Despite desperately needing cash inflows, Ukraine is becoming a tougher place to do business
(Kyiv Post Staff) As investment becomes scarcer during the global recession, Ukraine is among the world’s nations scrambling to appear attractive to foreign and domestic capital again.
The campaign is proving to be a hard sell. The international consensus is that Ukraine is a tough place to do business and an even tougher place lately. Investors, consequently, are turning to more business-friendly places around the globe.
Is it too late for Ukraine to lure them back?
President Victor Yushchenko doesn’t think so. “You are not wrong to invest into Ukraine,” Yushchenko told an international economic forum in Truskavets on Oct. 1. “Ukraine has inexhaustible possibilities.”
Russian Prime Minister Vladimir Putin, who effectively renationalized strategic oil and gas businesses during his nine years in power, is also trying to pose as investor friendly. “Russia’s economy is totally underinvested,” Putin said recently. “We will step up our efforts to get rid of the administrative barriers. Russia is open for foreign investment.”
For Ukraine, unfortunately, the cold hard numbers show that the investment climate is deteriorating. Ukraine dropped 10 spots, to 82nd, out of 133 countries in the World Economic Forum’s most recent Global Competitiveness Report.
The economy contracted 18 percent and net foreign direct investment plunged 66 percent (to a mere $2.7 billion) in the first half of the year.
It all adds up to a nation still in an economic tailspin and searching for a way out.
Referring to the Global Competitiveness Report, the American Chamber of Commerce in Ukraine said the downgrade is a direct result of the Ukrainian political elite failing to use the financial crisis as an opportunity to make desperately needed economic and fiscal changes.
“This recent negative news from the World Economic Forum is yet another warning signal for key decision makers representing both executive and legislative branches of Ukrainian power. The political elite has been talking about reforms for ages and the time is now to start working and implementing reforms for the benefit of Ukraine and her people,” the chamber said.
Instead, Ukraine’s leaders have done little to clean up the nation’s murky business practices as the global market gets even more competitive.
Foreign investors are not being singled out. Domestic investors face the same arcane and vague laws, unreliable courts and police, ubiquitous corruption and stiffling bureaucracy.
But the nation has made life even more difficult for foreigners recently.
Recent changes to already vague visa and work permit procedures have made it more difficult for foreigners to reside and do business in the country. Investors who manage to stay legally find themselves increasingly squeezed by state tax authorities desperate to cover a gaping budget deficit.
Those who overcome such hurdles find their interests, legal rights and property unprotected by an unruly and outright corrupt legal system, including the courts. Judges are widely considered to be unfair referees or unable to prevent speculative corporate raider attacks in which predators exploit weak legislation and loopholes to blackmail and shake down their victims.
Many see creation of an export-oriented economy as Ukraine’s salvation. But exporters continue to struggle with tax authorities to get refunds of value-added taxes, an incentive to exports, on time and in full. And pervasive corruption has infiltrated this sector as well: Many exporters claim they are promised timely value-added tax refunds only if they give bribes.
The “only way to ensure that Ukraine becomes a prosperous European country with a competitive economy is to engage in complex reforms,” the American Chamber of Commerce in Ukraine said. “The business community is constantly encouraging the political leadership to develop a comprehensive reform agenda. [Doing so] would help Ukraine to mitigate the current crisis and ensure that the country is well-positioned when global growth resumes by addressing issues that have negatively impacted the overall ratings of the country.”
“In the end these improvements will benefit the citizens of Ukraine ensuring that they live and work in a prosperous country in the heart of Europe. Everyone wins. Why not start now?” the chamber asked.
The answer is political gridlock. The iinterests of investors and citizens seem far from the minds of the nation’s politicians, as they jockey for advantage ahead of the hotly-contested Jan. 17 presidential election.
Natalia Korolevska, a lawmaker in Prime Minister Yulia Tymoshenko’s bloc, said if Ukraine’s rivaling factions learn to put partisan politics aside and unite to improve the nation’s business climate, then “even the weak ones will win.”
