Business drives Ukraine`s Euro-Atlantic integration

Ukraine`s Euro-Atlantic integration is first and foremost today being driven by the private business community in Ukraine, Europe, and the United States.

Ukraine`s aspirations for Euro-Atlantic integration, to be a major member of the world`s community of strong, democratic, independent, prosperous, private business sector driven nations, will be realized largely through the present leadership and investments from the business community and then hopefully with some real support later from the politicians and government leaders.

While the politicians of many countries, including Ukraine, argue and debate about whether Ukraine should ever be given a MAP for eventual NATO membership and when, if ever, Ukraine will have the opportunity to join the European Union the Ukrainian and international business communities are moving ahead very rapidly with large-scale economic and business integration.

This integration is being accomplished in spite of a general lack of new reforms being implemented by the government and the high level of political instability that has existed for the last several years which has hurt the number of new jobs created, the level of wages, and the creation of wealth.

ECONOMY SHOWS ROBUST GROWTH

The Ukrainian economy in 2007 continued to show robust growth, demonstrating strong resilience to energy price shocks and a solid immunity to political instability and global financial turmoil, according to The Bleyzer Foundation`s latest monthly Macroeconomic Report.

According to preliminary estimates of the State Statistics Committee of Ukraine, GDP grew in 2007 by a real 7.3% year-over-year (yoy) to about UAH 700 billion ($140 billion), notably exceeding the 6.5% yoy growth expected at the beginning of the year.

With average real GDP growth of 7.8% per annum over the last five years, Ukraine was among the fastest growing economies in the region.

In 2007, economic growth was underpinned by buoyant consumption and investment growth as well as a favorable external environment. Private consumption was the leading factor contributing to GDP growth in 2007.

In turn, it was supported by a continuing credit boom and strong growth  in real disposable income of households (up by 12.8% yoy in 2007).

Despite a prolonged period of political instability, the strong increase in investment demand was driven by the growing need to renovate existing production capacities in order to meet growing input costs and intensifying competition, as well as infrastructure expenditures and realization of Greenfield projects.

In 2008, the Ukrainian economy is expected to grow by about 5.5%. Slower real GDP growth compared to 2007 will reflect a 38% increase  in the cost of imported natural gas as well as more difficult forecasted external conditions.

The only major move by the government of Ukraine in the economic area has been to finally, after many years of delays, complete all the necessary requirements for membership in the World Trade Organization (WTO). Membership became a reality this month.

MIDDLE CLASS PURCHASING POWER AND SKILLS

Ukraine now has a large middle-class that has real purchasing power and the range of the skills needed for large-scale business development. They are creating a new wealth building capacity in Ukraine.

This new middle-class has developed since independence in 1991 and has had the opportunity for international education and job experience.

This is an exciting and challenging time for young people in Ukraine who now have the opportunity to gain wealth the old fashioned way, by earning it....not by basically stealing it, gaining it though political connections or by engaging in outlandish corruption schemes.

In March I attended a Ukrainian Investment Conference in London sponsored by the Adam Smith Institute.  Almost 800 people attend the Conference with over 500 of them coming from Ukraine.  The attendees from Ukraine were mostly young to middle-aged citizens who wanted to do real business, not just sit around and talk about when Ukraine might join NATO or become a member of the EU.

They are not driven by foreign policy and governmental agendas but by their interest in building their businesses by creating jobs, hiring people, borrowing funds, selling services, having adequate salaries, increasing sales, and showing strong earnings at the end of each year.

It was refreshing, exciting and very encouraging to be at the London Ukrainian Investment Conference and experience the vitality and energy one could see and feel. One could begin to realize that Ukraine is going to make it, is going to succeed, is going to do what is needed to be integrated into the Euro-Atlantic Community.

Many of the new Ukrainian businesses started in the 1990`s are now strong and large enough to export their goods and services, to invest in countries like Poland and Romania. Ukrainian business has more money invested in Poland than Poland has invested in Ukraine.

These new businesses are of interest to international businesses looking for mergers, acquisitions or equity investments in Ukraine.  Pepsi- Cola just paid over $600 million for the Sandora juice company.  A French company also purchased a juice company in Ukraine for over $200 million.

A considerable number of the new Ukrainian businesses are now positioned to obtain a variety of financial services in Warsaw, London and New York.  Ukrainian businesses are no longer just operating in Ukraine but moving into the international business scene.

Companies like Kernel (agribusiness) and Ferrexpo (mining) have been successful in securing large amounts of international capital. Volia Cable (broadband) attracted more than $200 million from Providence Equity Partners in Providence, Rhode Island.

The Ukrainian business community clearly understands the necessity to be integrated into the international business community, especially the Euro-Atlantic region, and is taking the necessary actions and making this a reality.

INTERNATIONAL BUSINESS COMMUNITY

The international business community has finally recognized the tremendous opportunities in Ukraine and are moving rapidly to integrate their business operations into Ukraine.  Companies already working in multiple countries, but not in Ukraine, are realizing they do not want to be left out of a country with 47 million people. Ukraine represents the largest emerging market in Europe today.

These companies have decided they had better start in Ukraine before it is too late, before all the best opportunities are gone.  These companies have decided they will find a way to operate in Ukraine regardless of the political, legal and business environment.

European banks have invested billions of dollars these past three years buying banks in Ukraine. This has been a real boost for Ukraine and its highly underdeveloped and underfunded financial institutions.

The European banks bring with them expertise, world-class technology, modern accounting practices, access to international money markets and thus adequate funds and in the long-run lower interest rates, all of which are needed in Ukraine.

A business in France or Austria is more likely to be interested in doing business in Ukraine if their bank is also doing business and providing banking services in Ukraine.  This makes their entry into the Ukrainian marketplace much easier. The European banks are bringing with them  a wave of expanded business investment in Ukraine.

A number of international lending institutions, most notably the European Bank for Reconstruction and Development (EBRD) are strong in their support for Ukraine`s economic growth. EBRD is now averaging placement of about $1 billion per year in funds to finance government and private industry projects that in many cases have a major multiplier effect.

European consumer goods companies are also expanding their work in Ukraine. Supermarket chains for food, consumer goods, household and construction supplies are expanding throughout Ukraine.

The real estate market in Ukraine is attracting international investors for office buildings, shopping centers, hotels, and  infrastructure projects. Tourism projects are now gaining international interest.

Law firms in Ukraine are all busy with local and international business clients and are expanding.  More international law firms are opening offices in Ukraine. The law firms all tell me they are searching for lawyers.

IT companies are expanding and looking for new talent.  The IT industry is also attracting considerable international investment. Hundreds of millions are being invested by international investors in agribusiness concerns who are leasing land, buying elevators and processing food.

UNITED STATES COMPANIES INVESTING IN UKRAINE

Westinghouse recently signed a new agreement that after ten years of effort gives the company a five-year contract during which it will be providing nuclear fuel to Enerhoatom, Ukraine`s nuclear power generating company.

During a period when all types of fossil fuel have immense problems relating to costs and environmental impacts, this new contract will allow Ukraine to enjoy for the first time a competitive situation for the fuel needed for its large and increasingly important nuclear power generating facilities.

For the first time in Ukraine`s history as an independent nation, it has a second source to compete with the Russian company that had previously been the exclusive nuclear fuel provider. This program has cost over $60 million with the cost being covered by the U.S. Department of Energy and Westinghouse.

At the same time as the Westinghouse contract, Ukraine signed an amended contract with Holtec International for the provision of the technology needed for Ukraine to provide its own nuclear waste storage. This contract has broad ranging implications for a variety of reasons.

First, the provision for internal storage of nuclear waste will save enough money to pay for the entire cost of the Holtec contract in just two years.

In addition, Holtec will work with Ukraine to develop the ability of local producers to manufacture nuclear waste containers. Ukraine gets not only a solution to a major problem, but also develops manufacturing capacities that greatly enhance its technological potential in this classic win-win situation. The Holtec investment will total over $250 million.

Vanco International of Houston, TX, was awarded the first contract to do deep water drilling in the Black Sea.  This was a major breakthrough for international energy companies and will provide $350 to $500 million in investment.

Companies like Coca-Cola, P&G, AES, ADM, Bunge, Cargill, Horizon Capital, Kraft, WJ Group, Kyiv-Atlantic, ECdata, Shell, Marathon, Siguler Guff, Cisco, UPS, Dipol Chemical International, P&G, Halliburton, EPAM Systems, SigmaBleyzer, the Atlantic Group, ALICO/AIG, Maxwell USA and Och-Ziff Capital Management Group are also continuing to expand their investments in Ukraine.

OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC)

However, I must point to an extremely frustrating situation that continues after almost ten years to blight Ukraine`s relations with the Overseas Private Investment Corporation (OPIC), an economic and business development agency of the U.S. government.

OPIC was in the past and could be again a major contributor to Ukraine`s ability to underwrite foreign direct investment through its programs of political risk insurance.

In addition, OPIC has a number of investment funds that could be energized in a very short time to provide as much as $500 million in funding for SME projects, if certain hurdles could be breasted.

In spite of years of discussion, the government of Ukraine refuses to accept the responsibility to do what is necessary to negotiate an acceptable settlement to a small debt [U.S. $17 million] going back to 1999.

There have been commitments to deal with the OPIC matter during previous governments and the new Tymoshenko government has signaled its willingness to deal with the issue. However, as of this date, years of talk have come to nothing and OPIC still remains closed to Ukraine.

INTEGRATING UKRAINE INTO THE WORLD

In spite of these and other distractions, the domestic and international business community continues to drive the agenda, integrating Ukraine into the world. In spite of self-serving actions by politicians in some cases and even business-hostile actions in others, Ukraine continues to make progress in building strong businesses.

We are now living in one of the most important periods in Ukraine`s history as an independent nation. We hope for greater understanding, support and real action from Ukraine`s politicians, but with or without them, the business community is leading the way to move Ukraine along the way to its rightful place as one of the great and prosperous nations of the world.

By Morgan Williams

"Welcome to Ukraine" magazine

Kyiv, Ukraine, 2 (44), May 2008

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Williams is director of government affairs, Washington office of the SigmaBleyzer Emerging Markets Private Equity Investment Group and serves as president of the U.S.-Ukraine Business Council (USUBC).  He has been active in the economic and business development of Ukraine

since 1993.