Uphill steppes
By : Roseanne Gerin
West means East: Agro-handel, a small plant in Srem near Poznan, exports processed meat to Ukrainian market.
Slawomir Kempa's first business foray into Ukraine a decade ago started off well enough. Two Ukrainians scouring Warsaw to recruit a local furniture distributor for their trade show stumbled into his office in 1991.
Kempa, the president and cofounder of Absolut (http://www.absolut.com.pl), a Warsaw-based seller and distributor of modern office furniture, arranged a meeting with his visitors in Kiev the next week and bought space in the show. His initial efforts there paid off handsomely, though not for long. Kempa sold all his furniture the first day of the month-long show and collected a stack of orders. Encouraged by the demand, he built a showroom in the Ukrainian capital. But a week after it opened, the building was burned down when Kempa refused to pay a bribe to local strongmen.
Undaunted, Kempa has spent some $5 million renovating his three-story, 45,000 square-meter Kempa Center (http://www.kempa.com.pl), the largest office-furniture salon in Kiev.
"Ten years ago it was easy to set up a business because it was just the beginning," said Kempa, whose Kiev operations now employ 125 workers. "But some investors say it's difficult now."
These business people are not alone. Other Polish small and medium-sized enterprises (SMEs) agree that establishing subsidiaries in Ukraine isn't easy. But some say the situation has to change since the future economic growth of Poland's eastern neighbor largely depends on foreign SMEs.
Ablolutely fabulous: Slawomir Kepa, president of furniture maker Absolut, has succeeded in Ukraine where others have failed.
"The development of the whole economy depends on the development of small and medium-sized enterprises in any given country," said Victoria Perebeynos, the director of the Polish-Ukrainian Chamber of Commerce in Warsaw (http://www.chamber.pl/ukraina).
Politicians on both sides of the border have taken up the cause and sounded their desire for Polish businessmen to play a greater role in Eastern trade. Last June, President Aleksander Kwasniewski visited Dniepropietrovsk in eastern Ukraine to open the Ukrainian-Polish Center for the Promotion and Development of Management, Entrepreneurship and Investment. Likewise, Ukrainian President Leonid Kuchma has publicly stated his country's goal of developing trade relations in its push toward European integration, and that its relations with Poland could be a model for doing business with Ukraine's other neighbors.
"Poland has many times recently underlined its strategic partnership with Ukraine," said Magdalena Tomczynska, the Kiev representative of Consumer Attitudes & Social Enquiry (CASE) (http://www.case-mr.com.pl), a Warsaw-based market research firm. "One symptom of this is politics, the other is business."
Trading ties
But economists point to another reason for increased business ties between the two countries. "The only way to give Ukraine a chance to develop is through trade links," said Witold Orlowski, director of the Lodz-based Independent Center for Economic Studies (NOBE) (http://www.nobe.pl), citing the country's lack of economic reform, low disposable income and weak currency.
So far, about 700 firms with Polish capital operate in Ukraine; mostly in banking and finance, international trade, transport, communications and agriculture. The majority are in the west of the country. Polish firms, in particular, are attracted to Ukraine's market of 50 million consumers just next door. The Ukrainian language is similar to Polish, so communicating isn't a major obstacle. Ukraine also offers a fairly fresh market where Polish goods are considered high quality.
"Ukraine is an immense and growing market for Polish producers, therefore we can systematically increase the sale of our products in this country," said Janusz Kesek, the sales and marketing director at Sniezka (http://www.sniezka.pl), a paint and varnish company in Brzeznica in southeastern Poland.
Ukraine's lower operating costs are also attractive to Polish investors. Although only 1% of total foreign trade was with Ukraine during the first four months of 2001, Yurij Kuzmyn, a foreign trade analyst at CASE in Kiev, said Ukraine "remains important for those Polish producers that encounter difficulty (operating) in other markets, but due to lower transportation costs and prices, are still successful in the Ukrainian market."
To promote Polish investment in Ukraine, trade shows like the one Kempa participated in are organized by business associations and economic symposiums in both countries, which are aimed at promoting Polish exports and sales. The Polish government subsidizes participation fees for SMEs. "The future for Polish-Ukrainian relations is in small business," said Elzbieta Bodio, the assistant director of the department of economic relations with foreign countries at Poland's Economy Ministry.
Yet while analysts, businessmen and politicians say foreign SMEs will help generate growth in the economically and politically wobbly Ukraine, Polish investors like Kempa are still in for a rocky ride.
"The investment climate in Ukraine is not good," Tomczynska said. "The potential here is enormous, (but) the unstable economic and political situation frightens companies."
Road blocks
Observers say the unrealistic provisions of Ukrainian law and unfavorable tax rules should be changed to entice investors. Red tape is also a problem. Others cite a mountain of administrative forms for importers/exporters, the need to obtain Ukrainian product certifications and corruption as further deterrents for foreign investors.
Polish SMEs have an additional disadvantage. Unlike German enterprises, they don't have international trade guarantees from the government that enable them to deliver goods and wait six months for payments because they usually need the cash immediately, Perebeynos said.
And Ukraine's overall economic doldrums and lack of easy bank transfers have had their effect as well. "Exporting to Ukraine is difficult," said Jan Ludwiczak, the president of Agro-Handel (http://www.agro-handel.com.pl), a meat processor in western Poland that exports about 300 tonnes of pork and beef products annually to Ukraine. "(The country) doesn't have the money, there is no insurance, and all the transactions have to be made in cash."
Ukraine has 12 special economic zones (SEZs) where foreign businesses receive special tax breaks on their investments, but not everyone believes in them. "Their effectiveness is doubtful," Tomczynska said. "You can't say that all (businesses) are productive. On the contrary, some are there to avoid taxation."
The bureaucratic hassles have spilled over into the SEZs. Last year, when Sniezka decided to start a new production plant in the Jaworiw SEZ, the firm had to wait a long time for "permission of every description" from the local administrative office before opening the factory, which now employs 40 workers, Kesek said.
Some foreign SMEs may not be able to afford the steep $250,000-$1.5 million fee to set up shop in Ukraine's SEZs. Big foreign companies, which can easily pay the fees, "enter the market, take it over and don't give a chance for the development of smaller companies," Perebeynos said. There's also the problem of additional taxes, duties and operational costs. "It's not good for SMEs in Ukraine," she added.
The border-hopping, black-market day trippers who sell Polish goods illegally in Ukraine can further undermine the efforts of Polish wholesalers and retailers that want to sell their products legally. Kuzmyn said that "Ukrainians who know how to overcome custom duties" illegally import and sell Polish products and foodstuffs.
Some SMEs complain about the Polish government's lack of support. "The Ukrainian market has a future, so investing in it holds a future for Agro-Handel," said Ludwiczak, whose turnover in Ukraine has not increased since the Russian crisis in 1998. "(But) the Polish government doesn't give enough support for small companies to develop."
If the official snags aren't enough to throw a wrench into a company's business plans, the unofficial graft may be enough to discourage entrepreneurial efforts in Ukraine. "There is a blacklist of Polish companies that have started businesses in Ukraine, which are assumed not to have fulfilled all their obligations," said Tomczynska, explaining that the list can be used to harass business owners. "They could never know the reason why they're on (the list). It could be any reason," such as not paying a bribe. "(Also), the tax inspection police can come at any time and dig long enough to find something."
Moving forward
In 1991, Poland became the first country to sign a trade agreement with Ukraine. Polish two-way trade with Ukraine rose gradually, but declined in the second half of 1998 and in 1999 following the Russian debt crisis, when the ruble's devaluation wiped out hundreds of banks and the savings of millions of people.
According to figures from the Economy Ministry, Poland's exports to Ukraine grew consistently from 1992 to 1997, when they hit a high of $1.2 billion, while imports from Ukraine that year totaled $415.5 million. In the aftermath of the Russian crisis, Poland's exports to Ukraine decreased to about $1.1 billion in 1998 while imports from Ukraine dropped to $377.2 million. In 1999, Polish exports plunged to $702.2 million, while imports from Ukraine dropped to $338.4 million.
Before the Russian crisis, Polish SMEs were not afraid to supply goods to Ukraine and wait for payments, said Perebeynos, "but when the crisis happened Polish entrepreneurs lost a lot of money and now they are afraid to invest again." She said the number of trade shows in Ukraine has declined in the past two years due to more cautious investment attitudes.
Now Ukraine is on the rebound. Last year's real gross domestic product the market value of a country's goods and services reached a high of $41 billion, a 6% increase over 1999, while industrial output rose 12%. Likewise, foreign investment is on the rise. Perebeynos said in general foreign investment in Ukraine increased by about 18% in 2000 hitting $3.7 billion.
Polish investment in Ukraine is also rising. In 1999, Polish exports to Ukraine totaled $701.1 million, while imports from Ukraine were $338.4 million. Last year Poland's exports to Ukraine reached $798.2 million, an increase of about 13.8%, while imports from Ukraine accounted for $475.4 million, giving Poland a positive trade balance of $322.8 million and making the country Ukraine's 12th largest global trading partner.
Ukrainian officials say the government is taking action to create a more comfortable business environment for foreign companies. The country is developing a system of credits and insurance for trade transactions, said Myron Jankiw, the commercial adviser at the Ukrainian Embassy in Warsaw. He added that Polish and Ukrainian banks are working together to create an integrated transaction system for import-export companies and introducing bank guarantees. He also pointed out that regional governments in Ukraine have special funds set aside for SMEs.
These measures may mitigate the fears of Polish SMEs mulling investments in Ukraine. "The only thing that is preventing Polish companies from investing in the East is the fear of risk, but there is no business without risk," said Kempa of Absolut. "Polish businessmen think that everything is going to come to them, and they don't want to go toward the East. But the product has to be there, not here in Poland."
