Ukraine Business Forum focuses on attractive investment climate

Ukraine Business Forum

Ukraine Business Forum focuses on attractive investment climate

Matthew Dubas

(Originally published in The Ukrainian Weekly)

NEW YORK-Ukraine’s business leaders from diverse sectors converged at the Waldorf Astoria Hotel here on December 6 at the Ukraine Business Forum to present what they argued is the attractive investment climate in Ukraine.

The UBF was organized by a steering committee co-chaired by Walter Zaryckyj, executive director of the Center for U.S.-Ukrainian Relations and Adrian Karatnycky, president of The Orange Circle, though neither organization was formally involved with the forum.

Also attending the conference were Valeriy Kuchinsky, permanent representative of Ukraine to the United Nations, and Mykola Kyrychenko, consul general of Ukraine in New York.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, said, “Ukraine has a lot of potential,” with its growth market, potential export to Europe and Russia, sophisticated consumers and a highly developed work force.

Mr. Zukoski commented that the “wait and see” approach to entering the Ukrainian markets is not the right attitude after the rise in opportunities that resulted from the Orange Revolution of 2004. This increase in opportunities and shift in attitude are marked by a difficulty to meet market demands, and an intensification of efforts to attract European investors, Mr. Zukoski said.

Areas of high activity in Ukraine, according to Mr. Zukoski, include agriculture, banking, commercial real estate, consumer goods and light manufacturing in areas of high technology. “Ukraine needs to move toward more technology rather than exports of steel and commodities, and needs to work with the private sector to be successful in the global marketplace.” Mr. Zukoski commented.

The biggest obstacles for Ukraine, from Mr. Zukoski’s experience, are the regionalism of eastern Ukraine’s industrial background, the failure to collect value-added tax refunds that demonstrates Ukraine’s lack of fiscal discipline and is a source of corruption, and the lack of a clear land allocation system that would foster development of commercial real estate.

Speaking of investing in Ukraine, Michael Marresse, director of J.P. Morgan, found that Ukraine has done well in the last two years, but there are challenges that Ukraine needs to address, including rising energy costs, energy security, rise in credit growth and banking practices open to market development.

As an example of Ukraine’s potential, Mr. Marresse pointed to neighboring Poland, which has attracted 7.5 billion euros in foreign investment after attaining its EU membership, and cited the new “big R” – Romania – as an example of successful technology development.

On Ukraine’s economic future, Jock Mendoza-Wilson, head of international and investor relations for Systems Capital Management, said that SCM accounts for 8 percent of Ukraine’s GDP, making it a powerhouse player in Ukraine’s economy. He said SCM has branched out into diverse sectors such as mining and metals with Metinvest, energy development with D-Tek, finance with SCM Finance, telecommunications with Telco and in other areas of brewing, hospitality, sports and media.

In an effort to promote transparency, financial reporting and investment, SCM publishes its figures annually and hires independent directors and supervisors, Mr. Mendoza said. To increase competitiveness with China’s and India’s steel production, Mr. Mendoza said Ukraine needs to update its equipment and promote more energy-efficient practices.

Ihor Shevchenko, president of the Ukrainian Bar Association, said that the reduction of corruption in Ukraine is the result of corporate law improvements and a reform of the legal profession with an increased stress on ethics.

Ukraine’s Minister of Energy Yurii Boiko said there is a $5 billion investment opportunity in the energy sector of Ukraine. As an example, Mr. Boiko cited energy partnerships like the one with Houston-based Vanco Energy Co. that is scheduled to begin drilling oil on the Black Sea.

Other areas of energy development include domestic uranium production, and increases in domestic oil and gas production to 5 billion to 6 billion cubic meters annually. As a condition of these developments, Mr. Boiko expressed his desire to maintain strong relations with Russia to promote stability.

On the topic of investing in Ukrine, and the opportunities and obstacles involved, Robert Bensch, president of Cardinal Resources, said that Ukraine has a lot of legacy issues that are remnants from the days of the Soviet Union that will have to be addressed. From his oil and gas experience in Ukraine, Mr. Bensch said that Ukraine’s significant natural resources allow it to be both a supplier and a transit nation, but ensuring security, he found, is dependent upon the political party in power.

John Imle, president of Vanco Energy Co., which is scheduled to commence an oil drilling operation off the coast of Ukraine in the Black Sea, said that his company’s goals in Ukraine would be to finalize a profit-sharing agreement with Ukraine’s government, with over half of the profits going toward the government. As a condition of this agreement, Mr. Imle said that his company seeks a “transparent and durable 30-year agreement that must withstand public and political scrutiny.”

In areas of high technology, Roman Kyzyk, managing director of DFJ Nexus, a Silicon-Valley venture capital firm, said, “Ukraine is an environment based on technology education that is a legacy from the Soviet days.” However, this environment of “pure research,” Mr. Kyzyk said, lacks management and standardized practices.

In areas of aviation, for example, Mr. Kyzyk said that Ukraine is the No. 1 producer of titanium welding and that Ukraine launches more satellites than NASA. Mr. Kyzyk also commented that the no-visa policy in Ukraine makes better business sense that investors should capitalize on.

On the “wait and see” investment attitude, Gregory Vaksman of Aerosvit Cargo said, “Investors can’t wait for the best timing. Go to Ukraine and see for yourself.”

Minister of the Economy Volodymyr Makukha said that Ukraine is progressing in the areas of transparency, economic reform and the development of the private sector.

Areas of needed reform for Ukraine, according to Mr. Makukha, include legislation, law enforcement and the reluctance of regional leaders to modify behaviors after legislative reforms have taken effect.

Citing areas of progress, Mr. Makukha said Ukraine is close to finalizing preparatory WTO legislation, but remarked that, with respect to free trade zones, mistakes have been made and learned from. Mr. Makukha also said there should be a development of industrial parks, similar to those in the U.S., for the technology sector.

In an effort to promote investments in Ukraine, Serhiy Lesyk of Millennium Capital said, “Without investments [in the Ukrainian market], shareholders fight each other for a majority stake in the company. This promotes a climate of instability.”

Ukrainian stock market operator Alexander Bondar told the forum that Ukraine’s stock market is underdeveloped, which allows for large opportunities for investors. Citing a comparison between Ukraine and Poland, Mr. Bondar said that Ukraine’s market accounts for 5 percent of the GDP, while in Poland, the market accounts for 37 percent.

Representing a company that is just two years old, Lucas Romriell, head of sales for Concorde Capital, said that the gas price hike had little effect on Ukraine’s economy. Mr. Romriell remarked that opportunities in the banking sector have a huge privatization potential, specifically in areas of retail. As signs of progress in the market, Mr. Romriell cited Mittal, a steel manufacturer that has proven its capacity for cutting costs, and the electric energy sector that is awaiting privatization.

For Ukraine to reach its market p
otential, Mr. Romriell said, “Ukraine needs better protection of property rights, a reformation of the stock market on the model of London or Frankfurt, and a shift in attitude by Ukrainian businessmen recognizing the value of foreign investment.