Most of the reasons behind foreign investors’ wary attitude to Ukraine are generally known: use of non-market methods, the reprivatization debates. There is also the proverbial sword of Damocles hanging over the 2006 parliamentary elections, which is forcing the government to pretend that it cares about ordinary Ukrainian citizens’ interests, and to go through the motions of fulfilling their campaign promises about bandits being kept behind bars. Such outwardly simple declarations have turned out to be difficult to implement, particularly in view of the fundamental rules of international law and investment risks. Domestic and foreign investors will have more confidence in the current Ukrainian government and its bona fide cooperation if the populist social budget appropriations are supported by the stated liberal fiscal policy. A politically unaffiliated view from the sidelines is always useful. Mr. Francis O’DONNELL, permanent representative of the UN Development Program (UNDP) in Ukraine answers some questions from The Day.
Do you think that Ukraine has experienced fundamental changes since the Orange Revolution?
F.O’D.: These changes are striking, especially with respect to freedom of the press. Some changes are also obvious in your economy, but they are controversial. The problem is that a number of Ukrainian businesses require capital investments from various sources, including special economic conditions. Similar agreements have been made, but these are rather exceptions that the rules of investment. Despite your government’s constant declarations about quickly liberalizing power-business relationships, I was personally amazed to learn that a great many businesses have to endure inspections by a number of controlling authorities, that there are some 150 kinds of licenses that must be obtained in order to operate in a given line of business, and that all this is covered by 1,300 legislative acts. No foreign investors or local businessmen can function normally in this overregulated system.
In other words, you’re saying that Ukraine should cancel the so-called law on the “regulatory guillotine” as soon as possible?
F.O’D.: You have to introduce across the board the long-awaited one-window procedure for registering new businesses; overcome existing overregulation, including price-setting; enact a law providing for financial security as an inalienable component of protecting foreign investors’ business interests; introduce IFRS accounting standards, so that people can operate transparent and legally controllable business in your country. You must carry out the required tax reforms to improve Ukraine’s long-term competitive image and add to the budget return items. You should also discard the practice of politically motivated administrative appointments. The customs reform should be continued. Your government’s performance must be kept perfectly transparent and all its enactments freely accessible to any citizen. The government should form an independent commission to regulate business and serve as a guarantor of all such enactments. This commission should be composed of experts and observers representing other institutions to speed up the process of passing decisions and strengthening their implementation. This group of experts must be positioned on the highest level, in the offices of the president and the prime minister.
What do you think about the reprivatization debates in Ukraine?
F.O’D.: A number of investors were prepared to do business in Ukraine. Their proposed investments represented millions of dollars, yet their enthusiasm quickly waned after the sums were doubled or even further increased. Take the reprivatization of Kryvorizhstal; here an attempt may have been made to change the price, ranging from $1.6 to 2 billion — other sources point to $3 billion. They first mentioned 3,000, and then there was a list of at least 29 privatized projects that were subject to revision. No one knows how many such cases will crop up: 29, 150, or 3,000. The press has written a lot about stopping privatization and nationalizing large enterprises, later to be put up for re- sale. All this hearsay is like a cold shower for investors. You had excellent opportunities to develop the market during and after the Orange Revolution, something other countries could only dream of. I’m talking about the surge of world interest in Ukraine, something that never happened before. For two months Ukraine remained on top of the world news; everyone everywhere was following the presidential campaign. One might say that Ukraine was in the center of an absolutely unprecedented world promotional campaign. Many countries have to pay millions, tens of millions for such publicity. The result was a phenomenal global interest in Ukraine on the part of investors, who were learning about your country not only from what they were seeing on television, but also because they realized that the Orange Revolution resulted in Ukraine being clearly on its way to European integration, becoming integrated into international organizations. Your country had embarked on a democratic road and there was also a phenomenal growth in the people’s expectations. And so any business project in Ukraine seemed foolproof. Now it’s possible to say that Ukraine has squandered a unique opportunity to welcome an overwhelming investment influx and to keep its economic growth during this transition period. Yet the situation is largely reparable, and the roundtable showed that the new Ukrainian government understands where they must be headed to score an economic success. Turkey shows a 12% GDP increment. You can also expect a considerable increase in your economic indices, even if the world market is watching them go down, with China taking the lead. Despite all this, Ukraine can increase its GDP by at least 8% this year, maybe more depending on investments. Against this background all talk about reprivatization sounds utterly stupid and absurd. Some political gains could be achieved, but in return you would lose potential investors. You’ve wasted five months and Ukraine is losing billions in potential investments.
How productive has the “investment rainfall” been in other countries?
F.O’D.: Yes, let’s compare. In Poland the average annual investment is $150 per capita, compared to less than $50 in Ukraine. Or take Serbia and Montenegro. In the 1990s Serbia fought in the Balkan wars; nearly all of the national structure was devastated, yet in 2003 its investments totaled $1.3 billion — and this with a population numbering 10 million. Ukraine has five times more people, but there aren’t any investments to write home about, although experts believe that investments should amount to at least $7-8 billion a year. In reality it’s $1.0-1.5 billion. Don’t forget that Serbia got out of the armed conflict only several years ago, and it hasn’t totally recovered from that military campaign. You have a peaceful country, which is a great asset; you have no conflicts like what happened in the Balkans, and you also have great potential, high technology, and engineering. Serbia doesn’t have any of this, yet look at its investment level. The Ukrainian economy might be suffering from a degree of neglect; some of your technologies may be obsolete; there could be some economic dysfunctions, corruption, but you don’t have war devastation, you have infrastructures and market potential. Why are you slowing down the investment process? Our estimates show that a country the size of Ukraine should have investments ranging between 10 and 12 billion dollars a year; instead all you have is losses.
Is Ukraine paying attention to the opinions of international experts?
F.O’D.: Your president, prime minister, and speaker appeared before a large audience with a joint reprivatization memorandum that was adopted shortly before the roundtable (the so- called mini-Davos meeting). It served as a very positive signal for investors; it’s safe to assume that there will be no reprivatization based on the current legislation. The problem is the existence of too many legal network controversies. This fact has been noted by many, including your president and prime minister. Your courts of law not only have to make rulings, but also have to ensure that they are duly carried out. A number of investors have won cases, but have never seen them actually implemented. They had to turn to arbitration, but even if they won their cases, the whole thing took too much time, money, and energy. We’ve repeatedly told you that you don’t have to invent a special Ukrainian approach, meaning that you shouldn’t ignore words of friendly advice. You shouldn’t refuse to learn from the experience of other countries. Here is the most important piece of advice for your president: don’t turn away from a helping hand, accept our proposals, form your own opinion, which is applicable to Ukraine; learn from the experience of other countries, even if it’s not by 100%, and then decide what can be useful for Ukraine, what you wish to change in Ukraine, and then head in that direction. The Blue Line Commission’s recommendations entitled “Proposals for the President” have been read by a number of Ukrainian dignitaries; some of them have told us that it’s an important document, and that most recommendations are being heard. If you want to show quick progress in terms of reform, you must leave the door open for dialogue. A number of local administrations have begun consultations with the people. But this is not enough because it’s a process of consulting with ordinary people, not with the world’s leading experts. Although this kind of dialogue isn’t perfect, it is reform-oriented, meaning that it’s also important.
