DOING BUSINESS IN UKRAINE: The perspective from the U.S. Embassy
by Roman Woronowycz
Kyiv Press Bureau
Most experts believe, although none will give a timetable, that Ukraine will eventually climb out of its economic morass and establish itself as one of the leading economic powers of Europe. Even with an ever-changing set of laws, a heavily regulated economy and high taxes, international companies are drawn to Ukraine, with its potential market of 51 million and a large and well-trained work force.
However, many other businesses stay away, intimidated by an economy that is neither free market nor centrally controlled. To give our readers a better idea of what it takes to do business in Ukraine, we will run a series of features on the Ukrainian market place, which will include information on the general business climate in Ukraine and on what it takes to get a business going in Ukraine. This will include interviews with several successful American businesspeople who will explain just what it takes to be successful; the impediments; the advantages. The first installment of this series is an edited two-part interview with Andrew Bihun, the senior commerical officer at the U.S. Embassy in Kyiv.
PART I
Q: What does it take to develop a successful business in Ukraine? What are some of the problems?
A: There is almost nothing here that you could foresee in some other country. The problems exist all over the place.
What it takes depends on what kind of business you're getting into. If it's a small one, where your market is really a regional market within a particular city or a particular oblast, then you have to develop really good contacts with city authorities. Don't forget that you have a situation right now where city authorities and oblast authorities are not exactly of the same mind. Therefore, depending on how wide the scope of your commercial activities is going to be, whether they are going to be city-wide or oblast-wide, you have to develop the appropriate contacts in one or the other, or both.
Q: What does that mean? Does that mean getting the right paperwork, which means paying fees, or as some people allege, paying graft? City officials will tell you that these are licensing fees. How does this compare to business norms in the West?
A: The official fees are probably very comparable to Western European fees. But the number of fees that you have to pay, due to over-regulation on the central government and the local government level, for passing papers or for getting approvals of certificates for the start-up of a business or the continuation of a business - just the sheer number of them is enormous.
The payment of fees is viewed by a lot of people as a well for graft. It is a very natural process in a geographic area, a country in which you don't have an immediate set of laws that is going to regulate business. There is no process for regulating business. I think that Ukraine is at least starting to talk on paper, and certainly in various pronouncements starting with [Vice Prime Minister of Economic Reform Serhii] Tyhypko and all the way down to local levels, on normalization of regulations in the granting of certificates.
I'll give you numbers, and there are many numbers floating around. For a medium-sized business, it is said that it takes about 80 pieces of paper to be signed for it to open and operate, to become fully functional.
They are trying to reduce that to about 30. We would like for them to reduce that to about 10-15. They, meaning the central government. Now I don't want to call these average figures, but these are numbers I've heard from people in government.
I think that 10-15 certifications would make it very reasonable, very controllable and a lot more transparent. In other words, those could be watched. You can't watch 80.
For a company to control the flow of paper to get 80 pieces of paper processed and signed is a big undertaking. It takes a big chunk out of the operating funds for the business, in terms of money and time. Therefore, it makes it very difficult to start up a business. If it gets down to a manageable 10-15, and presumably that will mean a reduction in cost, not only of time, then obviously the business becomes more worthwhile to get into.
I would strongly encourage an American investor coming in to get legal assistance from both an American law firm that's based in Ukraine and a good local attorney. In many cases they can be found together. Many times an American firm will have a group of well-trained local lawyers who have training and experience in this country. Very often the American firm will actually provide additional education in the United States.
I absolutely recommend it. There are quite a few people, mostly small business men, who come here, take a lawyer, within three weeks hire another lawyer, or take a lawyer not on a retainer basis but simply as needed. I would not recommend that sort of ad hoc buying of legal time.
Q: And why not?
A: Simply because it takes a lot of time to get to become familiar with the intricacies and problems of the small businesses that come here and to be fully knowledgeable about Ukrainian governmental, whether central or local, issues that are going to touch their business.
Let's say you are opening up a detergent distribution center here. The lawyer must learn not only the laws, but at this point he must be fully aware of what are some of the competitive pressures from state enterprises or other entrants into the field. You also must know the politics of a particular city or a particular oblast and those who may try to squeeze you out.
There are people who will try to squeeze you out. Obviously the more competitive the situation becomes in Ukraine, the more of that there is going to be.
I think the commercial activities at this point, even though Ukraine doesn't have a flood of entrants from the West at present, but the pace of commercial activities are outstripping the pace of the adoption of proper laws and certainly the implementation of those laws.
Let's take an example. This is not a small business, it's a large business, but it's symptomatic. We had a situation with an oil and gas business. We had an American company that tried to enter the market and spent quite a bit of time and money in both extracting oil and gas and distributing oil and gas here. They were hampered by the fact, and still are - I'm talking in the last two years - that there is no production-sharing agreement legislation, which is a pivotal thing. You go into any country, any area of the world, and try to extract and process petroleum products, you need something that is called production-sharing agreement legislation; the laws that regulate how you extract, what ownership you have of the land; what rights you have in distributing and selling what you extract, etc. The whole business has to be regulated by production sharing agreements.
Right now there is no legislation for that. There are, however, pressures in the commercial area. There were companies that wanted to enter this particular area of the market because, according to them, there are tremendous deposits both on the Black Sea shelf and in the Azov Sea, in southern Ukraine, in eastern Ukraine in the Poltava-Kharkiv-Sumy-Donetsk region.
Your company budgets are only so big for this exploration; you have to wait and maintain staff, and maintain contacts at the local level. But if there is no legislation that will really give you any guarantees for conducting that business, to become fully operational ...
This is an example of where commercial intent has outstripped the passage of legislation and certainly its implementation. That occurs in a lot of other areas also.
Land ownership, for example. There is no clear pattern or a very clearly defined policy yet of how fast the privatization process, let's call it the restructuring of agriculture, is going to take place. There is a lot that is being said, that the certificates of land ownership that are now being handed out to individual farmers are going to be used for producing land tracts that make it economically feasible to farm. In other words if you are going to have a break-up into one-hectare plots, Ukrainian agriculture will become quite unproductive.
But the key point is land ownership. Now here is a situation where there is a tremendous amount of pressure. You have probably 30-40 American companies, small- medium- and large-range, that are coming here based on the potential gains that can be made from Ukrainian agriculture, which includes grain production, sunflower production, sugar beet production, fruits and vegetables and animal husbandry.
So the commercial pressure is tremendous; there is the strong intent of American companies to enter this market either as a seller of equipment or as a seller of soy products or animal feed, or an investor in farm manufacturing equipment, an investor in food processing, an investor in food distribution, etc.
The commercial pressure is already there. That intent has already outstripped the legislation, the changes in legislation surrounding agriculture. Now you see that happening in many areas.
Q: So what are the companies doing in the meantime?
A: Every one has a different pace. They are looking for alternate ways [to get into the market]. They know that eventually things will change. But it's a question of guessing when things are going to change. Based on that guess, which is the company strategy, they have to make decisions. They are not going away because they know that the potential in the food industry is tremendous.
Q: How would you characterize the amount of investment going into Ukraine? Is it increasing, decreasing? Who are these investors?
A: It is increasing.
Q: What about firms like Motorola, which left Ukraine saying the rules of the game are ever-changing? That has given the impression that foreign investment is leaving Ukraine.
A: The numbers show that it is increasing, although by very small percentages. [U.S. investment] stood at $200 million two years ago, now it is up to $400 million. It may be decreasing in the case of [the amount of investment] by individual firms, but other firms are coming here.
Over the course of the last three weeks I had talks with three American companies that are selling consumer goods here. They were selling here in drips and drabs through their Polish offices and their Austrian offices. Now they are actively seeking advice on how to enter this market in a more massive way by establishing better distribution systems here. And they are looking down the pipe a year or two from now to establish relations with Ukrainian firms for actually manufacturing here. That's three in the last three weeks just in the consumer field.
As I have been saying for the last month or so, there is a large line-up on the other side of the door. The more imaginative ones want to make sure they have a competitive place when massive improvements do occur, or even partial improvements occur. The more imaginative ones who do have legal assistance, who do know the market, the ones that know the workings of the current government and can anticipate the workings of whatever government is going to come later, are walking through that door, carefully, but they are walking through that door.
Still, that leaves a large line left on the other side. They don't seem to be walking away, with the exception of a couple of American oil and gas firms that have left for the reasons I mentioned earlier.
Others have not left. Motorola has not left the country. They left the project. It was very easy for the press to turn this around and say they left the country, but they did not. They just recently introduced the beeper project, which is a paging system, where Motorola equipment is going to be used by the partner of Motorola called Beeper Inc.
Copyright © The Ukrainian Weekly, November 2, 1997, No. 44, Vol. LXV
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