Ukraine's Political Change Unnerves Investors

KIEV, Ukraine -- An apparent divergence of economic thinking at the heart of government has unsettled the private sector and foreign businesses. The leaders of Ukraine's Orange Revolution hoped that the country's political change would stimulate a wave of inward investment, especially from the west.

State Secretary Oleksander Zinchenko

But so far it has not happened. Many business people are coming to Kiev to investigate the potential, but few have put down much hard cash. “It is slower than we hoped,” says Oleksander Zinchenko, the state secretary and one of President Viktor Yushchenko's key political allies. “Of course we are a bit dissatisfied.”

Mr Yushchenko intends to make a fresh appeal to international business this week at a meeting in Kiev of the Swiss-based World Economic Forum, which is bringing in more than 100 executives. Mr Yushchenko and his officials will emphasise their promises to open Ukraine to business especially western business that felt excluded under his authoritarian predecessor, Leonid Kuchma. But he will have to clear up doubts about government policy, notably the confusion surrounding plans to review some of Mr Kuchma's privatisations. He said yesterday he would wind down the privatisation review but did not say how. He promised to launch new privatisations including Ukrtelecom, the national fixed-line phone operator.

Mr Yushchenko will also face questions about his relations with Yulia Tymoshenko, the tough prime minister, who seems to be promoting a larger role for the state in the economy than the more market-oriented Mr Yushchenko. As Mr Zinchenko says: “The majority of investors don't like the political situation too much.”

Jorge Zukoski, president of Kiev's American Chamber of Commerce, said that in spite of Mr Yushchenko's strong statements on foreign investment, his government had made many contradictory decisions that had caught his group's members by surprise and left them confused about what the administration's direction would be.

A big mis-step was a budget law adopted in March that broadened the application of value-added tax and applied the changes retroactively, he said. “What we'd really like to hear is a reaffirmation that the government will have an organised and consistent dialogue with the private sector,” Mr Zukoski said. Business people accept that the country's economic growth is unlikely to match last year's record level of 12.1 per cent, which was partly fuelled by high world prices for steel, Ukraine's main export commodity. They say this year's forecast figure of 5 per cent is reasonable, given the upheaval of the revolution. However, they fear that investment policies may remain unsettled, at least until after next spring's parliamentary elections.

Ukraine has one of the lowest rates of foreign investment in eastern Europe, with $8.8bn (€7.5bn, £5bn) of accumulated foreign direct investment (FDI), or $187 per capita, as of the end of March. New FDI in January-March, at $444m, rose 54 per cent over the same period last year but the figure largely represents reinvestment by established companies.

Some new investors are starting to spend money, notably Ikea, which announced plans last year to invest $300m. But other well-publicised deals have yet to go ahead, for example the Austrian bank Raiffeisen's plans to buy a second local bank for up to $600m.

Russia's business groups, the biggest investors in Ukraine, were initially enthusiastic about the new government but they too are having second thoughts. Russian oil companies TNK-BP, Lukoil and Alliance Group, which own large refineries in Ukraine, were hit with temporary price caps on petrol in April-May and have since had to compete with imported oil products after the government lifted import duties. Lukoil, tyre maker Amtel and aluminium companies Rusal and Sual are also being threatened with revision of the privatisation deals through which they acquired some of their assets in Ukraine. Russia's National Reserve Bank, a private commercial bank, announced last week that it was freezing its investments in Ukraine after two of its projects a joint venture with Kiev's Hotel Ukraina and a waterfront resort in Crimea fell under investigation.

Ms Tymoshenko is hoping to announce at the conference that Ukraine's largest steel mill, Kryvorizhstal, will be reauctioned.

The mill was sold last year for $800m to Viktor Pinchuk, Mr Kuchma's son-in-law and two other Ukrainian businessmen, in a tender the new government says was manipulated.

Source: Financial Times