Why should I invest in Ukraine?

The biggest reason is that Ukraine presents investors with a lot of growth potential. In a number of countries, growth has stagnated, competition is up and margins are low. But things are different in Ukraine. Wages are increasing which means more buying power and, even though new and diverse products have just begun to appear in the market, competition is low in many sectors. This means maximal gains with minimal relative investment and makes all industries in Ukraine growth industries.

Ukraine is a country of 48 million, on a par with France, and the largest country of any in Europe (excepting Russia.) The people are highly educated and work long hours and extended days-- sometimes six days per week. Though growth has slowed this year from a high of about 13% (the highest of any country) to levels of around 8% (which many see as sustainable long-term,) this is still much higher than many other countries. And last years high rate shows at what level the economy can perform, given the right kind of incentives.

But what about the re-privatization the Prime Minster and other members of the Cabinet keep talking about? Doesn't that mean that any investment in any business in Ukraine might be re-privatized by the government? Why would anyone invest under those circumstances?

It is true that the government has been a bit schizophrenic in the signals it has sent out about what will be re-privatized and what won't be. Originally there was talk of close to 3000 businesses that would be investigated for potential re-privatization. That was the figure floated by the Prime Minister. But Yuschenko, the president, who has the authority right now, says that it would not be more than 29. Other reports suggest that 40 are being investigated at this point. To be perfectly honest, this back and forth by the government has made investors nervous. And rightly so. To invest in a business just to have it taken out from under you in a government bid to get a fair market value is not going to breed confidence. And, in what is the bigger problem, it undermines confidence that the government will ever really respect private property rights. Will title ever be good in a country that can re-privatize when it feels it should and feels it can?

We have been monitoring what has been going on and understand the feeling but we think this is a short-term problem only. The government has been plagued by a seeming lack of direction but is now more focused on the issues that affect the standing of Ukraine in the world community and economy. The government right now is taking WTO entry seriously, which has led it to begin to come to grips with the systemic and legal problems that stand in the way of that entry. This is good evidence that the government is serious about these kinds of issues.

Secondly, the government came to power promising a European lifestyle to Ukrainians. Though freedom from corruption was the trigger point of the Orange Revolution, Yuschenko linked that freedom to reform and movement toward the West, most specifically toward Europe.

There was some concern initially that Yuschenko might have so inflated people's expectations on this point that they would be impatient with anything less than an immediate improvement in their standard of living. And there was evidence that this was in fact the expectation. That the government was keen on meeting this expectation is born out by the increase in pensions and the wages of public workers undertaken right after the election. That it was inflationary is clear. But it was a bid to take some of the pressure off the government while it worked out the problems.

To not bring about a more European standard of living or to not be able to show the people that their standard of living will increase will impeach this government in the eyes of the people who took to Independence Square. The disappointment this would create would be broad and deep. This would all be in the context of a people who have taken to the streets once. They can do it again just as easily.

Yuschenko knows this and knows that he needs foreign investors to meet the expectations of the people long-term. For this reason, we expect that the tennis match between government ministers will settle down on the re-privatization issue soon. There will be a few companies that will be re-privatized. These will be the largest of the potential group. But the rest will be left alone.

The re-privatization issue, however, only affects those who are looking to invest in a company here in Ukraine. It does not affect those who are looking to establish a company presence and to market their products in Ukraine and the surrounding region. All of these efforts are far removed from the re-privatization issue. They will not be affected by them at all.

What about corruption? Isn't Ukraine considered one of the most corrupt countries on the Transparency International's Corruption Perception Index, higher even than Russia and some of the countries of Africa? If it is that corrupt, how then can we possibly do business in Ukraine?

It is true that Ukraine has been marred by corruption both in the government and in business. As a matter of fact, there has been little distinction between government and business in Ukraine in the past. Many who have been involved in business have sought the patronage of someone powerful enough to ease their way on the one hand or who allowed them to buy up government assets at "fire sale" prices on the other. A lot of wealth in Ukraine has been acquired in these ways.

Corruption was the major reason for the Orange Revolution. Though a lot of people have been involved with it, they have become tired of it. And Yuschenko has made it a high priority with his new government. He has instituted some important reforms in this area and is working on others. A lot more needs to be done to deal with it but the important point is that something is being done about it for the first time ever.

But saying that corruption is a problem in Ukraine is really a bit misleading. The corruption has to be put in context to understand just what the problem is and what a company might face when it deals in Ukraine. The fact is that corruption is a problem in many of the countries of the world. And it is in many of these countries that investors routinely invest and companies routinely set up to do business. Investors and companies find out that in doing business in other areas of the world, areas such as Latin America, the Middle East, Asia and Africa, and in specific countries like Mexico, India and China, for starters, corruption is an issue. The fact that corruption is an issue in these countries and areas means that it must be planned for by company management and dealt with when it comes up for a company to be able to succeed. And, by and large, companies and investors do this in these countries and regions.

Ukraine is not any different. Corruption is an issue and must be planned for and dealt with when it comes up for a company to be able to succeed. That it might be more or less than one country or another will not affect that planning or the company approach.

Ukraine is ranked pretty high on the Corruption Perceptions Index of Transparency International. This is true. And a lot is made of the fact that, of 146 countries rated by Transparency International in its Corruption Perceptions Index of 2004, Ukraine comes is ranked number 128. (Mexico, on the other hand, comes in at number 67, China at 71, and India at 91.) Some find it significant that this is near the likes of Zimbabwe, Sudan and Bolivia.

And this Corruption Perceptions Index is taken seriously by any number of institutions and people. This is also true. The problem with it, though, is in taking it too seriously, that is, taking it as anything more than an attempt at a ballpark determination about countries and corruption. In the first place, it must be understood that though there is every attempt in the world to base these rankings on objective criteria, they are not. It is not called the Corruption Perception Index for nothing. It is on the perceptions of those who do business or deal in a given country or countries that these rankings are based. And these are not the same people doing business in each country, something that would give at least a kind of benchmark to that subjectivity if it were the case. They are different people with different perceptions about things. So there is a problem with taking this as a real accurate assessment of corruption in the Ukraine for this reason alone.

As the report itself says

Why is the CPI based only on perceptions?

It is difficult to base comparative statements on the levels of corruption in different countries on hard empirical data, e.g. by comparing the number of prosecutions or court cases. Such cross-country data does not reflect actual levels of corruption; rather it highlights the quality of prosecutors, courts and/or the media in exposing corruption. The only method of compiling comparative data is therefore to build on the experience and perceptions of those who are most directly confronted with the realities of corruption. (Transparency International Corruption Perception Index 2004, p. 6.)

In other words, they do not rely on empirical data because they do not have any empirical data to rely on that would be of any use. So they settle for what they can get-- the opinions of those who work and do business in these countries.

In the second place, Transparency International could not take these rankings all that seriously either as a reliable indication of the degree of corruption in a given country. They themselves make the case:

Is it right to conclude that the country with the lowest score is the world's most corrupt country?

No. The country with the lowest score is the one perceived to be the most corrupt of those included in the index. There are almost 200 sovereign nations in the world, and the latest CPI ranks 146 of them.* (Transparency International Corruption Perception Index 2004, p. 6.)

The fact is that corruption is corruption wherever it is found and it means increased difficulty in doing business in any country where it is found. This is true no matter where the country is located on the index (except, of course, in countries at the top where all are agreed that corruption is an insignificant problem.) Companies need to plan for the inevitability of corruption whether they deal in China, India, Greece, Saudi Arabia, Mexico, — or Ukraine.

And, of course, competent expert advice is essential to help. We at Ukraine Consult, Inc. can offer that advice and that help.

* The Corruption Perceptions Index for 2003 was more candid:

Is it right to conclude that the country with the lowest score is the world's most corrupt country?

No. The country with the lowest score is the one perceived to be the most corrupt of those included in the index. The CPI is based on polls that are snapshots in time and reflect both opinions and experience. Furthermore, there are almost 200 sovereign nations in the world, and the CPI 2003 ranks only 133.