This year Investment Attractiveness Index of Ukraine failed down to its all-time low, having reduced a number of those, who wish to invest in the country, to a minimum. This was also marked during the international investment forum in London.

Posh hall of the most expensive hotel in London – five-star Dorchester – is fully crowded with decent public. Here at the very heart of financial hub of Europe the forum “Inside Ukraine 2011: A success story in the making?” is taking place.

Its organizer is the Foundation for Effective Governance, owned by Rinat Akhmetov, the richest Ukrainian; one could really expect a capacity crowd, as that was a platform for public authorities to promote investment power of Ukraine, one of the largest countries in Europe.

Serhei Tihipko, vice prime-minister, presented a history of the Ukrainian successful development process from the poverty to the developed capitalism. In his narration Ukraine looks like some kind of wonderland, where business people can easily bury their luck money to collect rich dividends later on.

Those of the guests of the forum, who are not yet conversant with the reality of the Ukrainian business, came under a spell of the promising speech of Vice prime minister. But for other participants of the forum from among those, who have already been working on the Dnieper banks for a long time, actions speak louder than words.

In the European Business Association (EBA), bringing together investors of the Old World, which operate in Ukraine, they say that the picture, described by Tihipko, is as far from the reality as London is from Kiev. The real life is the following: a foreign investor is scared by that middle ages, he encounters in Ukraine – ubiquitous corruption, corporate raiding increase, administrative outrage at the customs and the tax inspection.
“We’re regularly receiving complaints, - says Anna Derevianko, EBA Executive Director. – Even ambassadors are already talking about the protection of the rights of their investors. They do not recommend their businessmen to invest money in Ukraine any more”.
A portion of the reality

Ukraine is a huge 46-million market with significant investment potential. To tell the truth, outside funds volume proves that year after year it becomes harder to sell this potential to a foreign investor. In rate of foreign direct investments per capita Ukraine is behind all the EU countries, even such small as Slovenia and Slovakia.

To break this unfavorable trend the Foundation for Effective Governance convened the regular (the second in succession) investment forum in London. In the course of this forum Tihipko was doing his best to convince the auditors that Ukraine is being transformed into profitable place for allocation of money. According to the vice prime-minister, in the country banking sector is in the process of stabilization, investment climate is warming up. “The authorities are open to the possibility of cooperation with business,” – comes to the conclusion 51 year old politician and former businessman.

But bright cover in the form of a smart hotel, high-class arrangement of the summit and stilted speeches for potential investors has no effect anymore. Big business, except for several representatives, did not show up at the forum. This fact itself goes to prove that already moderate interest towards Ukraine is diminishing right in front of the eyes.

As Derevianko notes, the Investment Attractiveness Index, calculated on five-grade scale, in quarter III fell from 3,4 to record 2,6. This is a historic low since 2008, when Ukraine fell to the deep of political and economic crises.
As a result lawyers and representatives of consulting firms became the main participants of the forum, with many of them having an intimate knowledge of the fundamentals of the Ukrainian business activity. Some of them have such deep knowledge, that they are in no haste to open up.

“It’s a shame, that it takes so much effort not to work, but to overcome resistance,” – says one of them on condition of anonymity. Therefore for the moment he is considering other markets for investments.

“Investors say that for them a traditional rule is to invest USD 100 and earn USD 1. In Ukraine you can invest USD 100 and lose USD 100, - explains Natalia Korolevskaia, opposition member of the Parliament, who participated in the proceedings of the forum. – They are not ready to come with such a formula.”

We kept on suffocating them

Ihor Umanskii, minister of finance in the government of Yulia Timoshenko, refers to the data of international studies to illustrate the reality. And they show that Ukraine is the world champion in the amount of different taxes and makes the top three of the countries with the most complicated tax administration.

But the country’s fiscal authorities have no intention to rest on their laurels. Derevianko assures that business is each time tighter pinched in the tax clutches. Thus, this autumn the State taxation service of Ukraine banned entrepreneurs from including losses of the previous quarters into expenses of their companies. Eventually this money cannot be allocated to expenses and corporate income tax rate will be increased by this amount. Furthermore according to EBA Executive Director taxmen at their own discretion decide, whose losses should be deducted and in what amount, and whose – not.

ЕВА has submitted to the State taxation service of Ukraine the stories of 11 companies, which were in the beach due to such practice. Derevianko does not name these entities, but she noted that they belong to construction industry, retail business and financial sector. They all were introducing new projects and sustained losses, with its total amount having reached UAH 1 billion, a significant sum for the Ukrainian market.

Moreover Derevianko complains that the authorities report all the time on reduction of debt and automatic value-added tax (VAT) reimbursement. But “automaticity” is available not for all: very limited number of companies got into the list of those firms, who indeed regularly receive this tax refund. And one of the mandatory conditions for these lucky fellows is advance payment of corporate income tax.

“Companies do their best to find a way out to receive at least some share of current assets,” – explains Derevianko.

The expert adds that if reimbursement for 2011 at least is being carried out somehow, then debts for early periods are frozen. Anti-record in this taxation history has been achieved by the company "ArcelorMittal Kryvyi Rih". The government’s liability to the company – about USD 1 billion – equals to one-fifth of the rate, paid for the purchase of the enterprise several years ago.

The situation with VAT reimbursement kills on the vine not only the incumbent companies, but also deters those investors, who might be ready to use Ukraine as a ground for capacities allocation and service activities for the EU markets.
Apart from VAT Ukraine has one more fright for foreign investors. It is placed at the boundary and is called customs-house. There happen extortions and detention of cargos, and customs clearance procedure without a bribe is rare. The phone of Korrespondent is being rung off the hook by investors, having experienced problems at the boundary and willing to tell their sad stories.

But even if a foreigner succeeds in avoiding unpleasant contacts with tax and customs officers, he may encounter the Ukrainian judicial system, which became an instrument of forcible takeovers. The last famous example of that sort is an attempt to take away the metropolitan shopping mall “Ukraina” from the Swedish company “Quinn Holdings Sweden АВ”. Having preferred a complaint against the company the court seized all the shares of the shopping mall, priced at dozens of million dollars.
Now the Swedes are affectively suspended from control over their property. To defend their rights the company “Quinn Holdings Sweden АВ” appealed to the Prime-Minister Nikolai Azarov. Moreover to get a hearing the Scandinavians have posted in printed media an advertorial open letter to the Head of Cabinet of ministers. But they received no response.

“In your country corruption takes place at the very top, you do not have such a legal framework, which could be respected and followed,” – a foreign investor, acting in the Ukrainian market for almost five years, shares his feelings with Korrespondent on a no-name basis.

The latest studies prove it as well. According to the data of The Global Economic Crime Survey 2011, released by the PricewaterhouseCoopers on the 12th of December, assets misappropriation is one of the most common types of economic crime in Ukraine. Almost 73% of respondent businessmen experienced this crime. It is noteworthy, that two years ago this indicator was 14% down. Corruption trails it a little bit – more than 60% of the respondents had to pay bribes for their business development.
There is nobody home

In Ukraine they do not bother not only to create hothouse conditions for external injections, but can hardly direct those financial flows, which have been already pumped into our economy. According to Korolevskaia, as a result one of the biggest shares of foreign money is speculative investment, appropriated for refinancing subsidiaries of foreign banks.

In 2011 share of this money accounted to 22.4% of total amount of outward investments. “They are used just to support these entities. Whereas banking sector used to apply this money in real sector of economy by means of credit facility before, then currently even this opportunity is not available,” – says Korolevskaia.

The experts are amazed by neglect of investors’ calls by the authorities and unwillingness to take system-based steps towards foreign funds. Thus, Jorge Zukoski, President of the American Chamber of Commerce in Ukraine, while assessing the situation in the world markets, says that today, when multinational corporations possess limited amount of floating assets, they invest only in those countries, where they feel sustainability. And Ukraine does not have it.
After all we have an example of small Moldova right before our eyes, where authorities are making a dead set at each investment dollar. In his interview for Korrespondent Vlad Filatov, Prime-minister of this country, told that he punishes with severity those ministers and state officials, who neglect investors’ problems.

And the result has been already reached: several huge projects came into the market – the Swedish company IKEA, one of the world leaders in furniture and home products business, and the German company Draxlmaier, producer of automobile parts. Both firms have not entered the Ukrainian market, though IKEA tries to do that for a long time.

This picture is so dissimilar to the one, Derevianko faced on the Pechersk hills of Kiev – a center of the Ukrainian authorities! She personally submitted numerous complaints of investors to Azarov and Andrei Kliuiev, the First Vice Prime Minister. But a month and a half passed away, and still there is no response from the authorities.

To tell the truth, in his comment for Korrespondent Kliuiev said that the authorities are significantly interested in partnership with businessmen from EBA. “Cooperation of the Ukrainian authorities and international investors is certain to be rather fruitful,” – affirms the vice prime-minister.

But the analysts think differently. Vadim Glamazdin, partner and technical director of the consulting group “GEO”, has got sad forecasts for the next few years.

He considers the next year to be wasted for investors, as we’re having elections in the country. “During such periods the authorities center all their attention on election process and its results,” – notes the expert. Derevianko, qualifying the current situation as stalemate, keeps hoping for efficient dialogue with the government. “It seems as if they hear us, but we are not satisfied with the actions of authorities aimed at elimination of obstacles for investments. It feels like we are tilting at windmills,” – she says.
And while EBA keeps hoping and waiting, those investors, who already work in Ukraine, are searching for new markets. “It’s a shame that due to such an attitude of the authorities, countries with far less resources receive far more investments,” – summarizes one of the anonymous investors.