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October 7, 2013  ▪  Margarita Ormotsadze
-25

Unnerving Business

Ukrainian entrepreneurs take a break from business

“If journalists write that this asset belongs to me and that I am evading taxes, the tax police will be here tomorrow and will simply take away my business,” says Serhiy, co-owner of a big Kyiv retailer. “But that’s how the entire country is working today.”   

The businessmen The Ukrainian Week spoke to admitted that the Ukrainian state machine had never been friendly to non-oligarchic business. However, repressive and aggressive domination in favour of the chosen ones has mounted since the Party of Regions came to power. Business owners not linked to those in power thus seem to be taking a detached position, often manifested in the reluctance to develop. “Why? Someone in the government will notice my success tomorrow and raid by business. The best thing I can get out of it is a symbolic “compensation” for the business I built over the years. I can give you hundreds of similar examples,” Serhiy laments.

READ ALSO: Why Is Ukraine a Cage for Entrepreneurs?

In the last three years of this detachment, the most proactive Ukrainians – the middle class – have seen businesses taken away from their colleagues, competitors and partners, as well as mounting tax pressure. Still, they have not united to stand for their common interests since the Tax Maidan in 2010 (see Protest chronicles). As a result, business activity is abating. Recruiters say that they are getting more CVs, a signal of mass layoffs, especially in the manufacturing sector. Kruykivskyi Rail Carriage Building Plant, one of the biggest producers of rail carriages in Ukraine, recently announced plans to lay off 500 workers. According to HeadHunter, an international recruitment website, the number of new vacancies in H1 2013 compared to the same period of 2011 has halved. Uliana Khodorovska, head of the research department at HeadHunter, says the payroll is shrinking too: “Companies are now at a stage where they hire beginners who cost them less than highly-qualified professionals.” The number of vacancies in the production sector is falling, and new ones are mostly in trading companies.

Bankruptcy professionals claim that they have seen a surge in bankruptcies, most of them being genuine. Notably, business activity is folding in Kyiv. On some streets, several different-sized companies have closed down almost simultaneously since the beginning of the year. At Chervonopilska Street, a café, beauty salon, fitness centre and a store shut down within several months.

ADMINISTRATION OF CRONIES

The Ukrainian Week talked to the owners of small, medium and big business, and revealed three major trends in the local business. The first is escalating clan structures and centralization through administrative leverage. Ukrainian business owners are long used to operating in a corrupt environment and never-ending bribes. But most issues which a bribe to a civil servant could solve four to seven years became much more burdensome in 2010.  “The problem is degradation, mass systematic negligence and irresponsibility of those acting on behalf of the state. There is ever less common sense in the country, turning into a farce,” says Valentyn Kalashnyk, Director of OS-Direct marketing group.

READ ALSO: American Chamber of Commerce calls on Ukrainian government to stop discrimination of business

According to estimates by The Ukrainian Week’s experts working with regional and local communities as well as businesses, the only SMEs operating unhampered in the provinces are the ones that have family or crony connections with local governments. Many others have temporarily shut down their businesses or sold them in whole or in part to local “feudal lords”. This feudalism now thrives everywhere, with cronies on all levels, from small business to monopolists in major sectors of the economy. It is now almost mandatory for existing businesses to integrate into the Family oligarchic mechanism built by the government. “The country has come to a sort of bureaucratic collectivism where profits are distributed amongst the party bureaucrats running the economy and the state,” says management consultant Marharyta Chernenko. According to the National Bank’s (NBU) report on business expectations among Ukrainian enterprises, “representatives of big companies involved in exports and imports, in which the government owns over 25%, remain the most optimistic.”

THE FEAR MACHINE

The second trend is the ever-present fear of those in power. In an effort to adapt to the economic model that evolved in post-Soviet states, most Ukrainian business owners break some rules when running their business. Otherwise, they will not survive: some pay wages in envelopes, others have double and triple bookkeeping. One of the key components of successful business here is a protectorate, which comes at a cost. In 2010, many business owners found themselves in a situation whereby they either had to adjust to the tougher system of relations with the government or sell their assets to its representatives for peanuts. Many business owners, already hit by the economic crisis, have opted for the latter. “Optimism and faith in the prospects of a business are important for an entrepreneur. Today, there is none. Instead, business owners are confident that, as soon as they create a valuable asset, someone will come and take it away, regardless of the scale and size. First and foremost, they have to take care of protection and self-preservation, which means integrating into the model in which formal rules are ignored and informal rules change all the time,” claims Valentyn Kalashnyk.

READ ALSO: Questionable Improvement

To show who’s boss in the country, a slew of businesses have been demonstratively “executed” in the regions over the past few years. Companies were taken away entirely or in part. Few owners risked reporting these raider attacks, represented as a change of owners or the emergence of co-owners. Officially, the attack was presented as a regular or unscheduled tax inspection after which nothing seemed to change much. “The business is operating normally,” was the response of companies to The Ukrainian Week’s enquiries, having initially reported raider attacks or tax inspections that looked more like police raids.

At the end of 2011, Vladyslav Burda, the owner of the Antoshka chain of children’s stores, had problems with tax and customs authorities. Then, in December 2011, he said that Yuriy Ivaniushchenko, a Party of Regions MP close to the Family, helped him out. Over 2012-2013, law enforcers have raided the headquarters of many well-known companies, such as TMM, a construction company, as well as online stores Rozetka and Sokil. Many business owners who did indeed operate with violations and did not come to any agreement with those in power ended up in jail. Ruslan Demchak, the owner of ERDE BANK, the Dobrobut insurance group, Business Radio and other assets, was charged with financial fraud and ended up in prison. This was before the 2012 parliamentary election where he ran as an independent candidate against the Communist Party’s Hryhoriy Kaletnyk. Demchak has been released but ERDE BANK is undergoing liquidation, while most of his companies now have new owners, The Ukrainian Week’s sources report. None of these companies have officially announced this change. Another telling fact is that Business Radio now transmits the most pro-Communist Party propaganda.

READ ALSO: Foreign Banks Flee Ukraine

Many business owners were forced to leave the country. They claimed to have faced direct political or business pressure. These include Denys Oleynikov, the owner of ProstoPrint; Viktor Romaniuk, the rival of Tetiana Zasukha, a pro-government candidate in the 2012 parliamentary election; as well as Volodymyr Nemyrovskyi, the owner of the steel cable factory StalKanat-Silur and Ihor Liski, a Luhansk-based businessman – both headed the oblast offices of Front Zmin (Front of Change) in the 2012 election campaign. Companies that manage offshore planning claim that more and more Ukrainian business owners are now ask them for help in getting residence permits. The fear machine seems to go beyond just raider threats: the murder of entrepreneurs and government representatives linked to business in one way or another has become as frequent and violent as it was in the 1990s.

UNCERTAINTY

The third trend in Ukrainian business is uncertainty. “The future looks dim right now. The choice between migration and continued struggle at home is now in the minds of most people, valued as “social drivers” in the world. Many choose a third option. They take a few years off to get another degree or start teaching somewhere to preserve and expand their intellectual horizons,” says Valentyn Kalashnyk.   

READ ALSO: Crisis of Vision

These developments in business are already affecting the economy and its competitiveness on the macro level. “One of the primary competences for executives in international practice is values and behavioural skills. In Ukraine, such details are not even considered,” Marharyta Chernenko admits. “The result is the long-term decline in the quality of Ukrainian goods and services, as few players get a privileged environment for their business. We can expect protectionist measures to stifle imports and support domestic producers soon.” Some, such as higher customs duties and the newly-introduced vehicle utilization fee, are already in place.

However, the manual support of chosen domestic producers will have no positive effect on their ability to produce high-quality goods and services. Moreover, it is likely to further crush the competitiveness of Ukrainian companies, which will end up in the hands of the Family, oligarchs and those in power.

 

PROTEST CHRONICLES

The Tax Maidan was a series of massive protests by business owners against the Tax Code passed by the legislature in November 2010, unofficially referred to as Azarov-Tihipko Code. The protests started on November 16, escalated on November 22 and stopped on December 3 when hundreds of police officers disrupted the protesters and wiped out their tent town at Maidan Nezalezhnosti (Independence Square) in Kyiv. As a result of the protests, part of the new Tax Code was vetoed. The Tax Maidan was the first massive anti-tax rally in the independent Ukraine.

Denys Oleynikov. After persecution of his company ProstoPrint for making T-shirts with the anti-president “Thank you, people of Donbas…” slogan and accusations of illegal use of the Euro 2012 logo, Denys Oleynikov and his family were granted political asylum in Croatia in early December 2012

Viktor Romaniuk. A United Opposition’s candidate in the parliamentary election, Viktor Romaniuk was the main rival of the pro-government candidate, Tetiana Zasukha, in district No. 94 where a re-election is scheduled for December 15. He was forced to leave Ukraine under pressure


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