What does a country need to do if it really wants to make its way to market relations without triggering large-scale social conflicts? A different mentality? Fewer pensioners, individuals receiving benefits, and public-sector employees whose wages depend on budget revenues? More aggressive tax inspectors and forthcoming taxpayers? Or could it be huge loans from international financial organizations? How can we fill the budget coffers and ensure such incomes for the population that they could not only afford food and clothes but also a bank account? There are many possible answers. One of the right ones is to revitalize domestic production, which could really work and hence pay wages and taxes. One producer guarantees, by means of his paid workers, the consumption of products manufactured by others. Taxes paid imply normal social security and decent old age. Logical enough. How can Ukrainian production be switched on without inner resources? By borrowing? We’ve gone that road, and the consequences are all too well known. President of the Derzhinvest Ukrayiny (State Investment of Ukraine) Company, Volodymyr KUZNETSOV, is certain we must attract foreign investors, guaranteeing them full-fledged management of the finances they have brought in. He also says self-critically that his company’s chief task, to create favorable conditions for investment development in Ukraine, has not been fulfilled in full. Still, they tried. The result of their efforts is that every fifth dollar attracted to Ukraine as part of direct foreign investments is money brought in by companies Derzhinvest cooperated with. Consider what its president has to say.
“Throughout the years of independence, total direct foreign investments have come to about $3 billion (without portfolio investors an those who invest in government securities). Coca Cola, which had invested about $250 million, was long the largest investor. Since last year, the largest investor has been South Korea’s Daewoo corporation, which has invested in the Ukrainian economy over $300 million, of which over $200 million is live money that has gone through the accounts of Ukrainian banks within the framework of the AvtoZAZ-Daewoo project.
“The investment received per capita amounts to only $60, which will not withstand any criticism. In Hungary, for example, this index has reached $2,000. Hence the question becomes why money is not being invested in Ukraine. The answer is very simple: because of our instability, first of all, political and legislative. Who will ever want to work in a country where laws have a retroactive effect and can be repealed after being passed?
“Other, especially developing, countries fight for inflows of financial resources because these countries lack domestic investment resources due to the low level of public income and accumulation, both of the population and enterprises. The state budget lacks domestic investment resources, for it finds it difficult to make ends meet and even pay public sector employees and pensioners. The enterprises’ resources, depreciation and profit, have been exhausted by high taxes and inflation. Low current assets do not make it possible to earn a profit, depreciation is partially centralized and goes to the budget for specific economic programs, for example, to support domestic producers of ships, tractors, and harvesters which are noncompetitive and lack solvent orders. In other words, enterprises practically lack inner sources. It is the same story in the banking sphere. The total authorized capital of Ukrainian banks (of their own sources, excluding the money of depositors) is about $800 million. Essentially, this is small change. And, finally, money in the hands of the population is the last source of the internal funding of the economy. In the developed countries, this source provides for as much as half of all investment resources. But in Ukraine, only 2-3% of the population have surplus incomes making it possible to accumulate money and use it for investment.
“To attract foreign investment, a country must be above all predictable and have a stable national currency. When the national currency is falling or expected to fall, the investor will inevitably run the exchange-rate risks when investing dollars. The risks will in turn tell on the investment returns and the project’s financial viability. Another aspect is budgetary indices and the state’s foreign debts. It is difficult to persuade an investor to invest in Ukraine when debts of the government, traditionally most reliable borrower, sell for 45-60% of their face value on foreign markets. This means one dollar being invested in a corporate project is preliminarily valued at not over sixty cents. In other words, it will be not so easy to sell a business and return one’s own money in full. Derzhinvest has encountered this in the projects, which are usually most attractive all over the world, such as mobile phone communications. All this forces the investor to think not twice but perhaps twenty times before investing in a country like this.”
“Especially after the scandalous publications in The Financial Times, which clearly tarnished this country’s image.”
“Those publications are a slightly different story about the utilization of National Bank reserves. But who cares whether or not this happened or whether somebody robbed or was robbed of something? It is very easy to lose a good name in business but extremely difficult to earn one.”
“Something of the kind can also be said about the consequences of today’s restructuring of the foreign debt, for nobody can deny that today’s problems with creditors, both private and strategic of the IMF type, have a negative effect on this country’s investment image.”
“Naturally, the art of running up debts is not held in such high esteem as the art of doing business. In the latter aspect, this country has vast reserves, to put it mildly. On the other hand, have the major creditors done enough to develop the real sector? The Russians would give gas. I will be in for criticism, of course, but I have revised my attitude toward such organizations as the IMF and World Bank after seeing them from inside. We should take with a grain of salt what they recommend. I was very much struck by the Russian experience: the same team of IMF advisors that originally observed the development of the Russian crisis proposed later the ways to ride the crisis out. In other words, these organizations have become the clubs of intellectuals ruled by abstractions. I often view their recommendations as a desire to glean material for collections of documents, textbooks, and other research publications. I say this even though I was Ukraine’s first representative to offer a proposal at an IMF board of directors meeting in 1994 to give us our first STF loan. The IMF has fallen hostage to its own statutes and traditions, while Ukraine is now suffering because it could not firmly say no.
“Does this bother your conscience?”
“No. Almost six years ago this was the only thing possible if only because it was qualitatively different from anything else then known. The IMF and the World Bank remain partners interested in reforms, not in the commercial gain, and only they will offer the best loan conditions. But today I am convinced we must first change ourselves before demanding this from others. I remember the 1995 reforms. The Ukrainian delegation asks them to ‘understand its situation,’ that every reform has its own ‘top speed,’ we are interested in going down the road as fast as possible — we stress: ‘going’ rather than making haste — otherwise the people will reject the reformers. We say: the reforms won’t go on if you don’t support us! But what kind of support can we expect if the threshold of pain has been already been passed, and the reaction has begun? Do you want to deal with the communists? We are told in reply: the IMF is not a political organization and is not interested in the reaction of political forces. However, the latest events have shown some strikingly convincing examples when the board of directors overtly took into account political aspects when making a decision. Nevertheless, creditors, like parents, are not chosen.
“Any country can only become attractive for investment when it receives serious investment banks and large industrial investors, while the IMF-type organizations only give them the go-ahead. Ukraine was given such a go-ahead too late, although its economy, also thanks to recommendations fulfilled, is on a higher qualitative level than the status it was formally vested with. I am firmly convinced of this. I think international organizations should change their attitude toward Ukraine.”
“To continue the subject of investment climate, it would be interesting to know what you think about the current privatization program under which Ukraine is to sell $500 million in property this year. Do we have today enough investors capable of bringing in this amount and then having money for business development?”
“I think it possible to get UAH 2.5 billion, the more so that inflation will modify this figure a little. Besides, this year will see tenders for such interesting items as a 30% package of the Mykolayiv Alumina Plant (valued at $100 million), Ukrtelekom, etc. However, Ukrtelekom requires a serious brushing-up to raise its general acceptability. It should be sold at a profit rather than simply given away. On the other hand, many enterprises should be just given away and even with money to boot or sold at a symbolic price as Germany once sold Florena, which produced at that time good cosmetics for the USSR but was noncompetitive on the Western market. Today we see the same trait not only here but also on Western markets. This is why Ukrtelekom, the Mykolayiv plant, metallurgical and export-oriented enterprises, and enterprises with a stable effective demand on the domestic market, such as food and pharmaceutical facilities, etc., should not, of course, be given away: they can and must be sold. The state is the worst possible manager who, as a rule, thinks about personal profit rather than about how to channel financial flows at the enterprise... For so many years, our state- appointed managers, instead of thinking about how to streamline the financial flows at their enterprises, would only think about how to cash in on the paucity of funds and cheat the state, an artless shareholder. The state has learned to ruin, not to build. Neither the state nor the bureaucrats are the motive force of society. Businesspeople are this force. The traditional factors of production — labor, capital, and land — must be complemented by entrepreneurial initiative, with due account of the achievements of scientific and technological progress.”
“And what can you say about the potential investment capacities of, say, the Russians who have not yet officially submitted but have a list of Ukrainian strategic enterprises whose controlling shares they would like to get as payment for the Russian fuel debt?”
“The Derzhinvest authorized capital comprises shares of 16 Ukrainian enterprises, including such attractive ones as Oranta and oil refineries. But the Russians have shown no interest in these businesses. I wouldn’t say this disappointed us. Rather, this saved us some time to implement our chosen strategies. The state has very much work to do, above all, with guaranteed loan debtors. The amount will soon reach $1 billion. The Lysychansk Oil Refinery is a vivid example of this. The plant is not working to capacity now. And what shall we do with this enterprise traditionally oriented toward the Kuban? Shall we wait for Lukoil to build a refinery of its own in Krasnodarsk Territory and then the Lysychansk works will have to be dismantled and sold as scrap metal? We should remember that factories like food have a way of spoiling as time passes. It is the time factor that was practically never taken into account.
“The debt problem must be solved. Treating the debt problem philosophically, we should not perhaps give enterprises away only to pay off these enterprises’ debts. For example, we could sell some to the Russians (who, by the way, look at our businesses with the eyes wide open, knowing their condition and how much they owe), but only provided they pay off their debts to all their creditors. Giving them away is the last resort, it is better to sell and gain at least some budget revenue.”
“What are the criteria of pure investment? Is it possible to distinguish an investment which brings in new technologies and creates jobs from one which will be later used to launder the enterprise’s assets?”
“It is primarily the investors most willing to take risks who come to Ukraine, where the level of instability is high. And what kind of money do they risk? First of all, this is the money earned in shady operations: I do not mean here criminal sources and funds raised by drug trafficking, prostitution, and illegal arms trade. For example, the money earned by rendering some services and the money earned from differences of domestic and foreign prices have been taken outside this country usually for expedient, often political, reasons. But if those who earned something in this way earlier want now to return to this country this money as their own and invest it in enterprises, why not? This only requires the relevant political decision about the legalization or amnesty of capital. Contradictory as it is, this process has some indisputably positive economic points. As a rule, this money is in any case out of the country’s and its judiciary’s reach. One can ignore the problem and continue, with persistence worthy of a better application, to try to convince ourselves in the efficacy of the struggle begun, if my memory does not fail me, in 1993 when various committees were set up in order to ‘combat’ or ‘return’ something. We must search in the place where we lost something rather than where it is easier to pretend to be searching. I know there are moral and the psychological aspects here. But the word economy translated from Greek means the ability to keep house. Paraphrasing a well-known expression, it is to the point to say now that what is good for the Ukrainian house is equally good for Ukraine as a whole.”
