IKEA, HP and Cargill announce cuts to planned investments amid tough business climate
President Viktor Yanukovych has pledged to improve Ukraine’s business climate from its lamentable 142nd place out of 183 countries in the World Bank’s Doing Business 2010 report. But with three foreign companies recently announcing cuts to plans for investment in the country, he’ll have his work cut out to convince foreign investors that Ukraine is worth the risk.
The troubles of home furnishing retailer IKEA provide an insight into the impenetrability of Ukraine’s market. For more than a decade, the international big-box, flat-pack furniture giant has been struggling to roll out its solution for middle-class households. But with the sale of its three processing plants in western Ukraine earlier this year and the shelving of plans to open a store in Odesa in 2011, it may be another decade before cheap and chic beds and tables will appear on the local market.
IKEA is not the only big international firm pushing the retreat button. Cargill, the agriculture giant, and Hewlett Packard, the information technology company, have curtailed their plans for Ukraine since the start of 2010.
The multinationals are scaling back for economic and political reasons, said Volodymyr Klimenko, a member of the management board at Sokrat Investment Group. “Big companies like growing trade markets and predictable rules of work.”
Predictability, however, is in permanent deficit in Ukraine.
IKEA has been here long enough to be no stranger to the unpredictable environment. Having opened an office in 2005, the retailer obtained a land plot in Kyiv and another one on the Black Sea coast in Odesa. With the potential for some 25 outlets across the country, the company planned to debut in 2011. But not anymore, said Ukraine’s country manager Frida Malmquist.
“IKEA has decided to postpone its plans for establishing shopping centers in Ukraine. IKEA will follow the development in the country, and at some point re-evaluate its decision,” she said.
Leaving the Odesa plot empty for now, IKEA Group also sold three plants in western Ukraine at the end of April. They used to manufacture IKEA’s famous furniture for Russian markets. Danish lumber company DDS bought wood-processing firm Sten in Ivano-Frankivsk region. Romania’s Plimat took over Proza furniture factory and Karpaty wood-processing plant from Swedwood, IKEA’s daughter company.
“Ukraine has suffered more than any other western and eastern European countries in terms of main economic indicators,” said Klimenko. “It means that Ukrainian incomes tumbled further than others, so IKEA’s target group has diminished significantly. Klimenko predicted, however, that IKEA would return in the next three or four years.
A similar tide swept away Hewlett Packard’s expansion ideas in Ukraine. The company was gearing up to open HP Global e-Business Center in 2010, which would have serviced HP workers around the world. The information technology giant planned to hire 300 local people at the start of the project, eventually expanding it to a 1,000-staff office. Lviv authorities expected HP to invest $3 million to launch the project. But the plans have been halted “for a variety of reasons,” said Iryna Sokolovska, the company’s marketing manager.
Oleh Berezyuk from the Lviv mayor’s office blamed Hewlett Packard’s exit on the tax authorities. “We had to change one aspect of taxation, of absolutely no great importance,” said Berezyuk on April 27. “[But] they did not do this, and HP went to Egypt …. These were things that did not affect the amount of taxes, but impacted the term for paying taxes. Small items, which did not require changes of the budget code and tax law,” he said.
Sokolovska denied that Hewlett Packard chose Egypt over Ukraine. “Over the last couple of years, Ukraine’s government significantly improved its investment climate. But because a different team came to power now, we hope that they will not only support this strategy but work at improving conditions for foreign investors.”
One company that has had a hard time with tax issues is food and agricultural giant Cargill. The multinational has threatened to pull back from the grain market because of the state’s failure to refund value added tax payments.
In comments to Delo business daily on March 19, Vadym Miroshnichenko, head of Cargill’s commercial department, said that in 2010, the company “will export only 300,000 tons of grain,” which is four times less than in 2009.
The firm is not disclosing the amount the state owes Cargill. But officials working for the Donetsk mayor said, after a meeting with Cargill’s management in January, that the figure might be up to $100 million.
Anastasia Dudley, a spokesperson for Cargill, said that VAT issues are not unique to their company only. “For an investor like Cargill, VAT refunds are a routine part of day-to-day business. The lack of timely refunds reduces the attractiveness of Ukraine for foreign investments and limits the competitiveness of Ukrainian agriculture in world markets,” she said.
Sokrat’s Klimenko said that declarations to pull out are a method of pressure on government rather than a real intention. “Cargill may temporarily reduce volumes of operation but most likely will not do it because it will result in a smaller market share, and it’s not profitable for such a strong player,” Klimenko said.
Despite visible frustration with Ukraine’s economy, none of the three companies has slammed the door shut on the country yet. Representatives from all three said they are committed to working in Ukraine to find a workable solution.
Their complaints leave a bitter taste, however. “When respected firms depart or reduce business operations, it decreases the already small appetite of multinationals for Ukraine,” concluded Klimenko.
Kyiv Post staff writer Yuliya Popova can be reached at [email protected]
