Despite Ukraine being endowed with rich resources and strong business potential, the toxic mix of weak rule of law and pervasive corruption creates an unhealthy business climate.
According to the European Business Association, the Ukrainian economy has always been attractive to foreign companies and investors. But it’s a high-risk, high-return venture. They’re aware that Ukraine’s consumer market of 45 million people offers the chance for double-digit profit margins where competition is still relatively low and niche markets vacant, but also imposes certain risks with the majority of them related to corruption.
“For now there are no legal problems with launching a business,” said Sergiy Boyarchukov,
a managing partner at Alekseev, Boyarchukov and Partners law firm. “But it would be a victory for business if people in Ukraine followed at least the existing law. Ukraine definitely lacks a legal culture.”
There is the concept of “certainty of punishment,” explained Boyarchukov, which ensures that a person who has violated the law would bear responsibility for it. “Obviously this law has not come into force yet.”
However, red tape layered with pay-to-play schemes (bribery) on the part of public officials make it difficult to get a business off the ground.
Illuminating this is a list that the Federation of Employers of Ukraine recently published enumerating the toll that corruption took on businesses during the rule of former president Viktor Yanukovych. For instance, value added tax-repayment schemes generated $15-$20 billion in corrupt revenue.
Only 50 percent of customs clearance fees made their way to state coffers, while the rest ended up in the pockets of customs officials. In 2013, corruption in this field yielded $40 billion, according to FEU.
“The economic growth depends directly on the ability of the new government and all branches of power to develop and implement an effective “shock therapy” and to reset the functioning of all public bodies,” said Oleksiy Khomyakov, legal expert for Asters law firm.
“After the social and political events of November 2013-February 2014 in Ukraine, during the increasing foreign aggression on the Ukrainian state, the ‘new’ government failed at least to try to make a difference in the fight against corruption and implementation of new rules. On the one hand, there is much talk about the difficult working conditions of the new government, but it looks strange that they have not registered a single anti-corruption bill yet,” Khomyakov pointed out.
One of the ways to reduce corruption within the government bodies is to increase the salaries of public servants and in this way eliminate the commercial logic behind the corruption, Khomyakov said. However, a state employee must understand that in case of violation of anti-corruption legislation, he will carry tough responsibility in form of major economic sanctions,” he said.
“Thus, the income of state employees and their family members should be attentively scrutinized… Without implementation of strict rules for public servants and public companies it is impossible to improve the business climate in Ukraine at all,” he added.
Anders Aslund of the Washington, D.C.-based Peterson Institute for International Economics said the main reason for the escape of foreign businesses from Ukraine is the terrible environment for entrepreneurship and corporate governance, deliberately spoiled by deposed Ukrainian President Viktor Yanukovych’s inner circle in order to get control over certain entities.
“This trend is particularly noticeable in the banking sector, where half of the Western financial institutions have been sold to the ‘family’ (Yanukovych’s inner circle) and the other half was put up for sale,” Aslund told Ukrainskiy Tyzhden magazine.
Building closer ties with the European Union may improve Ukraine’s business climate substantially, the Swedish economist foresees. “It would become an introduction of the rule of law and protection of property rights in Ukraine as well as would have a positive impact on the Ukrainian economy,” Aslund said.
