Foreign investors endure harassment

When foreigners come to Ukraine to start their own small business, they often risk more than capital. They risk their health and, possibly, even their lives.

One common threat: the onetwo punch of local businessmen and officials who team up in envy against the successful foreign entrepreneur.

According to the World Bank, Ukraine ranked 145-th out of 155 countries in protection of foreign investors, despite attracting $36.5 billion in foreign investment since independence in 1991. Only Uzbekistan and some African countries ranked worse. The report concluded the situation is unlikely to change for the better in the next two years.

This could mean more bad news – and bad beatings – for investors who follow in the unfortunate footsteps of Swiss businessman Maurits Stamm.

Stamm, 28, became the first foreign investor in the picturesque village of Bahva in the Cherkasy Oblast. In December 2007, he arrived to find fallow land. The collectiveturnedprivate farms had gone bankrupt. The irrigation system had been destroyed by scrap hunters and much of the land had been taken over by local oligarchs to build their country villas.

The village residents said Stamm was a real ascetic. Until his company started bringing in a steady income, he lived in a repair shop for 18 months. A graduate of a provincial agricultural school, he invested 1.5 million euros into his Ukrainian farm. Within a year, he renovated an abandoned farm that soon became the first profitable enterprise in the area.

Stamm became a victim of his own success. The first person to show interest was Petro Yevych, then head of the KorsunShevchenkivsky district administration, and now head of the agricultural firm RosAgro.

“He came together with his broadshouldered assistants and hinted that I have to hand my business over to him, or I would be in trouble,” Stamm said. The regional police department told Korrespondent, the Russianlanguage sister publication of the Kyiv Post, that three of the visitors were members or coaches at the Cherkasy kickboxing club. Their second visit sent the foreign farmer to intensive care in Kyiv.

His misfortune is nothing unusual. Ihor Skoryk, analyst at the Center for Work with Foreign Investors, said that his organization recorded 1,500 violations of foreign investors’ property rights due to the whims of local authorities and businesses since early 2007.

Most victims speak out only after realizing that they are facing a much stronger opponent. While Stamm is facing only a former provincial government chief, wine importer Christina Xinias is fighting with a business partner in Kyiv who, she said, is backed by someone higher in the government hierarchy – the chief of the National Committee for Energy Regulation.

Zbigniew Wroblewski, a Polish ice cream maker working in the Kyiv oblast, said he is losing his battle to one of Ukraine’s largest business groups. His compatriot, Dariusz Kwiecinski, has all but lost his business as a result of a decision to fire his local top manager.

“In most cases the local raiders attack businesses outside the capital,” said Dietrich Treis, head of the Association of Foreign Investors.

Local farmers say that in Stamm’s case the attack was out of envy. His company was paying over Hr 1,000 in wages to once destitute farmers, and, in return, they leased him more land in 18 months than the former government official, Yevych, had managed to rent for many years.

Apart from physical attacks, Stamm’s farm was set on fire. The very same people who had beaten him up organized several meetings with land owners, trying to persuade them to reclaim his land ownership certificates and, therefore, the land itself. But nobody would agree to it. Korrespondent contacted RosAgro for comments, but Yevych could not be reached.

Stamm has not recovered from the assault, but has maintained his company. His case is being monitored by the Cherkasy regional governor and the Swiss Embassy.

Stamm said that, despite his extreme investment experience, he will not leave Ukraine. “My whole life is in this farm. There is no way back,” he said, adding that he is considering hiring armed personal guards.

Poles in trouble

The case of ice cream maker Wroblewski is not so straightforward. In 1997, he invested $11 million in a unique ice cream factory in the village of Kyselyovka in the Kyiv oblast. He said it had the potential to become a monopoly in the region, so the Privat business group became interested in it.

Wroblewski himself said the threat to his factory came as soon as he got Ukrainian shareholders. “When we were catastrophically short of revenue to start operating, I went to some people in a Kharkiv bank and offered them partnership for $4 million of additional investment,” he said.

KIB-Service, a Kharkiv company, and Cyprusregistered Avagno Enterprises Limited both offered him investment in exchange for a share in the statutory fund of FermaKi, the company that owned the factory.

The money never materialized, but the Ukrainian partners had received enough statutory documents to attempt a takeover. “The documents I signed effectively gave my former partners a chance to take over the factory,” said Wroblewski.

In 2006 the Supreme Court confirmed that Wroblewski owned 100 percent of his company, while the General Prosecutor’s office started criminal proceedings against KIB-Service and Avagno Enterprises Limited, accusing them of largescale fraud. But Wroblewski’s joy was premature.

On Aug. 5, he lost the case in the High Economic Court in Kyiv, and almost immediately the greater part of his joint stock company was sold.

The Polish investor said he fell victim to a takeover by Privat, a large business group led by oligarch Ihor Kolomoiskiy. Wroblewski has mentioned in many interviews to the Ukrainian press that the security company that seized his factory was connected to Biola food concern, where Kolomoiskiy is an investor.

Korrespondent contacted Biola, but their marketing department said they knew nothing of Wroblewski and had nothing to do with the takeover.

Another Polish businessman, Dariusz Kwiecinski, is facing a different set of circumstances in Bibrka, Lviv oblast. After he dismissed his local manager from Polisyntez, a foamed polyurethane maker, a part of the 5 million euro factory was burned down. His losses of 1.5 million euros and a cross left on top of the burned building were just the beginning of his troubles. The local council closed down the factory, claiming it threatened the environment, and a third of his company’s shares were quietly bought out by a third party.

“My partners and I realized that the dismissal, the fire, the local council ban and the purchase of shares were not a coincidence – they are links of the same chain,” said Kwiecinski. He stopped his investment projects and began extended court procedures. “Ukraine is a country where it’s impossible to defend your rights,” he said.

In some cases, Ukrainian business partners make it clear to the foreign investor that it makes sense for them to quit their business voluntarily to avoid hassles and expensive lawyers. The weightiest arguments for persuasion in such cases: high ranking state officials who turn out to be close relatives of the Ukrainian side.

This was the case with Christina Xinias, a Greek business lady who founded wine importer and distributor DolmartUkraine 15 years ago. She said she started another company called Sommelier in 2006 to handle some aspects of the business, and appointed former commercial director of Dolmart, Anna Kalchenko, to run it.

Dolmart invested Hr 4 million into Sommelier, which later tried to take over the whole business, according to Xinias.

“I have two letters that Sommelier sent to our suppliers saying that Dolmart went bankrupt, and their products will be imported to Ukraine by Sommelier,” said Xinias, who later sued Sommelier.

On the eve of court hearings, strange things started happening at Dolmart. “Information started disappearing, then computers,” said Xinias.

Finally, she was paid a visit from an powerful guest, about whom she had heard many times before. It was Valery Kalchenko, the father of Anna Kalchenko and head of Ukraine’s energy regulating body. Xinias said he threatened “special interference” if Dolmart failed to withdraw its lawsuit. Korrespondent could not reach Anna or Valery Kalchenko for a response to the accusations.

According to the State Statistics Committee, in the first half of 2008 alone, foreign investors withdrew $500 million from Ukraine, and twice that in 2007. It was partly due to the stock exchange crash, but partly because of the problems facing foreign investors. The country's president has only just noticed the trend, saying at a recent press conference that he was “concerned” by the scandals.

In the meantime, none of the cases are likely to be resolved soon.

Investigation into Stamm’s case has been dragging for months, and no court hearings have been appointed. The ice cream maker Wroblewski describes his relations with Ukraine as “cold war.” He and his embassy are desperately bombarding government organs with petitions, but getting nowhere. “Everything is within the frame of Ukrainian law,” Wroblewski quotes the most popular response.

The cold shower of local realities has forced those investors who persist in staying in Ukraine to think about selfdefense. The Polish entrepreneurs united into the Association of Polish Businessmen, which grew to include representatives of other nationalities. It was transformed into the Association of Foreign Investors, now headed by Treis, who also heads the Kyiv bureau of O.L.T. Ñonsult GMBH, a consultancy for foreign investors in Ukraine.

“After the cases of Stamm, Wroblewski and Kwiecinski, and a number of other outrageous reprisals, it is obvious that an organization is needed to defend the rights of foreign investors,” said Treis. He said a further increase in the number of disgruntled investors can lead to a chain reaction when other investment projects start closing down.

In the meantime, business investors are adapting to local economics, preferring to negotiate rather than fight. “You need to solve problems not with the police, but by negotiating with local authorities,” said the limping Stamm.