Practical Recommendations to Foreign Investors in Ukraine
Ukraine has a reputation of providing one of the most difficult legal and economic environments for FDI currently to be found. The currently changing legal and regulatory environment; the omnipresent state bureaucracy; the weak enforcement mechanism; the intransparency of the privatisation mechanisms; they all provide constant and serious challenges to foreign investors wishing to enter Ukraine, or already operating in Ukraine.
At the same time, Ukraine provides enormous opportunities to any investor – whether institutional, private, or corporate – who brings with him a long-term view, patience, and flexibility. More than any other country in central and eastern Europe, including Russia, Ukraine still provides substantial “first-mover advantages” in practically all sector of the economy. Ukraine is a compact country with a population of 50 million potential consumers. It benefits from its proximity to the EU. It has huge restructuring and investment needs. It has significant material and human resources. It has, to date, enjoyed only minimal foreign investment, and the various market sectors are still wide open to newcomers. If a more benign investment environment could be installed, Ukraine could potentially enjoy above average growth rates for many years to come.
Until the FDI environment in Ukraine has matured, investors will have to rely on their wits in coping with the current state of affairs and make the best of it. We have therefore attempted to give some practical recommendations to investors considering an investment in Ukraine:
1.Involve All Decision-Making Levels
The difficulties in closing on investment transaction in Ukraine may be attributed partly to fragmented decision-making mechanism at the various levels of the Ukrainian Government. This starts from the top level where the executive branch (divided into the Cabinet of Ministers and the President along with his Administration) is frequently at odds with the Parliament, and where Presidential Decrees often contradict existing laws and regulations. There are also additional splits in the decision-making authority between the central level of Government and the various local/regional administrations. Moreover, the numerous governmental agencies are often vested with overlapping authorities and responsibilities. And finally, those agencies are frequently reshuffled leaving little certainty that the adopted decisions are final. In order to steer the typically fragmented decision-making process in the right direction, it is therefore essential to establish good relationships with all the various decision-making levels involved in a transaction and keep in contact with all of them throughout the process. Investors often make the mistake of relying on one level only, in the hope that it will resolve any issues arising at other levels. This is rarely the case.
2.Involve Company Management in Privatisation Tenders
Besides involving the various Government levels, potential investors are also advised to come to an understanding with existing management of a Ukrainian target company in advance of any privatisation tender in which the investor may want to participate. Management typically is still in a very strong position in Ukrainian companies. And the better the company’s performance is, the stronger the management feels. The investor will have to invest some time to establish a relationship of trust and he will have to explain what he can do – and equally what he cannot do - for the company in which he wants to invest.
3.Always Perform Professional Due Diligence
Like many other emerging markets, Ukraine suffers from the absence of disclosure rules, inadequacy of the local accounting standards, and prevailing shadow practices. Therefore, due diligence involving reliable legal and audit firms, is a necessary requirement. Due diligence can be a difficult process given that management of the target company (or other stakeholders in a potential deal) can be reluctant to open their real books, which are kept secret from local tax authorities. If an investor wants to invest in a company through an investment tender, he has to get to know the company as soon as possible. Investors should not wait for a tender to be announced in the hope that they will be given enough time to perform due diligence.
4.Consider Choosing a Local Partner
It is often wise to enter into a consortium with a local partner – for example, a local investment or trading group. These obviously need to be screened carefully. However, in an environment where the legal environment is still under development, long–established relationships between individual entrepreneurs, companies, and regional administrations mean so much more. Investors should use established relationships of this kind. Especially “big-name” investors should not assume that they can simply establish operations in Ukraine on the back of their reputation and that all doors will open to them. This would be naпve. Even the biggest names in international business are often not well known outside the main urban centers.