You're reading: After closing doors, Ukraine opens window to investors

Editor’s Note: This feature by the Kyiv Post explores the investment climate in Ukraine as well as investment opportunities. Please email story ideas to [email protected].A jungle of red tape and byzantine bureaucracy in the best of times, Ukraine is no easy destination for investors.

Yet an ambitious new government program, the “One-Stop Shop,” has the potential to become a glimmer of light in the darkness.

The “One-Stop Shop” is part of the Invest Ukraine investment promotion unit at the State Agency for Investment and National Projects. Launched weeks ago and operating out of a Kyiv-based office, it provides free services for large investors, guiding them through the complex process of investing in Ukraine.

The principle and aims of this project are, according to experts, a move in the right direction. Speeding up investment procedures should help attract capital, jobs, and know-how.

But to become a game-changer for Ukraine, notorious for its horrible investment climate and low influx of foreign direct investment, numerous wrinkles have to be ironed out.

The government has yet to address the most fundamental problem plaguing the business community – the lack of a legal, administrative and fiscal environment that would give companies the freedom to thrive.

Plans for the program are impressive. In addition to becoming one of the first sources for clear and structured information in English about doing business in Ukraine, the “One-Stop Shop” is supposed to provide, among other services, market research, feasibility studies, site development support and assist in making contacts with regional government administrations.

Officials at the state agency said the services will be free. However, in an interview this autumn, a senior official from the agency said that big and small investors involved in complicated projects requiring special attention will pay a fee.

The main idea is to speed up and simplify bureaucratic procedures that far too often bog down investors.

“Investing in Ukraine is too confusing. Investors spend too much time getting basic information,” Serhiy Yevtushenko, Invest Ukraine’s head, said during the formal launching of the “One-Stop Shop” office.

Currently, Yevtushenko noted, two years can pass between a company’s decision to invest in Ukraine and the launching of operations on the ground. The aim is to reduce this to 6-9 months, he added.

The agency claims to have set itself clear criteria by which to judge its success. “We aim to be measurable and predictable,” Yevtushenko said.

The list includes a first response within 24 hours or a query, a primary study within a week, an in-depth analysis and market research in a month, as well as an investment proposal in a total of six weeks.

Yevtushenko hopes that such diligence will allow the agency to bring in 10 major investors in 2012 that will pump an additional $2 billion into the local economy, creating more than 3,000 jobs.

This will be challenging, considering that Ukraine has since independence attracted less than one fourth of the $200 billion in foreign direct investment that has poured into neighboring Poland.

Even at Invest Ukraine’s “One-Stop Shop” project itself, work remains to be done. At present, contact information on the agency’s www.ukrproject.gov.ua and www.investukraine.com websites remain sketchy. Sections take ages to load only to turn up empty, and there is a lack of specifics.

To top this off, the facts and figures are, according to some accounts, misleading. Gross domestic product per capita in 2010, for instance, is set at $6,700, way above the International Monetary Fund’s estimate of $3,013. That is because the former is adjusted to the cost of living – an acceptable solution, but one that must be clearly marked.

The presentation materials are also inaccurate. The average monthly wage in Ukraine, for example, was set at Hr 2,240, considerably below the October level of Hr 2,729, according to the government statistical office Ukrstat. Then this was converted into dollars using an exchange rate of 9.33 rather than 8. The two moves effectively turned an average wage of $340 into $240.

Yet even if one assumes these “bugs” will be resolved and the agency will be free to pursue its program unfettered, it remains unclear how more systemic challenges will be addressed.

For one thing, the program focuses solely on big companies, ignoring the small and medium enterprises that form the basis of modern economies.

This point was driven home by the Estonian Economy Minister Juhan Parts, who highlighted that there are close to 300 Estonian companies operating in Ukraine, but that they are easily overlooked due to a preoccupation with big investors.

Yet smaller businesses, usually operating in high-tech and high value-added industries, boost a country’s competitiveness and wage growth. “Don’t forget about small investors,” he emphasized.

The Estonian minister is well-placed to dispense such advice. After suffering from a 15 percent gross domestic product decline at the height of the 2009 global economic crisis, Estonia immediately got back on the horse and is projecting 6.5 percent growth in 2011.

The foundation of this recovery, he explained, were smaller enterprises, flexible and versatile enough to adapt to the new realities. “Open up your economy, adapt, and move up in the value-added ladder,” Parts concluded.

Yet small companies are not the only ones struggling, and experts are united in their appeal that Ukraine’s authorities first take care of current investors rather than chase new ones.

Bohdan Yarmolenko, partner at the auditing company Ernst & Young, highlighted the difficulties most troubling international investors: a lack of transparency, a tough legal environment, language barriers, and financial manipulation, notably in connection to the tax regime.

This has indeed become a major problem of late. At the end of October, the tax office flaunted Ukrainian law and international practice by instructing collectors to disregard carrying forward losses from 2010 and before.

The move prevents companies from taking losses incurred in previous years into account when paying taxes. Experts say this could have a crippling effect on businesses, costing them billions of dollars in losses.

Tomas Fiala, president of the Kyiv-based European Business Association and CEO of local investment bank Dragon Capital, pointed to another problem area: privatization of prized state assets.

All too often it is with tenders that limit outside bidding and skew chances in favor of domestic oligarchs. “The ongoing privatization of electricity companies is not the best example,” he said.

According to Fiala, the current initiative to sanction the sale of agriculture land is also troubling.”The draft law on land privatization would be a big step back,” he explained, emphasizing that it would be “very detrimental to the development of agriculture.”

Time will tell whether or not the “One-Stop Shop” will overcome these problems as well as a deteriorating global economic environment.

“The reaction of the investors will be the best assessment of the project,” Yarmolenko of Ernst & Young said.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].