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2 May, 2016

"In the past, the church was responsible for society. Now business is taking on this responsibility"

President of the American Chamber of Commerce in Ukraine about reforms and what exactly is hindering the development of business

Interviewed by Lyubomyr Shavalyuk

How do you evaluate the reforms that Ukraine has gone through over the past two years?

Let's look at where we were two years ago and which state the country was in. When Yanukovych was president, there were huge threats for businesses. They could just take away any company. I was told how the president's son went to specific firms and basically said that he wanted some of their shares. That doesn't happen anymore. The changes here are obvious.

Analysing what has been done to reform the country, we can mention positive and negative aspects. The problem is that the expectations of reform that were formed in society as a result of the Euromaidan were very high. Many wanted everything to change overnight. That's why Ukrainians are disappointed to some extent and believe that the transformation is happening too slowly. But judging by concrete facts, we can see a lot of changes in some areas. The American Chamber of Commerce has singled out at least 19 strategic developments over the past year that will improve the country's investment climate. These are examples of real change.

Several specific innovations have had a positive impact on business. Firstly, the single social contribution rate has been reduced. Until this year, we had 40+ percent, now it's 22%. This is quite a noticeable and important change for employers that pay wages legally. Secondly, the electronic VAT administration has been improved. Thirdly, deregulation in various sectors ranging from energy to agriculture and the food industry. Fourthly, the adoption of several laws on the public procurement of medicines. I once worked in pharmaceuticals, so I have a good idea of the public procurement conditions that existed previously and what they are now. The changes are obvious and very real. Fifthly, the transparency of the Antimonopoly Committee of Ukraine has increased. This list of positive things could be continued.

Would we like to have more changes? Yes, definitely. Do we want to speed up the reform process ? Undoubtedly. The American Chamber of Commerce is working to solve a whole range of problems to improve investment climate in Ukraine and set clear, predictable rules for doing business here...

What are the priorities that need to be resolved in the near future?

Business is facing a number of glaring problems in Ukraine. The American Chamber of Commerce regularly asks its members about their vision of the situation. The number one issue for them is corruption. 98% of companies surveyed believe it is widespread in Ukraine.

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How can we overcome corruption in Ukrainian realities?

There is the "three P" rule – prevent, publicise and punish. Above all, this means that it is necessary to prevent corruption by reducing the space for it to operate in through deregulation and the introduction of as many electronic services as possible. Public servants must receive decent wages – this is one of the most effective safeguards against bribery. It is impossible for state officials to have  low salaries and great responsibility at the same time; otherwise, they will be faced with incredible temptation. Furthermore, the evidence of corruption should be publicized and distributed as widely as possible, which is mainly your work – the duty of journalists. Today, the country doesn't perform this function ideally, though it should be noted that the number of media investigations in Ukraine has increased significantly in recent years. Finally, the corrupt should be punished. If there is no penalty, bribe takers do not have a sense of risk.

Potential investors considering entrance into the Ukrainian market often contact us for accurate information. An interesting thing is that most of them are deterred not by the risk that Russian tanks will roll down Khreshchatyk. The main fear for them is that the director of their local office will be taken away in handcuffs and photographs of this moment will be printed in the Western press with the company logo. That is to say, corruption is not only eating away the economy, but also kills off unborn, potential investments.

For business, it is very important to see that change is happening. Despite the continuing number of positive reforms, there are certain things in the country that remain the same. Corruption is one of them. 2016 will probably be the decisive year and show whether Ukraine is really fighting this plague or not. If the fight does not become more noticeable, then it will be impossible to explain why nothing has changed three years after the Revolution of Dignity (two have passed already).

Besides combatting corruption, we see a few more priorities for reform in 2016. Among them are judicial reform (which is partly required for the first thing too), further deregulation, protection of intellectual property rights, the harmonisation of Ukrainian legislation with European laws as part of the implementation of the Association Agreement with the EU, further steps to improve fiscal policy and the introduction of electronic services in public administration.

The Chamber has a number of priorities for each sector. For example, in the financial industry it is important to ensure adequate protection of creditor rights and further development of cashless payments in Ukraine. It is necessary to improve land legislation for the energy sector to be successful – in order to effectively develop oil and gas fields. In addition, Ukraine still lacks a coherent national strategy for waste management. The violation of intellectual property rights inhibits the development of the pharmaceutics, healthcare and seed production. The problem of illegal import is overarching.

How have the scale and penetration of corruption, the size of bribes and other characteristics changed over the past two years?

We conduct regular surveys among the Chamber members on this subject, and the results are interesting. For example, 73% of respondents answered "no" to the question "Do you think that corruption has decreased in the period from March 2014 to present?"

However, 65% of respondents also said "no" to the question "Do you think that companies in Ukraine should be involved in corrupt practices to increase their chances for success?" This indicates that it is possible to be successful without engaging in corruption.

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According to 87% of respondents, the most corrupt government agencies are the courts (second is the prosecutor's office: 61% of respondents). There was no trust in them before and there isn't now. What is there to talk about when even Ukrainian oligarchs solve major disputes among themselves in the courts of Stockholm or London.

How much does the fight against corruption depend on individual people in the government and the presence of technocrat ministers?

It's always easier with technocrats, because they are people who have no political or personal obligations. We have repeatedly said that it would be a good scenario for technocrats and professionals to hold office in the Cabinet. However, there are some strong candidates from the political scene who can also be trusted and granted ministerial positions. There are certainly professionals who are capable of conducting reforms in specific sectors for the good of Ukraine. The most important thing is to give these people an opportunity to work.

What are the criteria for ministers' success today? We can see that there are people among the current members of the government who have shown that they are capable of working in the interests of the country and achieving results in reforms. Will this positive result help them to stay in the Cabinet? We'll see.

History is being written as we speak. The Financial Times recently published an article on Ukraine. The authors aptly said that these days will decide its fate: whether Kyiv will continue to move towards Europe or return to the past.

So the decisions being made now could be momentous and the people responsible for them could go down in history. It's a crucial moment. You know, names are written into the history books for the right reasons and the wrong reasons. We will soon find out which of these options politicians will choose.

In Ukraine, the majority of the population have given a bribe at least once in their lives. Businessmen grew up in this environment, so they are comfortable with corruption. Is it possible to beat it in business and the state without getting rid of it at a social level?

In my opinion, businesses, primarily foreign ones, should become a flagship and give an example to other sectors that it is possible to be successful without corruption.

The tallest buildings in the panorama of any city today are business centres. There is a number of residential skyscrapers in Kyiv too, but in, say, London or New York, they clearly surpass the rest. If we were to look at the panorama of the Ukrainian capital 100 years ago, the highest building would probably have been Saint Sophia's Cathedral or another church. The same applies to other cities. What does this mean? In the past, the church was responsible for society, but now business has taken over that role. So companies should take on responsibility: corporate, social and so on. And the fight against corruption is no exception.

If the state has the political will to fight corruption and unites its efforts with business, there is no doubt that a result will come. The American Chamber of Commerce is also actively involved in this process. In particular, we contributed to the development of the law "On Prevention of Corruption" with regard to the anti-corruption programmes of legal entities. And we are prepared to continue working on this in accordance with our resources.

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You mentioned potential investors who contact the Chamber for information. Are there more or less of them today than a year or two ago?

There is definitely interest in Ukraine from potential investors. But now they are waiting to see what will happen next. Last year, economy performance dropped rapidly, but now the situation is gradually changing. If this year's macroeconomic indicators show at least some humble signs of growth that will be a turning point. So we are sending our partners the corresponding message: come now, because you have the opportunity to grow along with the  economy that is going to bounce back from its low point. This is one of the main reasons for investors' interest in Ukraine.

For now, we cannot talk about any systemic activity from non-resident investors or a tangible inflow of capital, but there are nevertheless a number of positive examples. For example, Cargill signed a $100m investment into a deep-sea terminal a few weeks ago. We are expecting something similar from some other companies. Infrastructure investments are starting to show up and actors such as Uber are entering the market. So there are real examples of non-resident investment activity at the moment.

Another thing is companies that are already operating in the country. It is necessary to create the right conditions so that they stay here. After all, when companies that have worked here for years close their offices that is a much worse signal to potential investors than any lack of new investment. Therefore, it is critically necessary to focus on firms who already have a presence here, pay taxes and create jobs.

Privatisation offers  certain hope too. It is important for it to be organised in a transparent manner, according to Western standards, with competitive tenders to create confidence in the authorities both within the country and abroad. If privatisation is successful, it could attract tens of billions of dollars in new investment over the next, say, three years. That's realistic.

It was talked about in 2014 and 2015, but the process has still not started. Is it possible that in 2016 we will see a big privatization?

The American Chamber of Commerce hopes that it will happen after all. So does the group of investors directly interested in the relevant state assets. It is important that the first, the second and the third privatization tenders be conducted at a high enough level to win back investor confidence. I would also like to note that several foreign companies interested in taking part in such tenders have already contacted the Chamber.

BIO

Andy Hunder was born in 1971 in London. In 1988-1994, he studied philosophy and theology at the Pontifical University of St. Thomas Aquinas in Rome. Has worked at UMC (now Vodafone Ukraine), GlaxoSmithKline, PLEON Talan, Magisters, Sayenko Kharenko. Served as director of the Ukrainian Institute in London from 2010 to 2014. On April 15th 2015 Andy Hunder was appointed president of the American Chamber of Commerce in Ukraine.

 

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