The global lockdown has not only changed our everyday life but also led to mass reconsideration of investment strategies. Some countries may jump into this emerging window of opportunity by presenting their great potential and consistent commitment to understandable rules of the game. How is Ukraine mapped out among other countries competing for the allocation of investment flows? What is the perception of us among foreign decision-makers and influencers? We addressed these and many other questions to Peter Teluk, a US-qualified lawyer, who recently joined the partnership of Sayenko Kharenko.
UJBL: According to your work experience in both business and government in Ukraine, how do you characterize overall business development over the last 10 years?
Peter Teluk: Business development in Ukraine over the last ten years has been shaken by a world economic crash in 2008, a revolution in 2014, the ongoing war, and COVID-19 in 2020. Notwithstanding this, business is growing and developing in Ukraine. The current government continues the longstanding efforts to root out corruption and bureaucracy and allow the business environment to grow. The revolution brought another positive, civil society that has continued to pressure government to take measures in order to promote business. Ukraine still has a way to go, but overall, businesses are developing and becoming more sophisticated in terms of their business and also their business needs. Business development over the past five years has moved further away from dependence on Russia and more towards opening up opportunities in Europe, North America, Asia and the Middle East.
UJBL: What is your opinion on the current investment climate in Ukraine? How would you describe the perception of the country by foreign business?
P. T.: Ukraine is viewed as a country with great potential. Potential in agriculture, technology, and energy. It has a great well-educated work force. It is a European market and its geographic location is a plus. However, this potential is stymied by the Soviet legacy of government control, bureaucracy, over-regulation and, worst of all, corruption. The economic opportunity is recognized by foreign businesses. The shortcomings of the government institutions in adhering to the rule of law, are also, unfortunately, recognized. However, Ukraine is moving forward in its efforts of continued reforms, just not as fast or consistently enough as would like to be seen by foreign business.
UJBL: Could you explain the difference between American investors and European or Asian ones?
P. T.: Let's start with the similarities - all investors are here to make profit and to bring value to their shareholders. All investors want to play by the rules in any country in which they invest. If there is a difference, then it would likely be the time in which investors are looking to profit and the profit margin which they are looking to make. While this is not the same for all types of investment. Generally, American investors have a shorter horizon during which they want to see returns on their investments. Asian investors, especially if the sector is considered a key or strategic sector, have a longer horizon and less of a need for the higher profit margins. They view investments over a longer term through the strategic lens, instead of the purely financial one.
In addition, American investors, and to some extent, European ones, also are very cognizant, and concerned about compliance and corruption issues. With the American and European legislation on anti-corruption, businesses from those countries are well aware that the arms of the legal justice systems of their jurisdictions are long and the rules imposed by the US and European regulatory authorities extend to their investments all over the world.
UJBL: What are our country's prospects in terms of attracting American investment? Is it the right time to accelerate this process right after the global lockdown?
P. T.: The USA still commands almost a quarter of the world economy and the US capital market is by far the largest in the world, dominating approximately half of the world's market. Therefore, for Ukraine to effectively grow its economy, it makes sense to attract American investment.
In terms of accelerating the process, it is always the right time to accelerate the process for attraction of American, or for that matter, any investment, whether foreign or domestic. American investment will flow into areas where a positive return on investment can be made; and where it can be done legally. Ukraine must continue to reform its institutions in order to create a country based on the rule of law, where all investors play under the same rules.
One area where there is an untapped, but potential huge economic potential for Ukraine, is in the area of defense industry. Ukraine is moving away from its dependence on Russia in this sector and is moving towards NATO standards. What is less known is that Ukraine is also reforming the way defense products and equipment will be manufactured. There are efforts under way to reform the industry. Ideally, they will move to a system that is more transparent and open. Instead of the whole sector being in a "black box" and funded wholly from the state budget in a completely non-transparent way, there are efforts to create an industry that would be open for investment. American investment could play a huge role in such development. Ukraine is already a recipient of large amounts of aid from the US in the defense sector. If Ukraine reforms its defense sector, allows for transparent purchasing of necessary equipment and provides transparent rules for investment, I see huge potential in this sector.
UJBL: What kind of state policy actions are most likely expected to re-launch interest in the jurisdiction?
P. T.: In my view, Ukrainian state policy needs to continue positively developing in the following three broad directions: deregulation, consistent enforcement of laws and regulations, and judicial reform. Deregulation, which includes making it easier to do business, has already taken place to some extent over the past six or seven years. State policy must continue to streamline unnecessary bureaucracy, licensing, permitting, rules and regulations left over from Soviet times. Such over-regulation makes it easier to continue corruption and harder for businesses to attract needed investment. Consistent enforcement by, and less harassment from, government agencies is also the key. Finally, as it has been discussed for years here in Ukraine, reform of the judicial system is key and consistently sighted by investors as a top concern. For years, I have heard that it is not the laws that are particularly troublesome for investors, it is the inconsistent and sometimes corrupt application of the law by the authorities and courts that is most troubling. As a whole, investors want to know what the rules are and whether they will be consistent over time when they are making the decision to invest.
UJBL: What business sectors are the most interesting for Western investors as of now?
P. T.: The three traditionally big sectors are agriculture, IT, and energy. They are big and will continue to be of interest to Western investors. Also, defense, media, and manufacturing are all beginning to grow or poised for growth too. As mentioned before, the defense sector will bring enormous interest if it is properly reformed. In addition, small and mid-sized manufacturing has already been growing, especially in the automotive sector and, especially after COVID-19 and now reviews of supply chains, there is also a big opportunity for Ukraine as companies will be looking to move certain manufacturing away from China.
In addition, large-scale infrastructure projects will be interesting for investors, whether it is rail, ports, roads, airports, etc.
With respect to energy, it is important that Ukraine unlocks or resolves certain issues, such as proceeding with production sharing agreements, resolving the green tariff issue and continuing deregulation of the gas and power markets to allow for further competition and investment.
UJBL: The pandemic has certainly accelerated development of the global technologies industry and set new tasks for the telecommunication sector. How do you see the future of these sectors globally and in Ukraine?
P. T.: The technologies and telecommunication sectors, both globally and in Ukraine, will continue with innovation, growth, expansion and consolidations. Smaller innovative companies will continue to innovate, grow and the best will be bought and integrated into larger companies with more diverse platforms. The media sector should also be included as being a part of the international growth, combining with the technologies and telecommunication sectors to provide content.
Specifically, with respect to Ukraine, I see some continued growth in product producing companies in the technologies sector. Ukraine has always had a strong service sector in the IT sphere, and will continue to be a strong presence in the outsourcing of developers. However, Ukrainian entrepreneurship will also grow and I expect to see more IT product companies developing, expanding and eventually being bought out by larger players.
UJBL: Last year was marked by the largest M&A deal - the acquisition of Vodafone Ukraine by NEQSOL. Do you predict further integration of the telecom sector into the regional market?
P. T.: The mobile market is dominated by the three network operators, one of whom was bought last year by NEQSOL. I believe that it is less likely that the other two, at this time, will target for further integration into the regional market as both are owned by larger regional players.
The MVNO market remains underdeveloped and few operators have been licensed thus far. Nevertheless, some analysts predict that in the coming years a gap in the low-cost segment may provide the opportunity for MVNOs to thrive. This may provide new smaller players in the telecoms sector that may become ripe for acquisition in the future.
Mobile broadband services also present a growth opportunity and significant investment has been made in extending 3G infrastructure and LTE.
It should be noted though that the coronavirus in 2020 is having a significant impact on production and supply chains globally. During the coming year, analysts predict that the telecoms sector, to various degrees, is likely to experience a downturn in mobile device production and overall progress towards 5G may be slowed. It may also be difficult for network operators to manage workflows when maintaining and upgrading existing infrastructure.
UJBL: What is the role of compliance for international business? Do you observe new trends from your perspective?
P. T.: Compliance already plays an important role for international business and also for domestic Ukrainian business. Whether one is talking about anti-bribery statutes (such as the US Foreign Corrupt Practices Act or the UK Anti-Bribery Act) or GDPR (General Data Protection Regulations) from the EU, or anti-money laundering legislation or sanctions legislation or adherence to EU regulations for exported goods, compliance issues touch every business. Even more so, they affect any international business. In addition, in recent years, Ukraine has adopted numerous anti-corruption regulations.
It is important for both international companies acquiring or investing into Ukrainian businesses, to be well aware of the compliance issues faced by Ukrainian business. Not only faced, but also how Ukrainian business has implemented measures to both identify and minimize the risks of violating a myriad of international compliance regulations.
I have been here for over 20 years and have seen compliance issues almost laughed at by Ukrainian businessmen. "This is Ukraine, it is just the way things work here." they would say. Since then, many foreign enforcement agencies have taken a hard line and have also taken a long reach with the law in enforcing what they see as compliance violations. If you do not believe me, ask a certain Ukrainian businessman who has been sitting in Austria for over five years as the US government tries for extradition in order to have him face FCPA violation charges. The businessman has never been to the US, nor even had any US companies. His alleged crime involves hiring an agent in the US to assist with a deal in India.
Or, I know of a case where a large US based multinational bought a European company with a subsidiary here in Ukraine. Turned out the US company then itself discovered that they had potentially bought an FCPA issue due to the actions of the Ukrainian subsidiary. The Ukrainian subsidiary did everything legal according to the Ukrainian legislation, but something did not add up and put them at risk from the US authorities. The acquiring company, probably after completing their own internal review, decided to self-report and pay a fine for actions of a subsidiary that they did not even own when the alleged acts took place.
Thus, given the broader reach used by the foreign authorities and given the greater awareness of this issue, plus given Ukraine's less than stellar reputation in corruption indexes, the trend will be for more businesses to become aware that a robust compliance review and implementation of proper policies is a smart way to increase and maintain company value. Compliance will continue to be viewed as a value-added economic activity and not simply as a cost burden by companies striving for long-term success in the global market.
UJBL: Taking into account your long-term experience representing international business in Ukraine, what was behind your decision to join Sayenko Kharenko?
P. T.: Sayenko Kharenko is commercially-minded, trying to resolve business issues, and finally, prides itself on being extremely ethical in its approach to guiding clients in Ukraine. Its partners worked with many of the world's best international law firms on many of the most sophisticated and benchmark projects involving Ukraine and are committed to continually improve and innovate. The firm stands out on the Ukrainian legal market as an independent local law firm quickly adapting to changes. I have known both Vladimir Sayenko and Michael Kharenko during my decades here in Ukraine, and have always respected them as lawyers, people, and businessmen. They have built a legal practice covering all major areas of the law and a deep practice with over 110 lawyers. As such, I am thrilled and honored that they would have the confidence and trust in my legal capabilities and invited me to join this great team during the difficult time of COVID-19 and global economic slowdown. I am impressed that they have the vision to see the potential of Ukraine, its economy and business during a crisis and the vision and confidence to keep expanding their firm by having me join their team.
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