RENAISSANCE OF KYIV: Internal investments spur economic development (11/17/02)

RENAISSANCE OF KYIV: Internal investments spur economic development

by Natalia A. Feduschak

KYIV - The Kyiv-based privately-held company XXI Century is the new face of business in Ukraine.

Its portfolio comprises several highly popular restaurants boasting Ukrainian décor and cuisine. The company has introduced Shvydko, a version of Ukrainian fast food, which it hopes will become a local competitor to McDonald's. Along with mini-shopping centers placed strategically in underground walkways, XXI Century is planning to shortly unveil several shopping malls in the Kyiv area.

Each investment reflects a new opportunity that helps fill a void in the Kyiv market, said Andrey Mirgorodsky, XXI Century's vice-president.

"Kyiv is more interesting to investors now than even Moscow," said Mr. Mirgorodsky, who is also a deputy in Kyiv's City Council. "Moscow is more expensive and the market in Moscow is more developed. There is still a lot to be done here. When we look at the development of Kyiv, we're only in the first stages."

After several fitful years, Kyiv's business and economic development is on the upswing. Retail space is rapidly growing; once-empty shops are filled with goods ranging from Made-in-China knick-knacks to Chanel couture and Ukraine-produced foodstuffs. Restaurants and cafés line city streets and out-of-the-way neighborhoods. Apartment buildings are being built at an unprecedented pace. If the current rate of development continues, people here predict that Kyiv will eventually catch up with many Western European cities in terms of investment and standards.

To be sure, the Ukrainian capital still has not attracted the kind of investment enjoyed by other Central and Eastern European nations since the demise of the Soviet bloc. If Warsaw and Prague have drawn billions of dollars of investment, Kyiv has seen only a fraction of that. Although Kyiv's city administration has streamlined some bureaucratic procedures for registering businesses, the waiting time can be frustratingly long for investors, particularly when dealing with land possession questions. Local officials also worry that investors are scared away by allegations of government corruption and the sluggish pace of reforms as a result of which rational laws on taxation, money laundering and financial transparency are lacking.

Still, the Ukrainian capital can compete with most Eastern European cities in terms of development and potential, investors said. Those already doing business in Kyiv say it is the place to be.

"This is a very progressive and developing city. It is investor friendly," said Myron Wasylyk, vice-president of the PBN Co., a Washington-based public relations firm with offices throughout the region. "There's lots of infrastructure development that attracts other investments. All the indicators show continued growth," he added.

Kyiv is an attractive investment for several reasons, businessmen said.

The bulk of Ukraine's wealth is in Kyiv, which makes the city an important investment destination. Because its residents have the highest standard of living, the most important Ukrainian consumer lives here. Kyiv is also home to the government agencies, foreign embassies and representative offices with which most investors interact.

"It is the central nerve center," said Marko Iwashko, vice-president of the Western NIS Enterprise Fund, a private equity fund that invests in small- and medium-sized private enterprises in Ukraine and neighboring Moldova. "For a lot of investors, although their manufacturing is located elsewhere, their headquarters are in Kyiv."

What makes Kyiv also attractive is that it is administered under a separate law that gives the city a special status, including self-governance. Thus, City Hall is able to provide special incentives to investors, including reduced tax rates and levies on corporate profit, personal income, land use and other local taxes and levies.

Some 40 percent of Ukraine's investments are in Kyiv, according to officials. Investment from Ukrainian companies edges out that of foreign investors. Local companies have also been very active in financing many of Kyiv's reconstruction projects, such as the city's main plaza, Maidan Nezalezhnosti, Independence Square, - which includes the country's only underground shopping center.

"Those investments have totaled over 1.5 billion hrv," said Kyiv Mayor Oleksander Omelchenko. "No money from the city budget has been spent on upgrades."

Foreign investment increased to $248 million in 2001, up from $163 million in 2000, with the largest investors coming from the Netherlands, the United States and Great Britain, according to Volodymyr Sytnyk, head of the investment department for Kyiv's External Economic Relations and Investment Division.

In an attempt to generate more interest from foreign investors, Kyiv this year has invited both Moody's and Standard and Poors to rate the city.

"We now have a large hope to expand into external financial markets," Mr. Sytnyk said. "After the rating, in our budget for next year we'll look at taking an external loan."

Kyiv has also undertaken important transportation projects that make it easier for businessmen and other visitors to travel to Ukraine. After a $15 million reconstruction project in the early 1990s, Kyiv's Boryspil International Airport, the country's main aviation hub, is undergoing another expansion. A new wing currently under construction will enable the airport to handle 1,200 passengers an hour, up from the current 600 passengers. It is the first phase of a multi-year effort that will allow Boryspil to eventually handle 25 million passengers annually - 10 times its current capacity.

Much of Boryspil's expansion is due to the fact tha Kyiv is increasingly being seen as a transportation hub between North America and Europe to countries further east, including Russia, China and Japan.

"Boryspil International Airport has real perspectives," said Natalia Martynenko, country commercial manager for British Airways in Ukraine. "Taking into consideration Kyiv's geographical location, it could become a huge international hub, a transit center for worldwide flights."

For overland travelers, Kyiv last year completed a $100 million reconstruction of its central train station, bringing it up to European standards. Ukraine's transportation ministry has also started to introduce faster and more luxurious trains that run to the country's most often visited business and tourist destinations, such as Crimea, Kharkiv and Donetsk.

Investors view construction, real estate, retail and food processing as the most lucrative businesses in Kyiv today. "This is just the beginning of development in Kyiv," said Andriy Petrivsky, an investment officer with Western NIS Enterprise Fund. "If you look at the development in Kyiv like retail shops, it's not just high end. It's geared toward the average consumer, the middle class."

This is particularly true of the new apartment buildings being constructed in Kyiv. Entire districts are popping up: Kyiv is adding between 1.5 million and 2 million square meters of apartment space annually. So great is the city's housing shortage that building at this pace is expected to last for another two decades.

Ukrainian companies are cashing in on the upsurge. For instance, the facades of many of the new apartment buildings are covered with bricks from Slobozhanka Budivelna Keramika (SBK), a brick company based in the small town of Romny in the Sumy region. With 40 different shapes, four primary colors and seven shades of brick, SBK currently has around 70 percent of the facade brick and 30 percent of the regular brick market in Kyiv. Western NIS has invested in SBK.

SBK's success in Kyiv is helping spur its growth elsewhere. SBK, which owns two production facilities, is expanding and will open another plant in the eastern Ukrainian city of Kharkiv. The new facility will double the company's current production capacity from 60 million bricks to 120 million bricks annually.

Residents who are able to buy apartments are doing so either in cash or on credit; and they want Western amenities that were notoriously absent in Soviet-era housing, such as larger kitchens, more living space and underground parking.

Another missing luxury in those days were cars. In another indication of the city's rising wealth, new car sales grew by 90 percent last year, with the majority of transactions made in cash rather than on credit. Consumers have started to shy away from the expensive BMWs, Mercedes and high-end SUVs that clog Kyiv streets. Instead, they're opting for no-nonsense and economical Peugeots, Toyotas and Fords.

In addition, many of the new apartment buildings have small shopping centers in their lobbies so residents can stop conveniently at the store on their way home. In a boon for the budget-conscious, Kyiv is also seeing a proliferation of so-called cash-and-carry stores, a European version of Costco or Sam's clubs, with many stores offering discounts for the weekend shopper.

Because of its rapid growth rate and the fact that many of its industrial areas were abandoned after the break-up of the Soviet Union, Kyiv is a good candidate for its own version of a business district like The City in London, maintains Mr. Mirgorodsky of XXI Century.

"That's something I'd like to see," he said, adding that he intends to push for the concept in City Hall.

"This is only the beginning," said Mr. Mirgorodsky, expressing a sentiment that many Kyivites, with their eyes on their city's future, fervently endorse.

Natalia A. Feduschak is a freelance journalist who has written for The Washington Times, The Denver Post, The Wall Street Journal and other U.S. and Canada-based publications. She divides her time between the United States and Ukraine. She is also a former staffer of The Ukrainian Weekly (1985-1987).

This article is the third in a series on the "Renaissance of Kyiv."

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