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Morgan Williams assesses Ukraines Euro-Atlantic integration

 

Morgan 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.

 

Ukraines Euro-Atlantic integration is today primarily being driven by the private business community in Ukraine, Europe, and the United States.

Ukraines aspirations for Euro-Atlantic integration, and to be a major member of the worlds 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 from the politicians and government leaders.

While politicians of many countries, including Ukraine, debate whether Ukraine should 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 have been moving ahead rapidly with large-scale economic and business integration.

This integration is being accomplished despite the lack of reforms being implemented by the government and the high level of political instability that has existed for the last several years, hurting 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 Foundations 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 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 and 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 should become a reality in May.

 

Middle class purchasing power and skills

Ukraine now has a large middle class with 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 been developing 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 in the old fashioned way by earning it, and not basically stealing it, gaining it through political connections or outlandish corruption schemes.

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

They are not driven by foreign policy and governmental agendas but by their interest in building businesses through the creation of 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 encouraging to be at the conference and experience the vitality and energy there. One could begin to realize that Ukraine is going to make it, succeed, and do what is needed to become integrated in the Euro-Atlantic Community.

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

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

A considerable number of 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, based in Providence, Rhode Island.

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

 

International business community

The international business community has finally recognized the tremendous opportunities in Ukraine and is moving rapidly to integrate their business operations into Ukraine. Companies already working in many countries, but not Ukraine, are realizing they dont 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 should start in Ukraine before its too late and all the best opportunities are gone. These companies have decided to find a way to operate in Ukraine regardless of the political, legal and business environment.

European banks have invested billions of dollars in the last three years, buying banks in Ukraine. This has been a real boost for Ukraine and its highly underdeveloped and under-funded financial institutions.

With them, European banks bring 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 Ukraines economic growth. The 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, and 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 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 10 years of effort gives the company a five-year contract during which it will be providing nuclear fuel to Energoatom, Ukraines nuclear power-generating company.

In a period when all types of fossil fuel are having immense problems connected with costs and environmental impacts, this new contract will for the first time allow Ukraine to enjoy a competitive situation for the fuel that is needed for its large and increasingly important nuclear power-generating facilities.

For the first time in Ukraines 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 more than $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 of nuclear waste for internal storage 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 not only gets 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 more than $250 million.

Vanco International of Houston, Texas, was awarded the first contract to do deepwater drilling in the Black Sea. This was a major breakthrough for international energy companies and will provide $350500 million in investment.

Companies like Coca-Cola, P&G, AES, ADM, Bunge, Cargill, Horizon Capital, Kraft, WJ Group, Kyiv-Atlantic, ECdata, Shell, Marathon, Sigular 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 10 years to blight Ukraines 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 again be a major contributor to Ukraines 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 overcome.

Despite 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 government of Yulia Tymoshenko has signalled its willingness to deal with the issue. However, as of today, years of talks have come to nothing and OPIC still remains closed to Ukraine.

 

Integrating Ukraine into the world

Despite these and other distractions, the domestic and international business community continues to drive the agenda, integrating Ukraine into the world. Despite 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 Ukraines history as an independent nation. We hope for greater understanding, support and real action from Ukraines politicians. However, with or without them, the business community is leading the way to move Ukraine toward its rightful place as one of the great and prosperous nations of the world.

 

By E. Morgan Williams

 

The meeting of the USUBC with the Minister of

Economy of Ukraine Bohdan Pylypyshyn took

place in downtown Kyiv, in the conference

room at the offices of SigmaBleyzer on

March 19 2008.

 

The grand opening of pharmaceutical production

plant was launched by the Ambassador of the United

States to Ukraine William Taylor (left), chairman of

the board of directors of BTA Bank Muhtar Ablyazov,

and president of Max-Well Dr. Ken Alibek.

Max-Well is a USA company making a major

investment in Ukraine.

 

From left to right: Dr. Kris Singh, President of Holtec

International, Mr. Anders Jackson, Vice President

of Westinghouse, and Mr. Yuri Kovrizhkin, President

of Energoatom, toast recent contract signings with

two USA companies, Westinghouse for supply of

nuclear fuel and with Holtec for supply of spent

fuel transport systems. March 30 2008.

 

From left to right: Ukraines Ambassador to the USA

Oleh Shamshur, US Ambassador to Ukraine William

Taylor, Morgan Williams at a recent USUBC meeting

in Washington, D.C.

 

Serhiy Tyhypko, Swedbank Board Chairman, and

Morgan Williams at the meeting of the Investors

Council at the Cabinet of Ministers of Ukraine.

Kyiv, March 18 2008.

 

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