After a year of significant change, Ukraine continues to be an attractive destination for foreign direct investment (FDI). The Orange revolution put the country in the international spotlight and has now carried a broad coalition into parliament. Despite upheaval, the country’s fundamental dynamics remain robust, as the country continues to advance from a low economic base. The improving business environment and the potential for World Trade Organisation (WTO) membership have further attracted attention from investors. In this first edition of Emerging Ukraine, Oxford Business Group takes an in-depth look at the events that have shaped the country over 2005-06 with analyses, viewpoints and interviews with major political and business players, including President Viktor Yushchenko, Borys Tarasyuk, Minister of Foreign Affairs, Volodymyr Stelmakh, Governor of the National Bank of Ukraine, and Herbert Stepic, CEO of Raiffeisen International Bank Holding.
TABLE OF CONTENTS
With the euphoria of the Orange revolution replaced by political divisions, tough policy challenges continue to mount for the new government coalition in 2006 and 2007. The “gas wars” of January 2006, unmet expectations and unending political squabbles have left many in the electorate disillusioned. While the new government coalition is likely to be dominated by the Party of Regions, led by Viktor Yanukovych, much has changed since December 2004. The country has entered a period of lively, competitive politics that bodes well for its nascent democracy. And despite the current political stalemate between the blue and orange parties, the medium-term political outlook for Ukraine looks relatively bright. With no more elections scheduled until the presidential election in 2009, Ukraine can enter a period of reforms and growth, apply for World Trade Organisation (WTO) membership and become more integrated in the global economy, leaving behind 15 years of underachievement. In-depth features cover the constitutional reforms made after the Orange revolution, the difficult relationship between Russia and Ukraine, domestic opposition to NATO membership, EU accession and economic reforms, and an explanation for why east Ukraine differs so much politically from the west. Interviews include President of Ukraine Viktor Yushchenko, chief of staff to the President of Ukraine Oleh Rybachuk and Minister of Foreign Affairs Borys Tarasyuk, with viewpoints by Member of European Parliament Dr Charles Tannock and President of the National Academy of Public Administration under the President Vira Nanivska.
From modest beginnings and a very difficult post-independence financial situation, Ukraine’s economy was the fastest growing in Europe from 2000-04. Though challenges such as rising fuel costs, political uncertainty, red tape and post-Soviet legal problems remain, investors are watching the country closely for new opportunities as the business environment improves and WTO membership looms on the horizon. In-depth articles focus on issues such re-privatisation, transparency, foreign investment, the road to WTO membership and issues arising from the country’s Soviet past. Viewpoints include Anders Aslund, Senior Fellow at the Institute for International Economics on re-privatisation, and Dmitry Dragun, Partner of Trust Capital Group on the initial public offerings of Ukrainian companies on the London Stock Exchange.
Ukraine is seeing something of a boom in its banking sector of late. Foreign majors such as BNP Paribas and Raiffeisen International have made significant acquisitions in the sector, as Ukraine, other than Russia, is the last frontier in the otherwise saturated eastern European banking market. Problems remain, and some fear foreign domination of the sector. But with so much foreign expertise and capital entering the market, a significant transfer of knowledge and skills should help the sector to develop, free of heavy governmental intervention. Also featured are interviews with such key figures as Volodymyr Stelmakh, Governor of the National Bank of Ukraine, and Herbert Stepic, CEO of Raiffeisen International Bank Holding.
As it is such a young market, the Ukrainian bourse faces issues concerning standards of transparency, shareholders’ rights and corporate governance. But more and more local companies are seeing the benefits of listing, not least to raise cash for restructuring, though they must decide whether to do so at home or abroad. The chapter includes share analyses on six companies listed in Ukraine, and interview with Anatoliy Balyuk, Chairman of the State Securities and Stock Market Commission, and a viewpoint by Tomas Fiala, Managing Director of Dragon Capital.
The insurance structure has seen major growth, with premiums collected rising six-fold since 2000, and the percentage of market penetration increasing by four times. Corporate and retail customers are now slowly embracing classical risk management practices. While major growth is expected to continue, the government will need to rewrite the tax code to ensure fair and transparent practice in the sector.
Suffering from underinvestment, Ukraine is now making efforts to clear red tape and streamline customs and tax procedures to kick start the development of transport infrastructure, particularly the country’s main international airport in Kiev. The chapter includes an interview with Yuri Miroshnikov, president of Ukraine International Airlines
Work is underway to develop energy generation and distribution, as well as reduce the country’s dangerous dependence on Russian gas. The so-called “gas wars” of January 2006 have spurred efforts to develop domestic oil and gas reserves as well as look for other suppliers. Coal mining, which has a long history in the country, is being looked at anew to reduce dependence on foreign gas. Included is a viewpoint by Garry Levesley, Vice-President of AES Corporation.
With the Black Sea, Carpathian Mountains and wide plains, not to mention a rich cultural heritage, Ukraine has all the necessary draws for a vibrant tourist market. Infrastructure however, is in need of serious investment, but the government has taken action to tackle bureaucratic headaches regarding visa applications, making travel to the country much easier for potential tourists. Featured is a viewpoint by Udo Heine, General Manager of Donbass Palace
CONSTRUCTION & REAL ESTATE
Construction is everywhere in Ukraine as the real estate market struggles to keep up with rising demand. Everything from hotels and office space to residential housing is needed, and local firms are scurrying to take advantage of the opportunities available. Transparency issues, red tape and one well-publicised case of fraud have dampened the enthusiasm of developers, and though costs are rising, so is quality. An interview with Lev Partskhaladze, Chairman of the Supervisory Board, XXI Century Investments, is also featured.
IT & TELECOMS
From a slow start Ukrainian telecoms have leaped quickly ahead of other regional markets. The sector has adopted the latest technologies and savvy consumers have snapped up new phones and taken advantage of packages offered by telecoms providers. Despite challenges that include the privatisation of Ukrtelecom and the partnership gone bad between Russia’s Alpha and Norway’s Telenor, infrastructure is improving and IT is thriving, all good news for the country’s businesses. Featured are an interview with Georgiy Dzekon, Chairman of the Board of Ukrtelecom, and a viewpoint by Bohdan Kupych, VP of Corporate and Business Development, Kvazar-Micro Corporation.
Pharmaceuticals, food and beverage, steel and automotive manufacturing are just a few of the industries with big potential in Ukraine today. It was a major centre of industry in the former Soviet Union, but with independence in 1991, heavy subsidies dried up and a great deal of inefficient capacity was left over. Privatisation and economic development have improved the industry, yet recovery has been uneven between sectors. Price hikes on gas have also presented a new problem, but demand is rising. Included is a viewpoint by Kamen Zakhariev, director of the European Bank for Reconstruction and Development in Ukraine.
MEDIA & ADVERTISING
After decades of tight state control, the Orange revolution of December 2004 ushered in an era of unparallel media freedom in Ukraine, with the press not afraid to criticise even the new government it had helped bring to power. Advertising spending continues to grow, reflecting a rising confidence in the economy, but more emphasis needs to be given to branding and creativity.
Long saddled with inefficient Soviet-era collective farms, the country’s farmers are developing their business skills and improving crop management. Access to credit and loans remains a challenge, as well as inconsistent government involvement. However, investors with capital, technical know-how and a bit of patience can certainly find the right opportunities in Ukraine.
In some ways Ukraine is a rather new country, taking its present shape as recently as 1954 and gaining real sovereignty only in 1991. However, a land called Ukraine is mention in texts written as far back as the early middle ages. Yet the country’s people have withstood centuries of domination by foreign groups as diverse as the Ottomans, the Mongols and Russians.
THE BUSINESS GUIDE: ACCOUNTANCY
Experts at Ernst & Young provide an in-depth look at select accounting issues for businesses in Ukraine, including the new foreign investment regulations of 2005, financial reporting and regulations, the current tax environment, and a look at the overall fiscal environment in the country.
THE BUSINESS GUIDE: LEGAL
Legal firm Baker & McKenzie give a survey of legal issues for businesses, including arbitration and how to open a local business. An overview looks at the constitutional reforms made after the election of the Orange coalition in December 2004, which lessened the powers of the president and the new civil code, which was designed to clarify and unify the legal code.
Featuring profiles of Lviv and the famous port city Odessa, as well as the national poet of Ukraine, the Guide will give you plenty of places to visit, including the country’s premier hotels and restaurants.
All the numbers you’ll need to know, including chambers of commerce, embassies and consulates, airlines, car hire, hospitals and taxis, plus cultural centres and other places of interest.
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