Original article by Gennadiy Kurochka, for UP
The last carefree days of Indian Summer are passing by, soon to be replaced by demanding analytical Fall. By tradition, experts from different spheres in the country’s life will begin vying with each other to present both Ukraine and the world-at-large with their assessments of the achievements and failures of the country’s politicians in the eventful 2006.
Against a background of overused rhetoric regarding strategic political errors of the Orange Administration and the unexpected return of the “Regionals” to the fortress of state, pundits’ impressions of Ukraine’s progress and squandered opportunities in the economic sphere promise to be far more interesting.
The hottest topic of economic debate this year is likely to be the situation that has lately arisen from controversial tendencies around foreign investment. In the epicenter of this turmoil is the advance of new forms of contempt for the rights of foreign companies in Ukraine and the inappropriate—and in some cases completely unacceptable—response to this on the part of key government agencies, the consequences of which can only be negative for the national investment climate.
In 2006, two world-class corporations became the victims of the most publicized attacks on the business interests of foreign investors in Ukraine: Telenor, the Norwegian telecommunications company, and Bunge, the international agricultural and food-processing corporation.
By manipulating the court system and running suspect PR campaigns, in both cases certain business interests were operating with the purpose of violating the property rights of significant foreign investors who are majority shareholders in related Ukrainian companies.
Such attempts to push leading foreign corporations out of Ukraine are against the country’s economic interests, as they seriously damage the investment climate and Ukraine’s overall international reputation.
Of course, financial groups are generally established precisely with the purpose of increasing their own capital and expanding their economic influence, not to concern themselves with the national interests of the countries involved.
We may not agree with the unethical methods of the battle for market share of these business piranhas, but there’s nothing surprising there at all. Much harder to understand is the unwillingness of government officials to recognize the seriousness of the situation, for whom protecting the national interests of Ukraine is a direct Constitutional duty.
A clear example of the short-sightedness and irresponsibility of the Ukrainian government’s position regarding the consequences of these attacks on property rights for the country’s investment climate were recent events in the corporate stand-off between Telenor and Storm, who respectively own 56.5% and 43.5% of Kyivstar, a mobile operator.
At the heart of the conflict are the efforts of Storm, the minority shareholder, to gain parity rights with Telenor to run a company whose market value today, by the most conservative estimates, is EUR 5 billion.
To achieve this objective, Storm have been bombarding Ukrainian courts since the beginning of 2005 with demands to declare Kyivstar’s statutory documents invalid—documents that both companies had knowingly and willingly signed.
One thing to keep in mind is that, behind Storm’s public declarations of why it is fighting for parity of rights for Kyivstar’s two shareholders, stand the much more serious geo-economic interests of the powerful Russian financial group known as Alfa, which owns 100% of Storm.
At an August 9, 2006 meeting with Russian President V.V. Putting, Alfa top official Piotr Aven announced that the group intends to establish the biggest telecommunications corporation on CIS territory, with its headquarters in Moscow.
Taking advantage of loopholes in Ukrainian legislation, which, unlike that of most developed countries, does not have any anti-monopoly rules that would prevent a single company from owning more than one mobile communications operator, Alfa has been slowly but surely fortifying its positions in Ukraine.
At the moment, in addition to the already mentioned 43.5% of Kyivstar, Alfa directly or indirectly owns significant stakes in such Ukrainian mobile operators as Golden Telecom, Astelit (life:) brand), and Ukrainian Radio Systems (Beeline brand).
Hence the Russians’ heightened interest in Kyivstar, for without full control over this leader of the Ukrainian mobile market, Alfa would not be able to fulfill its “mega plan.”
Given that all previous attempts to resolve this messy corporate conflict between Telenor and Storm in the lower courts did not yield the desired results, the case was eventually taken before the Supreme Court of Ukraine. Both sides in the process have declared on numerous occasions that the result of the Supreme Court of Ukraine hearing, scheduled for October 3, should be the handing down of an objective and unbiased ruling that will cross the final T in this dispute.
And yet, despite the importance of maintaining the independence of the judiciary and the unacceptability of any kind of pressure on judges, especially in a situation where the rights of foreign investors are at stake, last week Alfa’s top officials had a meeting with Ukraine’s President and Premier.
According to information from the related government press offices, the meetings concerned only general matters concerning the Alfa Group’s activities in Ukraine.
But such formal assurances are unlikely to be sufficient to convince foreign investors who have been looking on in concern at the course of events around Kyivstar that the “neutral” discussion between Alfa and the government will have no impact on the results of the October 3 hearing.
To understand the scale of the damage that could be done to Ukraine if Telenor is not given the opportunity to defend its position without prejudice in the Supreme Court, one only needs to remember the aftermath of previous investment scandals around companies like Motorola and Gala Radio.
In both cases, information about the violation of foreign investors’ rights in Ukraine spread spontaneously far beyond the country’s borders and brought to nothing nearly all the achievements of the country’s investment policy up to that point. Should a world leader in telecommunications lose trust in Ukraine, the ruinous potential of a wave of image-wrecking can only be guessed.
It is essential that corporate conflicts involving foreign investors are seen in perspective. For the national economic interests of Ukraine, which lost 10 points in the World Economic Forum competitiveness ranking, it would be unacceptable, if not dangerous, to look at the current situation narrowly as nothing more than a local skirmish involving a limited circle of businesses.
Disputes among the shareholders of a company with foreign capital are, first and foremost, the litmus paper that allows the world business community uses to assess investment conditions in a given country.
Ill-judged actions on the part of government bodies, combined with the specific failure of individual commercial entities to uphold the most elementary principles of law and business ethics, are simply affirming an image of Ukraine as a country in which independent court decisions are impossible and, therefore, where there are no effective mechanisms for protecting the rights of foreign investors.
As an aspiring candidate for membership in the World Trade Organization and the European Union Free Trade Area and a country which must compete for foreign capital with other players in the global economy, Ukraine simply cannot afford to have its own investment reputation fall any further.
In making strategic decisions with regard to foreign investment, any country should be guided firstly by its own instinct for national economic survival.
Gennadiy Kurochka is a managing partner with CFC Consulting, a permanent expert in the working group for image-making policy of the Foreign Investment Advisory Council under the President of Ukraine, and an advisor to Telenor on strategic communication.
