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Entering the Ukrainian Market

How you go about investing in Ukraine largely depends on who you are. For those who are already here and knowledgeable in how things work, when a new investment opportunity arises, the chances for success are very high. For an outsider, coming in with ideas that have been successful somewhere else, but without any practical experience in Ukraine – it’s a gamble.

For individuals and small businesses entering the Ukrainian

market, partnering with an existing Ukrainian company makes the most sense. By carefully selecting partners who can help you make your business successful, you will gain access to information that no foreign entity can hope to achieve on their own and fast track through most of the hurdles set up for foreign entities. It’s much easier to answer an existing request than to introduce a new concept that has never been considered before in an unproven market.

In Ukraine, access to credit is extremely limited for small

businesses. Anyone with access to capital who can provide financing is seen as a valuable partner to a Ukrainian company that has the knowledge and other necessary resources to create a new business venture or to expand an existing one. When someone has taken the time to put together a well thought out plan, and all they need is financing, that’s the beginning of a successful business venture – although the original plan may need to be modified to reflect the needs and experience of both parties.

As in any business, it’s important to stay within your area

of expertise in an industry you understand well. Venturing off into unchartered territory in a foreign country is not the right approach, as opposed to bringing necessary skills and resources that may be inaccessible locally.

Immediate opportunities that are already well developed

include agriculture, food processing and food packaging, as well as traditional industries in oil and gas, metallurgy, coal and timber. Infrastructure development is another area that could use a great deal of investment in Ukraine, but dealing with government entities can be more complicated than negotiating with private companies and should be approached with caution.

Another area worthy of attention is human capital.

The Ukrainian workforce is highly skilled, educated and competitive. Many professionals are fluent in English, and technology makes it increasingly possible to create virtual working environments. Computer programming, database development, design and publishing, and other technology related fields are excellent opportunities for creating successful partnerships. People always find a way to work around obstacles, real or imagined, and where there’s a will, someone always finds a way. UBi Mila Borden 6 UkraineBusiness insight October/November 2010 In September 2010, a reworked

Tax Code proposal was submitted to the parliament. If adapted, it will be one of the most liberal in Europe; the new Code suggests reducing tax on profits from 25% to 17%, making Ukrainian big business one of the least taxed; VAT will be lowered to 17% from 20%, and light and tourism industries will see some tax breaks. So far the second version of the Tax Code has not drawn as much criticism as the first.

But if parliament approves

such a Tax Code with all its tax cuts, how is debt-ridden Ukraine going to fill its coffers? The government is hoping that the cuts will mean ‘de-shadowing’ the economy; more businesses will go legal and more taxes will be paid. There are also more general hopes of growth.

“The economy is going to

grow, and as it grows, other taxes are going to fill the government coffers,” says economist and Party of Regions MP Oleksiy Plotnikov.

In July, an IMF mission in

Kyiv agreed to grant Ukraine a US $14.9 bn stand-by loan. “We have to honestly say that this government received into its care a post-crisis country, post-crisis economy,” notes Ihor Burakovsky, the director of the Institute for Economic Research and Political Consulting. But it has not gone unnoticed that the new government almost doubled the amount of Ukraine’s foreign debt. IMF loans usually come with conditions such as much- needed economic reforms, fiscal stability, acceptable budget deficit. “In effect, Ukraine’s governments have no choice but to surrender a part of its sovereignty,” says Ashish Misra, Head of Investment, Strategy and Research at UK Private Banking, Lloyds Banking Group, “and not to the usual suspect – Russia, but in fact to the IMF. They get to tell Ukraine how to run its fiscal system.”

The IMF, along with other

commentators, says that the constant increases in social security payments, such as pensions and state salaries, has put a big strain on Ukraine’s budget. In his Programme for Economic Reform published in June, President Yanukovych announced plans to increase the pension age for women, currently one of the lowest, if not the lowest, in Europe. It will rise from 55 to 60 during the next ten years. It is an unpopular measure, even though many commentators say it is unavoidable. But some questions remain. “What kind of pension reform are we going to see?” asks Dr Burakovsky. “How will the Pension Fund problems be solved in the long run?”

“The economy is going to grow, and as

it grows, other taxes are going to fill the government coffers

” Yanukovych also promised

investment opportunities, justice and an investor-friendly regime. While many foreign investors in Ukraine have seen good returns, especially in agriculture and the food industry, agriculture was the only industry to grow during the recession. For risk-takers, the promise of big profits is there. But the risks remain.

“I could not and would not

recommend investment in a country without a demonstrably independent judiciary and without a legislative framework that is free from political manipulation,” says Misra. For him, the prospect of huge returns does not justify the risk. “I would not consider investing in countries like Ukraine, or Russia for that matter, where property rights are not respected and courts are not independent.”

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