Revolution blues
With controversy raging over the shifting sands of its economic policy, and rumors leaking out of Kiev of a split at the heart of the Orange Revolution, what economic future does the country have and what does it have to offer its Polish partners?
As the Orange Revolution unfolded across its border, Poland - both leaders past and present, and the population at large - backed the fledgling movement wholeheartedly from its very inception. The country has since stood shoulder-to-shoulder with Viktor Yushchenko's government on a range of issues including oil and energy supplies, international relations with Russia, EU membership and even a joint bid to host the European Football Championships in 2012.
However, the Polish show of solidarity with Ukraine has started to wear thin for many businesspeople, and some are rather critical and skeptical about what Ukraine can offer to foreign investors. The country is beset by a raft of legislative problems, including: unpredictable laws and regulations, such as a ban on crude-oil exports; the introduction of import licenses during the fiscal year, which imposed 100 percent prepayment for coal imports; and changes in VAT regulations. And then, as in many post-Soviet states, there is the corruption.
Special treatment
However, the recent controversy over Special Economic Zones (SEZs) in Ukraine has attracted the most ire from Polish entrepreneurs, and is indicative of the problems facing those wanting to do business in the country.
At the end of March, as part of its budget corrections, Ukraine decided to abolish tax concessions in SEZs. This met with a wave of protest from foreign investors, who were forced to change their investment plans, which often resulted in a financial loss. The Ukrainian Government has subsequently agreed to repay losses incurred by Polish companies as a result of the sudden decision. However, the zones themselves look destined for the economic dustbin.
Compensation claims
"A special team is working on it in the Ministry of Economy," said the deputy commercial attaché at the Ukrainian Embassy, Sergej Skrypka, and the Ukrainian Prime Minister, Julia Tymoshenko, recently assured Warsaw: "The government is considering how to compensate the loss of Polish entrepreneurs without infringing the equity of other economic entities."
President Yushchenko is also promising that business-friendly reforms are in the pipeline. At a World Economic Forum roundtable last week, he pledged that reforms planned for later this year could improve investment conditions.
"The task for the second half of the year is to kick-start reforms," he said, adding that Ukrainian policy would "guarantee conditions for business, both domestic and foreign, to function properly."
However, Polish firms cannot call their accountants with the good news just yet. "The compensation should be paid back, but I cannot say when the government will actually take this decision," said Sergej Skrypka. He also admitted that the chances of tax concessions in SEZs being restored are slim.
Cutting investment
This twisting and turning by the Ukrainian authorities on SEZs is a classic example of what Polish entrepreneurs complain about when it comes to doing business in Ukraine. "The actions taken by the Ukrainian government are not reliable at all," complains Tomasz Dobrzyński, the export director at Sanitec Koło, which produces bathroom fittings.
"We are going to invest but not as much as we planned. The investment will be two percent of what we intended to do if the SEZs were not abolished."
Paying a price
"SEZs are the foundation of our activity in Ukraine," admits the president of Inter Groclin Auto SA, Zbigniew Drzymała. "We have not deserved such treatment, we are disappointed." Groclin produces car seats and represents some 10 percent of the Polish investment in Ukraine.
Another bete noire is corruption. "Bribes are on an everyday basis," adds Drzymała.
"Bribes are expected everywhere in Ukraine, starting at the customs control. But most painful is the abolishment of SEZs; this is depriving us from our vested interest," complains Janusz Palikot, the head of the supervisory board at Polmos Lublin.
Lobbying loudly
The Ukrainian SEZs will not disappear without a struggle. Polish investors have vigorously protested against the changes in the zones and taxation law. At a meeting organized by the Polish Confederation of Polish Employers Lewiatan (PKPP) last month between Polish entrepreneurs and Ukrainian representatives, Drzymała announced that Polish businessmen would lobby the Polish government to help them regain the capital invested in Ukraine, before the SEZs were annulled. The Deputy Minister of Economy, Mirosław Zieliński, said that President Aleksander Kwaśniewski had raised the issue with the Ukrainian President, Viktor Yushchenko. "We are hoping it is a temporary misunderstanding," said Kwaśniewski.
The International Association of Polish Entrepreneurs in Ukraine has taken matters into their own hands, enlisted political support and issued an open letter to Yushchenko. It believes that the controversy surrounding the SEZs and imposing a 20 percent VAT on investments will deter foreign capital. Minister Bronisław Komorowski from Civic Platform (PO) says: "We are ready to listen to the expectations of the Polish businessmen and represent them in Ukraine."
Open door
Sergej Skrypka at the Ukrainian Embassy says that lifting the privileges was a means of increasing budget inflows. "This is the result of changes in the country. The government does not want the living conditions of citizens to deteriorate, [it wants] to improve them," he said.
"We have opened our door for you. We are waiting for you, we love you," gushed the Deputy Prime Minister of Ukraine, Ołeh Rybaczuk, during a recent visit to Warsaw. "Ukraine has a potential and it is a good business partner," insists Skrypka.
Healthy trade
Some 6,000 Polish companies are involved in the trade exchange between Poland and Ukraine. At the recent PKPP conference, Janusz Kaczurba, a PKPP expert and former ambassador to the OECD, said that in 2004, Polish exports to Ukraine grew by 30 percent and reached $2 (zł.6.7) billion. Imports from Ukraine increased by 41 percent and reached $1 (zł.3.35) billion. (However, the Ukrainians dispute these figures, and say that imports from Poland came to just $1 billion, half of what the Polish data shows. Independent analysts say that this is probably because the bulk of what Ukrainian buyers get is not revealed.)
The total value of direct foreign investment in Ukraine was $7.8 (zł.26.15) billion in 2004, according to Kaczurba, out of which only $200 (zł.670) million is from Polish investment. This is not much, but investment growth is fairly dynamic, and is now estimated at $250 (zl.838) million. Polish entrepreneurs have located their money in 900 undertakings, mainly in the processing industry (60 percent), financial sector (23 percent), and trade (11 percent).
Stairway to heaven
Despite the surfeit of stumbling blocks, many investors are willing to weather the storm in Ukraine, and investment opportunities are no secret in the country. To this end, President Yushchenko has listed 17 of the most promising areas of activity in Ukraine. Although not all are directly related with the economy, and some of the titles are on the poetic side, they shed light on what areas could be profitable in the future.
First on the list is 'the sphere of a better life'. It points to the demand for flats and cheap mortgages in Ukraine, with opportunities for investors in the country's flourishing real-estate market. "We could sell our experience on the construction supplies market. Ukraine is flooded by poor quality construction products," says Ryszard Kowalski, the president of the Association of Employers and Producers of Construction Supplies.
The second point applies to the development of the aviation industry. "Ukraine has the potential but we need the Polish experience," says Skrypka. Energy independence is another crucial issue, especially in light of Ukrainian dependence on Russian supplies of fuel. Building the Odessa-Brody-Płock pipeline is one of the projects mentioned within this program. The next point concerns the pharmacy sector and small- and medium-sized entrepreneurship.
EU ambition
What could be decisive for Ukraine's future international relations is point five, which includes a program concerning a 'common European house'. "Ukraine should integrate with the European economy as soon as possible," says Skrypka.
"The objective of Ukraine is joining the European Union. I know that a lot still has to be done," says Andrij Deszczyca, commercial attaché at the Embassy of Ukraine in Warsaw. "Unfortunately the reaction of the EU is rather cool. But if Turkey has a chance then why don't we have one? If we had a preliminary affirmation, it would be easier to organize the people."
Falling figures
Ukraine is also taking some steps to improve the investment environment. "Ukraine is on the stage of forming a new economic policy. The current changes create new conditions for cooperation," says Janusz Kaczurba of the PKPP. In 2004, the Ukrainian economy was politically motivated, which meant pro-social undertakings, support for state companies and interventionism. At the same time, it was a very productive year with regard to economic results. GDP growth was 12.1 percent. Industrial production increased by 12.5 percent and agricultural output rose by 19 percent. Inflation was slightly above 12 percent.
This year the results are more worrying. GDP has already fallen to 5.4 percent. The new government has not presented its detailed economic program yet. Plans announced so far include abolishing selected concessions, improving the management in state-owned companies, verifying the SEZs and achieving market-economy status. It is very uncertain to what extent these plans will be completed. It is still to be seen whether the government is capable of running a liberal economic policy. All this is accompanied by a specific social attitude, which is not acquainted with a liberal economy, and arespect for law and private property.
Fueling dissent
It is not just the economy that is starting to show cracks. There are rumors of a split forming between President Yushchenko and Prime Minister Tymoshenko. The country is in the grip of a fuel crisis, with gas only available to those holding special coupons. In a recent statement, Yushchenko severely criticized the cabinet of the Orange princess, and accused Tymoshenko's people of using administrative methods that conflict with the free-market economy and of exacerbating the situation by manually steering fuel prices. Tymoshenko blames the Russian concerns for the situation, claiming they are in collusion to monopolize the market. The Prime Minister is no stranger to the industry; in the 1990s her gas company, United Energy System, made her a personal fortune estimated at $11 (zł.36.88) billion. Despite this she has been accused by her own Deputy Prime Minister, Anatoly Kinakh, of attempting to resolve a "difficult situation ... through simplistic moves."
Orange saint?
She had earlier caused shockwaves by hinting that thousands of state-asset privatizations may be reviewed - forcing Yushchenko to step in and reassure anxious investors. Her ambition is also plain for all to see. On her website, browsers are asked to vote in a poll for which position she would be most effective in. The options are "president," "prime minister," "parliamentary speaker" and "other."
If the Ukrainian government is going to move forward it will have to first heal the rifts in its ranks. "The government's virtue is that it acknowledges its mistakes and is willing to improve them. It is very important to show us those mistakes," says Andrij Deszczyca from the Ukrainian Embassy. It seems Deszczyca may soon have a number of Polish visitors on his door all too willing to show him where his country is going wrong.
As the Orange Revolution unfolded across its border, Poland - both leaders past and present, and the population at large - backed the fledgling movement wholeheartedly from its very inception. The country has since stood shoulder-to-shoulder with Viktor Yushchenko's government on a range of issues including oil and energy supplies, international relations with Russia, EU membership and even a joint bid to host the European Football Championships in 2012.
However, the Polish show of solidarity with Ukraine has started to wear thin for many businesspeople, and some are rather critical and skeptical about what Ukraine can offer to foreign investors. The country is beset by a raft of legislative problems, including: unpredictable laws and regulations, such as a ban on crude-oil exports; the introduction of import licenses during the fiscal year, which imposed 100 percent prepayment for coal imports; and changes in VAT regulations. And then, as in many post-Soviet states, there is the corruption.
Special treatment
However, the recent controversy over Special Economic Zones (SEZs) in Ukraine has attracted the most ire from Polish entrepreneurs, and is indicative of the problems facing those wanting to do business in the country.
At the end of March, as part of its budget corrections, Ukraine decided to abolish tax concessions in SEZs. This met with a wave of protest from foreign investors, who were forced to change their investment plans, which often resulted in a financial loss. The Ukrainian Government has subsequently agreed to repay losses incurred by Polish companies as a result of the sudden decision. However, the zones themselves look destined for the economic dustbin.
Compensation claims
"A special team is working on it in the Ministry of Economy," said the deputy commercial attaché at the Ukrainian Embassy, Sergej Skrypka, and the Ukrainian Prime Minister, Julia Tymoshenko, recently assured Warsaw: "The government is considering how to compensate the loss of Polish entrepreneurs without infringing the equity of other economic entities."
President Yushchenko is also promising that business-friendly reforms are in the pipeline. At a World Economic Forum roundtable last week, he pledged that reforms planned for later this year could improve investment conditions.
"The task for the second half of the year is to kick-start reforms," he said, adding that Ukrainian policy would "guarantee conditions for business, both domestic and foreign, to function properly."
However, Polish firms cannot call their accountants with the good news just yet. "The compensation should be paid back, but I cannot say when the government will actually take this decision," said Sergej Skrypka. He also admitted that the chances of tax concessions in SEZs being restored are slim.
Cutting investment
This twisting and turning by the Ukrainian authorities on SEZs is a classic example of what Polish entrepreneurs complain about when it comes to doing business in Ukraine. "The actions taken by the Ukrainian government are not reliable at all," complains Tomasz Dobrzyński, the export director at Sanitec Koło, which produces bathroom fittings.
"We are going to invest but not as much as we planned. The investment will be two percent of what we intended to do if the SEZs were not abolished."
Paying a price
"SEZs are the foundation of our activity in Ukraine," admits the president of Inter Groclin Auto SA, Zbigniew Drzymała. "We have not deserved such treatment, we are disappointed." Groclin produces car seats and represents some 10 percent of the Polish investment in Ukraine.
Another bete noire is corruption. "Bribes are on an everyday basis," adds Drzymała.
"Bribes are expected everywhere in Ukraine, starting at the customs control. But most painful is the abolishment of SEZs; this is depriving us from our vested interest," complains Janusz Palikot, the head of the supervisory board at Polmos Lublin.
Lobbying loudly
The Ukrainian SEZs will not disappear without a struggle. Polish investors have vigorously protested against the changes in the zones and taxation law. At a meeting organized by the Polish Confederation of Polish Employers Lewiatan (PKPP) last month between Polish entrepreneurs and Ukrainian representatives, Drzymała announced that Polish businessmen would lobby the Polish government to help them regain the capital invested in Ukraine, before the SEZs were annulled. The Deputy Minister of Economy, Mirosław Zieliński, said that President Aleksander Kwaśniewski had raised the issue with the Ukrainian President, Viktor Yushchenko. "We are hoping it is a temporary misunderstanding," said Kwaśniewski.
The International Association of Polish Entrepreneurs in Ukraine has taken matters into their own hands, enlisted political support and issued an open letter to Yushchenko. It believes that the controversy surrounding the SEZs and imposing a 20 percent VAT on investments will deter foreign capital. Minister Bronisław Komorowski from Civic Platform (PO) says: "We are ready to listen to the expectations of the Polish businessmen and represent them in Ukraine."
Open door
Sergej Skrypka at the Ukrainian Embassy says that lifting the privileges was a means of increasing budget inflows. "This is the result of changes in the country. The government does not want the living conditions of citizens to deteriorate, [it wants] to improve them," he said.
"We have opened our door for you. We are waiting for you, we love you," gushed the Deputy Prime Minister of Ukraine, Ołeh Rybaczuk, during a recent visit to Warsaw. "Ukraine has a potential and it is a good business partner," insists Skrypka.
Healthy trade
Some 6,000 Polish companies are involved in the trade exchange between Poland and Ukraine. At the recent PKPP conference, Janusz Kaczurba, a PKPP expert and former ambassador to the OECD, said that in 2004, Polish exports to Ukraine grew by 30 percent and reached $2 (zł.6.7) billion. Imports from Ukraine increased by 41 percent and reached $1 (zł.3.35) billion. (However, the Ukrainians dispute these figures, and say that imports from Poland came to just $1 billion, half of what the Polish data shows. Independent analysts say that this is probably because the bulk of what Ukrainian buyers get is not revealed.)
The total value of direct foreign investment in Ukraine was $7.8 (zł.26.15) billion in 2004, according to Kaczurba, out of which only $200 (zł.670) million is from Polish investment. This is not much, but investment growth is fairly dynamic, and is now estimated at $250 (zl.838) million. Polish entrepreneurs have located their money in 900 undertakings, mainly in the processing industry (60 percent), financial sector (23 percent), and trade (11 percent).
Stairway to heaven
Despite the surfeit of stumbling blocks, many investors are willing to weather the storm in Ukraine, and investment opportunities are no secret in the country. To this end, President Yushchenko has listed 17 of the most promising areas of activity in Ukraine. Although not all are directly related with the economy, and some of the titles are on the poetic side, they shed light on what areas could be profitable in the future.
First on the list is 'the sphere of a better life'. It points to the demand for flats and cheap mortgages in Ukraine, with opportunities for investors in the country's flourishing real-estate market. "We could sell our experience on the construction supplies market. Ukraine is flooded by poor quality construction products," says Ryszard Kowalski, the president of the Association of Employers and Producers of Construction Supplies.
The second point applies to the development of the aviation industry. "Ukraine has the potential but we need the Polish experience," says Skrypka. Energy independence is another crucial issue, especially in light of Ukrainian dependence on Russian supplies of fuel. Building the Odessa-Brody-Płock pipeline is one of the projects mentioned within this program. The next point concerns the pharmacy sector and small- and medium-sized entrepreneurship.
EU ambition
What could be decisive for Ukraine's future international relations is point five, which includes a program concerning a 'common European house'. "Ukraine should integrate with the European economy as soon as possible," says Skrypka.
"The objective of Ukraine is joining the European Union. I know that a lot still has to be done," says Andrij Deszczyca, commercial attaché at the Embassy of Ukraine in Warsaw. "Unfortunately the reaction of the EU is rather cool. But if Turkey has a chance then why don't we have one? If we had a preliminary affirmation, it would be easier to organize the people."
Falling figures
Ukraine is also taking some steps to improve the investment environment. "Ukraine is on the stage of forming a new economic policy. The current changes create new conditions for cooperation," says Janusz Kaczurba of the PKPP. In 2004, the Ukrainian economy was politically motivated, which meant pro-social undertakings, support for state companies and interventionism. At the same time, it was a very productive year with regard to economic results. GDP growth was 12.1 percent. Industrial production increased by 12.5 percent and agricultural output rose by 19 percent. Inflation was slightly above 12 percent.
This year the results are more worrying. GDP has already fallen to 5.4 percent. The new government has not presented its detailed economic program yet. Plans announced so far include abolishing selected concessions, improving the management in state-owned companies, verifying the SEZs and achieving market-economy status. It is very uncertain to what extent these plans will be completed. It is still to be seen whether the government is capable of running a liberal economic policy. All this is accompanied by a specific social attitude, which is not acquainted with a liberal economy, and arespect for law and private property.
Fueling dissent
It is not just the economy that is starting to show cracks. There are rumors of a split forming between President Yushchenko and Prime Minister Tymoshenko. The country is in the grip of a fuel crisis, with gas only available to those holding special coupons. In a recent statement, Yushchenko severely criticized the cabinet of the Orange princess, and accused Tymoshenko's people of using administrative methods that conflict with the free-market economy and of exacerbating the situation by manually steering fuel prices. Tymoshenko blames the Russian concerns for the situation, claiming they are in collusion to monopolize the market. The Prime Minister is no stranger to the industry; in the 1990s her gas company, United Energy System, made her a personal fortune estimated at $11 (zł.36.88) billion. Despite this she has been accused by her own Deputy Prime Minister, Anatoly Kinakh, of attempting to resolve a "difficult situation ... through simplistic moves."
Orange saint?
She had earlier caused shockwaves by hinting that thousands of state-asset privatizations may be reviewed - forcing Yushchenko to step in and reassure anxious investors. Her ambition is also plain for all to see. On her website, browsers are asked to vote in a poll for which position she would be most effective in. The options are "president," "prime minister," "parliamentary speaker" and "other."
If the Ukrainian government is going to move forward it will have to first heal the rifts in its ranks. "The government's virtue is that it acknowledges its mistakes and is willing to improve them. It is very important to show us those mistakes," says Andrij Deszczyca from the Ukrainian Embassy. It seems Deszczyca may soon have a number of Polish visitors on his door all too willing to show him where his country is going wrong.
