Prime Minister Anatoly Kinakh began a recent conference on foreign direct investment in Ukraine by pointing out that Ukraine had received less foreign investment per capita than other country in the Commonwealth of Independent States besides Belarus. On paper, it shouldn't be that way. Ukraine has a large and well-educated population, an aging but serviceable industrial infrastructure and some of the world's best soil, just to name a few advantages.
There's only one problem: Ukraine disdains investors. As if the FDI figures alone don't prove that, the eruption of another high-profile foreign investment dispute certainly does. The case involves troubled Korean conglomerate Daewoo and its local partners in Ukrainian Radio Systems (URS), which operates the Wellcom cellular phone service. On July 19, the local partners forcibly removed the firm's Korean directors from URS' central office in Kyiv and installed their own team. The Koreans say that the takeover was illegal. The local partners say simply that a change in management will do the company good. The local partners have since offered to buy Daewoo's 49 percent stake for $120 million.
One can hardly dispute the local partners' claim that Daewoo has mismanaged URS. And as with any management dispute, it would be a mistake to go out and immediately assume the Ukrainians are wrong and the foreigners are right. But at the same time, there are troubling details of the current case that echo earlier investment disputes and seem to exemplify why foreign companies are so wary of doing business in Ukraine.
The first detail is the complete lack of transparency within the ranks of the local partners. Daewoo's original partners in URS, Ukrfondinvest and Interinvest, are mysteriously being represented by Optima, a well-connected telecoms group based in Dnipropetrovsk. Daewoo alleges that Optima has bought out both Ukrfondinvest and Interinvest. Daewoo has also mentioned two other companies - Biznesinvest and SOLM - as possible partners with Optima. Daewoo alleges that all three of those companies are linked closely with Dnipropetrovsk's most powerful bank, Pryvatbank.
Again, it would be a mistake to take Daewoo's claims at face value. But the unwillingness of the local partners to come clear on their ownership structure and to better explain Optima's role in the deal does little to deflect suspicion that Daewoo is correct. Unless the local partners come clean on the details of URS' corporate governance structure, it will continue to look like Daewoo got a raw deal.
The other alarming aspect of this case is the clear involvement of the government on behalf of the local partners. Before the takeover the state had refused to extend the Korean managers' work permits, thus providing the invading local managers with a modicum of legal justification for their actions. In any civilized country in the world, the government would have stayed out of the dispute and let the courts handle it. In Ukraine, they actually assist in bringing down the foreigner. Chalk up one more black mark for the country's reputation among foreign investors.
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