Ukraine's economy expanding at quickest rate among CIS (07/01/01)

Ukraine's economy expanding at quickest rate among CIS

by Roman Woronowycz
Kyiv Press Bureau

KYIV - With Ukraine's economy expanding at the quickest rate of all countries of Europe and the CIS in the first five months of this year after achieving a healthy gross domestic product (GDP) of 6 percent last year, one would expect a steady flow, if not a flood, of foreign capital finally finding its way here.

But foreign investors, wary of the political instability of the last seven months and still far from confident that a sufficient amount of economic and structural reform has taken place, have continued to distance themselves from Ukraine, a country with a skilled work force, plenty of natural resources and generally acknowledged economic potential.

As the economy enters what may be a period of robust expansion - with GDP growing by 8.5 percent over last year in the January-May time frame and industrial output in April showing a 20 percent increase - incongruously, foreign investment fell off by 5.6 percent to $168 million in the same time period. The latest figures give Ukraine a paltry 10-year total of $3.9 billion in direct foreign capital, which puts it only above Belarus among the newly emerging economies of Eastern Europe and the Commonwealth of Independent States.

On June 18-19 the Ukrainian government hosted an international business forum to address the problem. The business convention, organized in conjunction with SigmaBleyzer, a large Kyiv consulting and investment firm, took place on the eve of the annual meeting of the Foreign Investment Advisory Council (FIAC), a group of representatives of leading foreign corporations that consults President Leonid Kuchma on improving the investment environment in Ukraine.

The message the international business community gave Ukraine was clear: until the country further deregulates the business environment, creates a stable legal environment and begins to successfully attack corruption, international capital will shun this country even though it continues to hold tremendous potential draw. Concurrently, foreign diplomats and businessmen underscored that if Kyiv should push through the final reforms, the floodgates could open wide, and very quickly.

U.S. Ambassador Carlos Pascual, who spoke briefly at the forum, said Ukraine's recent growth is encouraging but that it cannot be sustained unless more reforms are made and the pre-eminence of the rule of law is accepted.

"Unless some changes are made, Ukraine will hit a glass ceiling," said Mr. Pascual.

He noted that Ukraine still needs judicial reform, a new tax code, a land code and intellectual property rights enforcement before it becomes an appealing investment point for foreign entrepreneurs and businesses.

Michael Bleyzer, chairman of SigmaBleyzer, introduced a study developed by his firm in conjunction with the Thunderbird Corporate Consulting Group by agreement with the Ukrainian government. A nine-point plan developed by the project, called the International Private Capital Task Force (IPCTF), strongly encourages the Ukrainian government to proceed with an intensive reform process. At a minimum, the report emphasizes that Ukraine's government should liberalize and deregulate business activities; provide a stable and predictable legal environment and improve corporate and public governance; and eliminate corruption.

Ideally the project would like to see all nine points implemented, including the liberalization of capital and foreign restrictions; banking sector reform; enforcement of anti-corruption measures; reduction in the political risks for foreign investors, including creeping expropriation and preferential treatment for government-owned companies; the elimination of investor "incentives," which often are simply subsidies to special firms or economic sectors, to level the competitive playing field; and a strong public relations campaign to promote Ukraine and the changes it will have made.

The study showed that Ukraine is receiving only a small portion of the potential flow of international private capital, which could reach $3.4 billion annually by 2005 if the policy changes are minimally implemented, and up to $6.4 billion if done so at an optimum level.

President Kuchma set his own reform priorities, however, when he met with the representatives of FIAC on June 19. In most aspects, these were not contrary to what the IPCTF report proposed. He told the group that Ukraine's chief priorities are radical tax reform, macroeconomic stabilization, lower inflation, a stable and secure hryvnia, a stronger and better developed banking system, transparency of the privatization process and further land reform.

He added that measures already undertaken would continue as well, including ongoing democratic reform, the development of a more stable legislative process, elimination of the shadow economy and additional anti-corruption efforts.

"We expect that our steps in this direction will be supported by the growing presence and acceleration of efforts by foreign businesses in the Ukrainian market, primarily in the implementation of large-scale international projects, especially in the field of high technologies," said Mr. Kuchma.

The Ukrainian president said he would like to see extensive participation by both European and Russian companies in the privatization of Ukraine's gas transit system. He said he believes a three-way configuration must be developed for private ownership of the natural gas line. While he acknowledged that Russia would like to have 51 percent ownership, he envisioned a scenario in which an equal, tripartite arrangement is reached, to include Russia, the supplier of the natural gas, Ukraine, the country through which it flows, and Western Europe, the chief consumer of the commodity.

Mr. Kuchma also invited foreign investors to help modernize Ukraine's coal industry. He noted that experts believe Ukraine has sufficient coal to last more than 400 years, with an annual output of 120 million tons - nearly double the current level. Ukraine extracted 62.5 million tons of coal last year, down by 2.5 percent from 1999.

Prime Minister Anatolii Kinakh, who spoke at both the forum and at the FIAC annual meeting, told the foreign businessmen that although his government would not cancel the special economic zones that it had created throughout the country, which largely benefit the Ukrainian entrepreneur, it would begin to narrow the focus of the zones and to move away from large demarcations to the creation of industrial parks.

He gave as an example the Japanese firm Sumitomo, which is developing an idea for a high-tech commercial park in Vyshhorod, just north of Kyiv. Mr. Kinakh said the new high-tech zone could lead to $1 billion in additional foreign investments.

The recently appointed prime minister also said that tax reform remains a priority for his government and that he expects to prepare the 2002 national budget on the basis of the new tax parameters. He explained that tax reform is in the interest of the country's national and economic security and is needed to raise the competitiveness of the Ukrainian economic sector.

The $3.9 billion invested in Ukraine thus far comes from investors in 112 countries. Leading the pack are U.S. investors, who had committed $644.4 million as of April 2001. The Netherlands ($367.2 million) and Great Britain ($310.7 million) are next, followed by Cyprus ($357.8 million), Russia ($284 million) and Germany ($241.3 million).

The recent unexpectedly strong growth of the Ukrainian economy has caused the government to increase its economic growth forecast to 6.2 percent for 2001. Industrial production now is expected to grow by 10.7 percent, while the agricultural sector is expected to expand by 6.5 percent.

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