrian, Polish, German and Scandinavian banks invested heavily. As a result, the Ukrainian banking system is evolving along the lines of the Central and Western European system and is becoming more distinct and distant from the Russian system every day."

"From an investment standpoint, Ukraine is a very exciting place to be today," Mr. Tarabakin concluded. "It is at the beginning of a cycle of bull markets. Almost all of the indicators are positive, and the Ukrainian stock market, though still small, has more than doubled its volume in just the last year."

Mr. Zulliger, the final speaker, also gave a positive summary of current conditions in the country. "Corruption and bribery still exist, but they are beginning to play less and less of a major role in doing business. As laws are passed and the process become clearer, it is possible to do business without resorting to bribery, even if it goes slowly. Ukrainian companies are learning to become much more energy-efficient; exports are diversified with one-third going to Europe, one-third going to the CIS, and one-third going to the rest of the world; wages are still very low and thus are providing an attractive climate for many international companies; the country is becoming democratic; it is becoming a free market; it will join the World Trade organization; it is getting closer to the European Union; and it is maintaining relatively close and relatively good relations with Russia."

"Among the problems that still have to be dealt with," Mr. Zulliger continued, "are liquidity, transparency in corporate governance, minority shareholder rights, sector diversification and settlement procedures for local shareholders."

"However, on the whole Ukraine offers good opportunities for investors, particularly for private equity," he concluded. "My company has been active in Ukraine for the past 10 years, and the economic climate has never been better."

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