Raiders threaten Ukraine’s economy

The EU decided last year to grant Ukraine market economy status.

But, despite a pro-democracy revolution and efforts to secure a position on the world stage, Ukraine remains full of risks for foreign investors. At the EU-Ukraine summit on 27 October, it is expected that the possibility of a free trade agreement will be explored. But looking at the dire corporate climate in the country, with foreign companies regularly falling prey to corporate raiders, European companies are unlikely to rush to do business in Ukraine, at least not before basic judicial reforms have been carried out.

Raiders use a variety of methods to seize control of companies. Starting off by acquiring a minority stake, they go on to use well-practised tactics to squeeze out majority investors. The first port of call is usually the local court, where raiders raise the alarm on fictitious abuses, obtaining rulings from weak judges which render the rights of majority shareholders null and void. Raiders have also been known to launch public relations campaigns alleging shareholder abuses or damaging the reputation of products sold by the companies. Threats and intimidation are not uncommon.

Over the past two years, more than 2,000 raider attacks have been registered in the country, according to the Ukrainian Union of Industrialists and Entrepreneurs. A Kiev-based official from the European Bank of Reconstruction and Development (EBRD) says: "In the past two to three years, EBRD clients have been experiencing raider attacks from all angles. What is happening basically is that they are exploiting weaknesses in legislation, trying to block the work of large companies. Local courts accept cases often very much on anecdotal evidence. The country desperately needs a stream of legal acts to stop this happening."

EBRD clients are companies to which the EU member states, which are all members of the EBRD, are lending money. Those affected include a Ukrainian shipping firm and a multinational agricultural company Bunge, which has a majority stake in a sunflower seed processing plant located in the industrial city of Dnipropetrovsk. Bunge, which entered Ukraine in 2002, has invested around €120 million in the plant. Last month, the company lobbied Ukrainian Prime Minister Viktor Yanukovych, who was visiting EU and NATO officials in Brussels. "We think it won’t be possible to deal with Ukraine if we are going to have these types of attacks," says Henri Rieux, corporate affairs director of Bunge Europe. "We consider that the business climate there is not good at all and that reforms of the court system are needed."

According to the ERBD official, it is suspected that Ukrainian financial conglomerate Privat group is behind some of the raids. The group controls Privat Bank and a handful of other companies which are conveniently based in different countries, making it all the more difficult to trace the source of the problem. EBRD has been urging the Ukrainian government to introduce judicial reforms since last year, recommending that a joint-stock company law be established to protect shareholder rights better and to protect companies from illegitimate interference.

Norwegian telecoms company Telenor has also been experiencing problems. The company has holdings in Russian telecoms operator Vimpelcom and in Ukrainian counterpart Kyivstar. For two years, Russian conglomerate Alfa Group has been carrying out attacks in both countries, manipulating the court system, launching nasty PR campaigns and putting pressure on politicians, according to Telenor Vice-President Dag Melgaard. "The aim of Alfa Group is clearly to obtain control without paying a dime," he says. "[We] hope Ukraine will soon harmonise its laws to comply with normal Western standards. The present situation poses serious threats to the business climate in Ukraine."

It was thought that the Orange Revolution would herald a new era of democracy in Ukraine, that cronyism and corruption would give way to transparency and fair play. But the in-fighting that dogged the reformist government after it took office in 2005 made it difficult to introduce lasting changes. In the meantime, pro-Russian forces have regained popularity. Yanukovych, the disgraced loser of the 2004 presidential election, made a comeback as prime minister in August. Unable to come up with any viable candidates from within his own fractured coalition government, pro-western President Viktor Yushchenko found himself having to approve his archrival’s nomination.

Polish Socialist MEP Marek Siwiec, chairman of the European Parliament’s EU-Ukraine co-operation committee, doubts whether beleaguered reformists would risk attempting to introduce the laws needed to rid the judicial system of present abuses. "Ukraine is talking about opening the market, but at the same time they are not taking the necessary steps," he says. "The question is whether the government is strong enough to implement reforms."

The EBRD and aggrieved parties are hoping that pressure will be brought to bear on President Yushchenko and Prime Minister Yanukovych at the EU-Ukraine summit. Any efforts to improve the business climate could only be of benefit to the World Trade Organization aspirant. "The important thing is to create strong credibility for foreign investors," says Siwiec. "At the moment, there is a high increase of direct investment in the financial sector, where it is relatively easy, but looking at [other sectors], there are a lot of question marks."

Asked whether his government was considering ways of tackling the problem, a Ukrainian official based in Brussels declined to comment.

The EU decided last year to grant Ukraine market economy status.