Ukraine, together with Syria, are today’s geopolitical hotspots, where battles of influence between Russia and the West have been raging for years. Almost 2 years ago, Ukrainians opted for the Western path of development, following the‘Euromaidan’ protests that ousted the ruling Yanukovych government. Since turning away from Russia at this pivotal moment, Ukraine has been living in anticipation of the arrival of desperately-needed European and American business and is carrying out painful IMF-prescribed reforms in order to do so.
Despite this, foreign direct investment (FDI) in the country’s economy has been falling in spite of the announced reforms and the European vector of the country’s development. According to the Vienna Institute for Economic Studies, while FDI in Ukraine stood at 6,360 million euros in 2012, that number fell to 300 million by 2014; a decrease of 95%. Arseniy Yatsenyuk, the Ukrainian Prime Minister, officially asked the European Union to increase FDI in Ukraine during the 17th EU-Ukraine summit in April, blaming Russia for his country’s economic collapse.
According to official data, however, EU countries are still the largest investors in the Ukrainian economy. In 2014, a whopping 70% of FDI in Ukraine came from EU member states. 30% of FDI came from the small nation of Cyprus, largely due to the fact that large Russian and Ukrainian businesses use the small island state as an offshore zone through which they channel capital to their enterprises.
Despite Prime Minister Yatsenyuk’s explanations for Ukraine’s plunging investment rates, international experts lay the blame squarely at the feet of the Ukrainian government. Anna Derevianko, Executive Director of European Business Association (EBA), argued that military operations in the East of the country do not constitute a sufficient excuse for the lack of reforms. Derevyanko notes a variety of problems that have not been tackled by Kiev, including, most notably, the lack of an effective fight against corruption and systemic modifications in the quality of public administration. Economist Jeffrey Sachs also considers the reforms of Ukrainian government to be too weak to attract foreign investment from West, a statement confirmed by the Carnegie Center, which has published a status report on Ukraine’s reforms every two months for the past year.
Indeed, corruption and its consequences, unstable tax legislation and the lack of protection of property rights, have been a central factor in Ukraine’s inability to garner more international investment over the years, and nothing illustrates this better than the very Ukrainian phenomenon of corporate raiding. While present in almost all post-Soviet republics, corporate raiding in Ukraine has reached an alarming scale. There are even a plethora of books for international businessman on how to deal with raiding while working in Ukraine or with Ukrainian businesses.
Raiding finds its source in public corruption, and having one’s “own people” in the relevant state bodies. This can take several forms. For example, if the raiders have some equity share in the company, they hold a fictitious meeting of shareholders, increase their stake in the company, and then replace the management with their own men, all on the basis of kangaroo court’s decision. Such schemes were turned into a veritable art form by Igor Kolomoisky, a well-known Ukrainian oligarch who was also appointed Governor of Dnipropetrovsk by President Poroshenko.
Another scheme involves a more serious corruption component, connected with the fake protocols of the meeting with the company owners. The corporate raiding of agrarian company “Chumaky” in the Dnipropetrovsk region is a good example of this scheme. The seizure of “Chumaky” took place with the help of an official from the Registration service, who notarized forged documents. In particular, information on the change of ownership of “Chumaky” by an unknown offshore company (STELLAR PARTNERS LTD) was illegally submitted to the Unified State Register. Dimitris Papadopoulo
Perhaps the most disturbing aspect of this is that corporate raiding seems increasing institutionalized in the Ukrainian economy. Gennady Korban, a mayoral candidate in Kiev, did not deny his “raider past”, suggesting that such activity was simply how business was conducted in Ukraine. “Nowadays, the only people I will remove from their jobs are officials,” he quipped during one interview. Vladislav Draeger, another notorious raider sentenced during the Yanukovych years for bribery, blackmail, and extortion, was released from the prison after the Euromaidan revolution.
There are even firms that specialize in helping corporate raiders, from procuring questionable legal documents to supplying armed militias. Needless to say, the conflict in East Ukraine and the generally instability and unpredictability of the country have only made it easier for businesses to change hands through force.
No on doubts that Ukraine has a long road ahead in reconstructing its economy and bringing its broken society back together. The task even looks impossible at times. There remains much political will and business interest in helping Ukraine on this path, though, as the proportion of FDI from the West shows. The first step to successfully convincing international investors that Ukraine is open for business needs to be a strong show of force against the corruption that has throttled the Ukrainian economy for far too long. Taking bold steps against the ruthless practice of corporate raiding is an obvious place to start.