Opinion: Risk and reward in the new Ukraine
Establishing a manufacturing presence in Ukraine in the nearest future, for most firms, is essential to securing a defensible position in Ukraine (and possibly Russia) as well as protecting home markets from future reductions in local market barriers to entry. A prudent, practical and fact-based analysis of a firm's 'next-step' development alternatives in Ukraine is essential.
First and foremost one must understand that Ukraine is not Poland. On a broad and aspirational level, Ukraine does not have to deal with constant pressure from an EU accession body that is pressuring it into convergence with a Western legislative and business-practices environment. One should not underestimate the effect of such guidance on the political powers-that-be and the business communities that support them.
Moreover, unlike Poland, there is a split in popular opinion as to the future direction of Ukraine - Russia or EU/US - undercutting any moral pressure on the political class. The result of this is likely to be a much slower convergence with Western legislative principles.
Obstacle course
Ukraine is dominated by approximately 80-90 business groups that are often led by members of parliament (who are protected by broad immunity). Business and politics in Ukraine are intimately intermingled and these business groups are very proactive about protecting their interests.
Understanding your industry's competitive landscape is crucial to understanding your prudent development alternatives. Should your firm enter with a local partner ('Krysha' in Russian)? Should the firm consider a greenfield or structured acquisition of a successful Ukrainian firm?
Greenfield investments in Ukraine are notoriously difficult, particularly in those industries where one of the business groups operates. There are dozens of permits and administrative rulings necessary to begin operations, and at each stage delays and administrative intransigence can frustrate the investors' efforts, cost the firm significant financial expense, and possibly lose it an advantageous competitive position. Competitors or extortionists are highly adept at creating difficulties along the way.
The right partner
Many firms consider utilizing the services of a well-connected partner. Initially, one must understand that nearly everyone in the Ukrainian business community is "well-connected." Thus, it is essential that any potential local partner be thoroughly vetted and researched.
Local partners are recommended in many industries - particularly those relying on governmental support, such as retail (real-estate permits) or natural resources (exploitation permits).
Key is the local partner's understanding and acceptance of clearly defined and prudently structured partnership agreements, preferably in an offshore domicile with a strong judiciary. Patience is essential in choosing the right partner.
Finally, most firms see acquisitions of going concerns with adept management and shareholders as the most efficient and effective method of entering the Ukrainian market. A well-structured, staged acquisition has clear benefits.
Wounded prey
Which leads us to one of the fundamental problems in Ukraine today - its poorly constructed legislation and weak judiciary are frequently manipulated by corporate raiders and unscrupulous shareholders. Currently in Ukraine there is a wave, almost a fashion, of aggressive corporate raiders seeking to extort 'fees' or steal away prized assets. Whereas before, the targets were largely local firms, now foreign firms are considered 'wounded prey' and easy money. The most common tactic is buying shares in a company and initiating questionable lawsuits in friendly judicial environs to stop the normal functioning of a corporation. Will today's minority shareholder or partner be tomorrow's enemy?
Telenor, a giant Norwegian investor with a majority interest in a leading mobile telephone operator, is currently in a battle with a well-connected business group over the extent of the rights of minority shareholders. Bunge, a $24 (zł.69) billion global leader of vegetable-based oils is fighting another well-connected minority shareholder. Owning over 90 percent of the shares in a sunflower-seed-processing plant, Bunge is fighting a shareholder's attempts to strip away a valuable asset.
Intesa, a leading European bank, is awaiting an inter-oligarch legal battle in the US to close its billion-dollar acquisition of a leading Ukrainian bank. The plaintiff has less than one percent of the shares.
Research is key
There are many other companies suffering silently from similar situations. Most cases result in huge legal bills, often with limited success. Some result in significant payouts to resolve the problems, thereby destroying expectations of the asset's internal rate of return.
Ukraine is a valuable, if not critical, opportunity for growth. However, foreign firms entering or developing in Ukraine need to take into consideration the real risk factors in Ukraine in order to mitigate against significant financial losses.
Neither the government, nor the judiciary can be relied upon to protect one's interests. Proper pre-deal planning and research, due-diligence and risk assessment, deal structuring and post-deal governance efforts are all crucial to lessening the probability of being caught in a spiderweb.
Yves Mousson-Lestang is a partner at Eurus Capital (Warsaw). Yuriy Zerov is a partner at Eurus Capital (Kiev).
