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Posts Tagged ‘ukraine’

Ukraine Pension reform = IMF money

Monday, March 14th, 2011

The government of Ukraine is back to the waiting game for another tranche from the IMF. Part of the expected deal, is pension reform, which translates into increasing Soviet era retirement ages.

Raising the retirement age in most nations is sound economics , especially with people are living longer. However, life expectancy has declined in Ukraine since the fall of the Soviet Union, especially among Ukrainian males, many of whom will die before reaching retirement age. Of course, this was how retirement and pensions systems were initially configured. In the United States, the retirement age for Social Security eligibility, was for many decades, higher than average life expectancy of Americans. It was one of the reasons the system worked so well for so long.

IMF May Decide on Tranche to Ukraine in April, Tigipko Says

The International Monetary Fund may rule on its next tranche to Ukraine in April and the nation must adopt a pension law, Deputy Prime Minister Serhiy Tigipko said.

The IMF and investors “are watching how we proceed with the decision on pension reform,” Tigipko told reporters today at a press conference in Kiev. Should Ukraine fail to pass the overhaul, “it will mean that we cannot fight the state budget deficit and we will continue to increase our debts.”

The IMF agreed in July to provide Ukraine with $15.6 billion, the country’s second bailout loan in two years. The fund already released $3.4 billion in two tranches last year, helping the government to cover the state budget deficit and to increase foreign currency-reserves.

The Washington-based lender’s mission visited Kiev in February to check the government’s economic policies and said then that more talks were needed to open the way for the payment of around $1.55 billion. Ukraine’s government initially expected the IMF to make the final decision on the installment by the end of March.

Tigipko said yesterday that parliament will vote next week on the pension law, which would raise women’s retirement age to 60 from 55 and men’s retirement age to 62 from 60. He said today that the increase in women’s retirement age may start in May.

Payments under the first program, approved to Ukraine in late 2008, were frozen in November 2009 after the previous government failed to cut spending before presidential elections in January last year. The IMF has asked Ukraine to keep its budget gap at 3.5 percent of gross domestic product this year.

To contact the reporters on this story: Kateryna Choursina in Kiev atkchoursina@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

(from www.bloomberg.com)

Ukraine Champagne

Monday, February 28th, 2011

One of the mainstays of a romantic evening here in Ukraine, is the ubiquitous Odessa Champagne. Tasty (at least the dry version is to my liking) and inexpensive, it is popular, even with those whom can afford the more expensive bubbly from the “Champagne” region of France.

They say that “imitation is the highest form of flattery,” though it seems the EU…the French in particular…have a hard on for regulations on food items. We had heard about the desire of European bureaucracy to standardize what was acceptable, even the shapes and sizes of bananas allowed to be imported into the EU (sexual connotations permitted!), and while most can understand the degree of national pride that a place like “Champagne” or “Cognac” can invoke, the names themselves have transcended national boundaries. If the French were to make borscht or pelmeni, or even hamburgers…and call them such, there would be few objections, only comparisons with the “original.” This is already the case with vodka, which is claimed by Russians, Ukrainians, Poles and others, but made in dozens of countries…and still referred to as vodka.

I recall a tasting  I once attended  years ago in Yerevan, Armenia. The hostess for this event-at Ararat, a former Armenian and then Soviet enterprise that still produces some of the best “Cognac” in the world, informed us that the French company Pernod, had just purchased this company. She explained that when executives recently came from France to taste the some of the 20 year old vintage quietly aging in oak casks, several of them mentioned that this was better than anything they had in the Cognac region of France, and reaffirmed their decision to buy the company. Interestingly, Ararat had won the right to call their brandy, “cognac style wine,” 100 years earlier when their drink impressed judges in a Paris Exhibition.

Perhaps the French and others should be happy that quality products produced elsewhere, use the current names. As the article below notes, renaming products could make them equally if not more famous when they are judged by quality, and could wind up supplanting the original in the hearts and on the tables of consumers. For me, that is certainly the case. 10 year old Ararat is my favorite drink, and I would not even think of paying all that extra money for the stuff produced in France.

The bubble bursts for Ukraine’s “Champagne”

By Shaun Walker in Kiev

Monday, 28 February 2011

Ukrainian winemakers will be forced to stop labelling their sparkling white wines as “Champagne” as part of a free trade agreement with the European Union due to be signed later this year. The head of the EU delegation to the country said last week that the issue is a “non-negotiable” part of the deal, which is expected to come into force in 2013.

Since Soviet times, the vineyards in the southern Crimea region of Ukraine have produced a syrupy sweet sparkling white wine, which is known as shampanskoye. It is often unpalatably sweet for Western European tastes, but is very popular in Ukraine and Russia.

From next year, however, producers will have to come up with another way to describe it. “Alternative names must be adopted,” said José Manuel Pinto Teixeira, the head of the EU mission in Ukraine, last week.

There are nearly 3,000 food and drink products which must be made in a particular area for the name to be used in the EU, including Parma ham, Roquefort cheese, and – as of last week – the Cornish Pasty. But in Ukraine, there are a whole range of products, first marketed in the Soviet era, that copy Western names. Aside from shampanskoye there are also the brandies known as konyak and sweet red wines called Madeira, not to mention local cheese brands marketed as Feta. All of them would fall foul of the EU’s rules.

“I don’t know what they should call shampanskoye but I have an idea for Ukrainian Madeira,” said Mr Teixeira. “The wines are produced in a place called Massandra. Why not call them Massandra wines, and who knows, maybe in a few years from now, tourists will travel to Massandra especially to drink the wines.”

Mr Teixeira said that Spain is an excellent example to Ukraine that rebranding products can work. When the country joined the EU, they were forced to rename “Spanish champagne” as Cava. “Now everybody knows what Cava is,” he said.

The trade deal with Ukraine, which both sides want to sign later this year, will ease trade barriers and bring the former Soviet state a step closer towards eventual EU membership. The branding issue has been one of the hardest for the Ukrainians to accept, said Mr Teixeira. Government ministers have now accepted that it is the end of the road for shampanskoye, but other Ukrainians are not convinced.

“I haven’t heard about this, but I can’t imagine anyone is going to stop calling it shampanskoye,” said Marina, a cashier at a Kiev supermarket.

(from www.independent.co.uk)

Bank Fraud in Ukraine

Tuesday, November 10th, 2009

Recently, one of my business partners here in Ukraine read his bank statement and discovered that he was the victim of fraud.  Parties unknown had withdrawn money from his European bank account…in Egypt. Well, today it was my turn to be the victim.

What the experience of my partner and I have in common is this:

We, like other travelers and ex-pats, use our bank debit cards to make withdrawals at ATMs here in Odessa.

…and the money was withdrawn from each of our accounts in Egypt.  In my case,  the fraud occurred after I had made a small withdrawal from UKRSIBANK (a member of the Paribas Group) here in Odessa this past Sunday. I am still verifying if my business partner had made any withdrawals from the same bank ATM.

I am not an expert on fraud, but I would think that banks would take precautionary measures to prevent this sort of thing.  Maybe it is an “inside job?” Would not surprise me. Bank fraud is prevalent throughout Ukraine. I was told this before I entered Ukraine. In fact, it is difficult to order goods and services online, and pay with a credit card.

Recently, a  Ukrainian banker(s) stole a BILLION U.S. dollars!! This was part of the money given to Ukraine by the International Monetary Fund. While the amount illegally withdrawn from my account was only about $1,000., there are probably scores of others who may have had considerably more taken.

One can only hope that Ukrainian banks-especially those that are foreign subsidiaries of larger institutions-are monitored more carefully by their parent companies, and that this type of fraud is addressed. Ukraine has great potential as a tourist destination as well as a place to do business. It would be a shame if it became known as a nation of thieves.


Hitler’s Ukrainian Bunker

Thursday, July 2nd, 2009

A few weeks ago, two of my business partners and I traveled by car from Odessa to Western Ukraine. On our way back to Odessa, we decided to stop and see Hitler’s wartime bunker in Vinnitsa, about 150km west of the Ukrainian capital of Kyiv. We had heard that it was more like a Roman ruins, and we were not surprised that there wasn’t much to see in terms of a structure that one could easily identify as a bunker.

What we found were bits and pieces of reinforced concrete in the area, scattered about since the bunker and the surrounding above ground structures were bombed. The actual bunker-called Werewolf-is sealed off. Recently, a team of Russian engineers surveyed it and proclaimed that it is unsafe and cannot be opened to the public since it was mined by retreating Germans. Apparently, live munitions remain in place, though this could be just a canard to keep the curious as well as neo-Nazis out.

The area where the bunker was built looks similar to an alpine forest in Germany. The bunker and barracks complex-which housed an army of SS- was easily concealed from aerial views by the woods. The surrounding fields-beautiful spans of Ukrainian farmland-were ideal for massing tanks and aircraft.

Hitler was transported by air to this command post.  From this vantage point, he directed Operation Barbarossa…the invasion of the Soviet Union…and watched his evil fantasy of “Lebensraum” unfold. Living space for Germans in the vastness of Ukraine and Russia was never realized, though the deaths of millions of Jews and Slavs unfortunately was.

One of the strangest aspects about visiting Hitler’s Bunker, is seeing what it has become: a Ukrainian National Park (see photo of sign below), where families stroll with their young children and couples congregate. Although it is a picturesque area, it is difficult to comprehend why Ukrainians would want to be there, other than to appreciate it’s historical significance. One would think that the death of millions of Ukrainians and Russians at the hands of Nazis who built this bunker for their beloved Fuhrer, would weigh on the minds of those spreading their picnic blankets about.

On the other hand, perhaps a park is a way of turning a negative into a positive? I however, found another form of expression. Before I departed the area where the most physical evidence of the Nazi invasion persists-a large piece of concrete from the bunker structure-I relieved myself on the remains of this edifice. Pissing on Hitler’s Bunker was my way of turning a “negative” into a “positive.” Maybe the grass will grow a little a little greener as a result?

…and coincidentally, just as I was finished “watering” an area where the Fuhrer might have walked more than six decades ago, a friend of mine in Odessa called me. Since my business partner wanted to hear as well, I put the call on speakerphone. The caller was walking through the center of Odessa where many street musicians play for small change and the music was now being broadcast over a good portion of the bunker area…excuse me; Ukrainian National Park. At that very moment, a familar piece of music was now echoing out: Hava Nagila.

Hearing Jewish folk music waft across a graveyard of Hitler’s dreams: perfect!!


Ukraine economy worse than previously thought

Friday, June 19th, 2009

This will come as no surprise to people living and working here, but the International Monetary Fund sees greater economic decline than it had projected earlier. The real concern…spoken in hushed tones by businessmen here…is that things may not really improve until the political situation does. The upcoming elections could help, but real reforms will be slow in coming and that may keep Ukraine in an economic funk long after other emerging markets recover.

IMF Sees Sharper Downturn in Ukraine, Budget Strain Amid Crisis

By Kateryna Choursina and Timothy R. Homan

June 18 (Bloomberg) — The International Monetary Fund will likely change its forecast for an 8 percent economic contraction in Ukraine to a sharper decline, an IMF spokeswoman said.

“We do foresee a sharper-than-expected contraction,” Caroline Atkinson, director of external relations at the IMF, told reporters today in Washington, adding that the numbers are still being worked out. “Obviously we are looking at the strains of the budget from the deeper contraction and from the continued financing need of Naftogaz.”

The global economic turmoil forced Ukraine, like other emerging markets, to seek assistance from the IMF last year to prop up its financial system and currency. Moreover, the Ukrainian government said this week it will increase the capital of state-run energy company NAK Naftogaz Ukrainy as it seeks funds to pay for natural gas to be stored over the summer.

Of the $16.5 billion the IMF has allocated to help Ukraine, the first $4.5 billion tranche was received in November and the second $2.8 billion in May.

The IMF originally planned a third payment of $2.8 billion, which Prime Minister Yulia Timoshenko has said can be $3.2 billion. To qualify for that installment, Ukraine needs to stabilize its troubled lenders.

The use of third tranche specifically to bolster Ukraine’s budget “is quite possible,” the IMF’s Atkinson said.

An IMF mission is scheduled to depart for Ukraine next week, she said.

(from www.bloomberg.com)

Not enough men in Ukraine! Why is that a problem?

Thursday, June 18th, 2009

OK…if you are a woman living in Ukraine you might think differently. However, if you are a man that likes women and you seek less competition, then you aren’t shedding too many tears.

Of course, behind the statistics there are discomforting reasons contributing to a shortage of men. The usual suspects include diet and lifestyle, high per capita alcohol and tobacco consumption, traffic accidents, a lack of safey standards and enforcement, TB & HIV, an inadequate health care system, and men leaving to seek employment and business opportunities in other countries.

Another factor are the high levels of stress due to a culture that has lost some of it’s bearings after the fall of the Soviet Union, and the lack of a stable political system and economy. Moreover, the difficulty in completing even the simplest task, as well as endemic corruption, wears people down in a way that is insidious and often obscured.  Something as simple as crossing the street in any Ukrainian city, can create a level of stress that one rarely experiences in the developed world.

Of course, women are also subject to many of the same stresses that men are, perhaps even more so when they are caregivers or mothers. As in most countries however, their level of alcohol consumption tends to be far less for example. Moreover, they are generally not employed in jobs that have the same degree of hazards that men are exposed to. In most societies, women also tend to utilize the health care system more than men and perhaps are genetically predisposed to deal with certain types of stress better.

Deficit of men in Ukraine is 3.6 million

As of January 1, 2009, the number of Ukrainian population made up 45 million 963 359 people (as of January 1, 2008 – 46 million 192.3 thousand people, as of May 1, 2009 – 45 million 881 048 people).

According to the official information of the State Statistics Committee of Ukraine, the number of urban population made up 31 million 331,587 thousand people as of January 1, 2009 (as of Janaury 1, 2008 - 31 million 413,1 thousand people, as of May 1, 2009  – 31 million 294,756 thousands), out of them men – 14 million 349,742 thousands, women – 16 million 981,845 thousands; rural population – 14 million 631,772 thousand people (as of January 1, 2008 - 14 million 779,2 thousands, as of May 1, 2009, – 14 million 586,292 thousands), men – 6 million 835,190 thousands, women – 7 million 796,582 thousands.

As for the age difference, the average age of a Ukrainian made up 40.1 years as of January 1, 2009. In particular, the average age of men made up 37.3 years, women – 42.5 years. Besides, as of January 1, 2009, the age of 1 thousand 425 Ukrainians, including 287 men and 1138 women, exceeded 100 years old.

(from www.unian.net)

Odessa’s newest Party place, that few know about…for now

Tuesday, June 16th, 2009

Even the most jaded Odessa local, expat or tourist will enjoy the new restaurant cafe Kakadu (Russian for the tropical bird Cockatoo)  located in the courtyard just behind McDonalds on Deribasovskaya and Krasnyi Lane.

Kakadu has a genuinely eclectic menu and is reasonably priced with generous portions of food (our favorite so far, is the Caesar salad). The interior of the restaurant has the sort of masculine style of expensive martini bars one would find in New York, yet it maintains an intimate and romantic atmosphere. The courtyard seating evokes the feeling one gets sitting outside a villa in Italy or Western Europe and is a nice respite steps from Deribasovskaya.

Kakadu has just started a “Ladies Night” every Thursday evening (free drinks with a coupon) and if the past two Thursdays are an indication, the event is gaining in popularity as some of the most beautiful women in Odessa are starting to congregate there. Let’s just hope that the place doesn’t become too popular and they start charging a cover.

Caution when using ATMs in Ukraine

Friday, June 12th, 2009
ATM Malware Lets Criminals Steal Data and Cash
by Elinor Mills

Malware has been found on ATMs in Eastern Europe and elsewhere that allows criminals to steal account data and PINs and even empty the machine of its cash, a computer forensics expert said.

About 20 ATMs have been compromised in that manner, mostly in Russia and Ukraine, but there are “early indications” of compromised ATMs in the U.S., said Nicholas Percoco, vice president and head of SpiderLabs at Trustwave, which provides data security and payment card compliance services.

Nicholas Percoco heads up Trustwave’s SpiderLabs, the forensics team that discovered the malware on the ATMs.

(Credit: Trustwave)

Percoco said he could not elaborate further on where the compromised ATMs were located and how they were used.

Someone had to manually install the malware on the machines, so it’s likely that an insider is responsible; either an employee at the bank, the ATM vendor, a company that services the machines or someone close to an insider, Percoco said in a telephone interview late on Wednesday.

The machines, all running Windows XP, had an executable on them that was masquerading as a legitimate Windows protected storage service, he said. The malware looks at all the data being processed by the ATM and records account information that is stored on the magnetic stripes on cards inserted into the machine and encrypted PIN blocks that are generated when someone types in their personal identification number, he said.

Although the PINs are encrypted, criminals could potentially intercept the encryption keys exchanged with the bank and use them to decrypt the PINs, he added.

Once the malware has been hidden on the ATM for a period of time, the criminal can return to the machine and use a special “trigger” card to control the ATM and print out the stolen data directly from the machine or instruct the ATMS to dispense all the cash it has, according to Percoco. ATMs can hold as much as $600,000 at a time, he said.

“There is evidence that (trigger) cards were used,” he said, adding that he could not comment on the number of accounts affected or amount of money stolen. The malware was first installed on at least one of the machines in July 2007, he said.

This is not the first time malware has been discovered on ATMs, Percoco said. “But this is probably the most sophisticated malware found on an ATM,” he said. “In all the versions we’ve looked at (the criminals) are enhancing the application as they go. They must be getting feature requests from someone.”

The latest version of the malware code found on some of the machines includes a function for writing the stolen data onto a card with a memory chip on it, which are commonly used in Europe, he said. However, that function does not appear to work, he added.

Although the malware was installed on the ATMs manually, it’s possible that future attacks would involve the propagation of the malware through the ATM network, he said.

Consumers should avoid using any ATM that does not “look right,” Percoco said, for instance, if the screen has a different interface or strange commands.

Also, criminals use “skimmers” over the slot where the card is inserted that steal the data that way and can record PINs with a hidden video camera positioned nearby.

(from www.news.cnet.com)

Pensions in Ukraine

Friday, May 22nd, 2009

Retirement no joy for most because of paltry pensions

Yuliya Popova, Kyiv Post Staff Writer

An average monthlypension of $100 might be enough tosurvive on, but certainly not enough to live well on.

Unlike their peers in most European countries, Ukrainian pensioners are too poor to enjoy retirement.

The MacDonalds of Scotland and the Zhornyaks of Ukraine are two retired couples. Both sets are highly educated, hard-working and looking forward to summer. But they lead vastly different lifestyles because of the retirement benefits each country offers.

While the MacDonalds hope for sunny weather so they can make a trip abroad and attend jazz festivals, the Zhornyaks want enough rain to produce a big harvest on their land plot. They will need the food to survive the winter.

Retirement is one of the many huge divides still separating richer Western nations from poorer Ukraine.

It’s not that Ukraine doesn’t spend a large share of its national wealth on pensioners, though. To the contrary, the nation spends a greater share of its gross domestic product than most nations. The problem is that the money just doesn’t amount to much. Moreover, a steady demographic decline is creating an even more onerous burden on working taxpayers just to maintain the tattered social safety net that exists.

The consequence is that retirement, considered part of a person’s “golden years” in more affluent nations, is a hardship for many of Ukraine’s 14 million pensioners, almost a third of the nation’s population. With average monthly pensions of roughly $100, they can afford only basic food and medicine.

“Before retirement, we lived like humans. We were able to afford summer holidays and pretty much anything we wanted,” said Nadia Zhornyak, 63, who worked as an engineer in central Ukraine’s Cherkasy. “But now we are beggars relying on potatoes and cabbage from the dacha.”

The MacDonalds, by contrast, relish retirement.

“My pension, combined with that of my wife’s, is adequate for our needs and is sufficient to allow some foreign travel. But we have to be careful how we spend it,” said James MacDonald, 73, who taught geology. The family’s income – combining various pensions and investments – is “more like 70 percent of my final wages,” MacDonald said.

In Ukraine, the Zhornyaks rely primarily on a state pension because they have little in the way of private savings or investments. They have enough to pay for one week of food and the monthly bills for their subsidized electricity, water, gas and heating.

But even these paltry sums may be endangered. The recession is biting hard at Ukraine’s economy and, in turn, budget and pension fund receipts. President Victor Yushchenko sounded the alarm bells in April, warning of a potential Hr 10 billion deficit in the Ukraine’s annual Hr 164 billion pension fund. In an attempt to keep citizens calm, Labor Minister Ludmyla Denysova insisted that there’s enough money to pay everyone in full and on time.

But independent experts side with the president’s bleaker assessment. Ludmyla Kotusenko, of the Case Ukraine Center of Socio-Economic Research, projected an Hr 8 billion “hole” in the pension fund this year.

The Zhornyaks get their monthly $200 on time for now. But as employment and wages are cut across Ukraine, and with as much as half of the economy off the legal radar, economists say the pension system is in deep trouble. The demographic trends – a shrinking and aging population – exacerbate the financial situation. “Each worker has to support one pensioner,” Kotusenko said. “And with the growing number of elderly, it will get worse.”

The result, as the International Monetary Fund has pointed out, is that benefits will most likely have to be cut or revenues increased, or a combination of both.

Pension fund expenditures will this year increase from 15 to 16.5 percent of GDP, among highest in the world, according to Ceyla Pazarbasioglu, the head of the IMF mission in Ukraine. But revenues add up to only 11 percent of GDP, leaving a deficit that is covered by the state’s general fund revenues, Pazarbasioglu noted.

“In this context, the IMF recommended measures to avoid a further deterioration of the finances of the pension fund,” she said. Pazarbasioglu said that, over the past three years, the average pension has increased by 140 percent, more than the rate of inflation.

“Pensions were growing faster than average salaries and the economy, which led to a huge deficit during the crisis,” said portfolio manager Alexander Tulko from Troika Dialog Ukraine.

Operating on the pay-as-you-go principle, employers contribute 33 percent of the total wage pool to the pension fund. The remainder comes directly from the state and compulsory 2 percent contributions from individual salaries. “However, this is a road to nowhere, because this money is used to finance only existing pensioners, and you don’t know what your situation will be like in 20-25 years from now,” Tulko said.

Besides having economies flusher than Ukraine’s, many European countries also give people a greater range of private investment options with their mandatory deductions. Many private companies in these nations also offer private pensions to their workers.

The financial turmoil, however, has drastically cut investment returns on private funds. The MacDonalds said that many retirees in Scotland “are faced with a much less comfortable existence in retirement than they had anticipated – no new car, fewer or no foreign holidays, difficulty in finding buyers for their large houses if they want to move to smaller ones, etc.”

But private, company-sponsored pension funds and individual private investment portofolios are rarities in Ukraine.

Improvements in Ukraine’s state pension system – either from the point of view of beneficiaries or the state – are not expected anytime soon because of politics. Ukraine’s next presidential election is likely in January.

Analysts at the International Center for Policy Studies explain that the state can’t afford to let people divert some of their state-fund contributions to private investments – not if government wants to keep pensioners such as the Zhornyaks from slipping more deeply into poverty. “Obviously, no one will dare institute [the reform] in 2009 or even in 2010, while attempts to introduce it later will stumble on worsening demographic trends,” analysts said in their pension system overview in December.

The IMF and World Bank have suggested that Ukraine might want to increase its retirement age. Ukrainian women currently are pension-eligible at 55 and men at 60, while most Europeans leave work at 60 and 65, respectively.

Tymoshenko dismissed the change out of hand, noting Ukrainians’ shorter life expectancies. According to the World Health Organization, Ukrainian men can expect to live to 61 years and women to 74.

Some demographers disagree. “It’s a common delusion,” said health expert Olena Paliy of the Kyiv-based Institute of Demography, who favors raising the retirement age as part of the solution. “Life expectancy at birth is sensitive to the rate of deaths in the early years of life. Those who reached 60 are expected to live another 14 years.”

Meanwhile, in Scotland, the MacDonalds write books, play in a jazz band and plan their next foreign trip while the Zhornyaks of Ukraine will be getting their hands dirty growing their own food – putting their faith in the land, rather than the state.

(from the Kyiv Post)

Investors stay the course in Ukraine

Monday, April 20th, 2009

“Best kept secret in Europe!”  That is the cornerstone behind the founding of MBS Ltd.  Our philosophy is that we can help companies navigate and mitigate the pitfalls and obstacles of doing business here, to take advantage of the many opportunities. This requires vision, and a LONG TERM perspective. For those individuals and companies that have that, the rewards will be great as Ukraine is a “virgin” market, untapped and ready to be reshaped.

We believe Ukraine will at some point, break free from current restraints and “leap frog” over many of its more developed neighbors like Poland. With MBS Ltd. and very soon BOZONGO.COM, investors and entrepreneurs will have the tools they need to realize their goals here.

Hard-Core Investors Staying Put Despite Endless Crises

KIEV, Ukraine — Weak competition, high profits still make nation a promised land for some businesses. No matter what Ukraine throws at them, a small, hard-core group of foreign investors – from giant multinational corporations to lone expatriates – weathers the turbulence.

A conveyor line at the Trostyanets chocolate factory in Sumy Oblast, the biggest Kraft Foods factory in Ukraine.

They stay through crisis and boom times, “blue” and “orange” politicians, a hryvnia worth 4.6 to the dollar and a national currency that trades closer to 10.

They stay put when other foreigners get scared away by headlines of rampant corruption, a sea of bureaucratic red tape and political chaos. Who are these determined businesspeople? Do they make a lot of money here? If so, how do they manage to swim in Ukraine’s muddy waters?

“Ukraine is the best kept secret in Europe,” insisted George Logush, vice president of Kraft Foods International and area director for Ukraine, Eastern Europe and Central Asia. “The European media did a wonderful job, focusing on negative things and rarely showing positive aspects. [To them, I say]: ‘Thank you for sheltering this market for us from the competitors.”

Kraft Foods Ukraine is part of Kraft Foods, the world’s second-largest food and beverage company. It is one of the most successful investors in Ukraine, known by Ukrainians for Korona and Milka chocolate, Jacobs coffee, Lux potato chips, holding a leading position in all three categories. In 14 years, Kraft invested more than $150 million into Ukraine’s economy and increased its business by 100 percent, Logush said, a feat that “would not be possible in very many countries.” Today, the Kraft group boasts annual revenue in Ukraine of about $400 million on domestically-produced products, and more on imports, such as coffee.

The company arrived in 1995, when the economy was still reeling from the collapse of the Soviet Union four years earlier. The hryvnia, the new national currency, had not yet arrived. In its place, until 1996, Ukrainians used the karbovanets, a coupon-like form of payments.

One of the keys to Kraft’s success, Logush said, has been the company’s ability to take advantage of hard times to introduce new product lines. “Now we launch biscuits,” Logush said. “Crisis is the time when you can shake up the established order, because it’s being shaken anyway.”

Yet Kraft remains one of a relatively small number of multinational corporations and foreign investors who have ventured into Ukraine, a vast and largely untapped market of 46 million citizens.

The nation has attracted a mere $35 billion in foreign investment since independence. By comparison, nearly $200 billion has poured into neighboring Poland, a European Union member with eight million fewer citizens than Ukraine, since the Soviet Union’s collapse.

Many investors have stayed out because of corruption, red tape and political squabbles between ex-Prime Minister Victor Yanukovych’s “blue” forces and the “orange” ones led by the now-dissolved alliance of President Victor Yushchenko and Prime Minister Yulia Tymoshenko.

Jorge Zukoski, president of the American Chamber of Commerce, said Kraft’s success is shared by many foreign investors brave enough to tiptoe into the market. They stay, Zukoski said, because they’re generating higher profits than they might in other nations. By establishing themselves first, companies such as Kraft grew fast, faced limited competition and can look forward to high growth rates ahead.

Zukoski said it helps to be in a place for the long run.

“At the end of the day, the large strategic and institutional investors that we represent see the current global financial crisis as a short-term blip on the radar screen. They look at Ukraine as a 50- to 75-year play and understand that there are very few countries left in the world that have the potential to drive future growth for their companies.” Despite the challenges and difficulties, chamber members keep striving for a Ukraine that is “competitive and well-positioned when global growth resumes,” Zukoski said.

But for some investors, the headaches of doing business in Ukraine are simply too much. And, while normal economic cycles are manageable, sometimes Ukraine’s off-the-charts corruption is not.

“The crisis did not affect our business in Ukraine as much as the corruption,” said Hanan Mor, owner of an investment company, in an interview with Israel’s Calcalist newspaper. “That is why we are stopping any business initiatives in this country.”

But the cheerleading and individual success stories cannot hide the fact that, by many measures, Ukraine’s business climate remains unfavorable. The list of grievances is long: unstable legislation, corruption, red tape, non-transparent taxation system, raider attacks, abuse of intellectual property and auctioneer rights.

Politicians are aware of the problems, even if they seem unwilling or unable to improve the situation. As parliamentarian Nataliya Korolevska told an investors’ conference in February: “As the world investment capital reaches $1.5 trillion, Ukraine has to do everything to participate in the process under competitive terms.”

Hard-core investors say instability is part of the game.

“I’ve been here for 15 years and this country has never been stable. I wouldn’t advise anybody to stay out of Ukraine, just because they want to wait for the next election,” said Glen Willard, a 15-year business veteran in Ukraine and founder of Willard, an advertising and public relations company.

Willard admitted that the worst part of doing business in Ukraine is its unpredictability. “Other than that, business is not easy anytime, anywhere,” Willard said: “So just get over it.”

Kraft’s Logush also said Ukraine is not for the squeamish.

“If you need to find an excuse to leave the country, you’ll find it,” Logush said. “Particularly, in terms of political instability, I think people are just extremely shortsighted and purposely blind. How long has democracy been in Ukraine?”

American businessman Paul Waters is one of hundreds of expatriates who have thrived on the Ukrainian market. Since arriving 17 years ago, Waters appears to have done a little bit of everything in Ukraine and he has no intention of leaving. From steel trading to the construction business, software and solar panel systems development, Waters said that “Ukraine has been very kind to me. I could be sitting on my boat in California fishing. But in Ukraine, I am enjoying everything. It’s not a Disneyland, it is real,” Waters said.

Waters did, however, confess that it took him awhile to get accepted. He also was cheated several times by Ukrainian partners.

“When I arrived, there were all these Soviet bosses, running businesses and, certainly, they were not as open to our ideas,” Waters said. Ukrainian companies still lack efficient administrators, but they have plenty of highly educated people, computer wizards and other professional standouts to choose from, according to Waters.

Seasoned foreign investors have had success in the financial, insurance and telecommunication sectors, as well as food production and construction, according to Konstantin Stepanov, chief analyst at Sokrat investment group.

The leading individual foreign direct investment in Ukraine’s all-important metal sector came from the $4.8 billion re-sale of the former Kryvorizhstal steel mill in Kryviy Rih, the nation’s largest steelmaker, to ArcelorMittal Steel in 2005. The sale followed a scandalous purchase by a group led by Ukrainian billionaires Rinat Akhmetov and Victor Pinchuk, who bought the steel mill for six times less than what ArcelorMittal, the world’s largest steel company, paid in an open auction.

So, 18 years after independence, Ukraine still represents a big gamble with big potential payoffs – and terrible downsides. It’s a high-risk, high-reward game, Logush admitted. But many are betting that emerging economies will get out of the crisis more quickly than developed ones.

“Which of them will [foreign investors] gamble on first? The ones with the greatest multiplier effect, the largest scales, like China and Brazil. But they always want to spread the risks,” Logush said. “I think those who’ll go into the Ukrainian economy will do very well.”

(from the Kyiv Post)