You're reading: Yulia Kovaliv: Success of existing firms will persuade new investors

If potential investors had as much confidence in Ukraine as Yulia Kovaliv does, she would be out of a job.

At the end of 2016, Kovaliv left her previous job as deputy economy and trade minister to head the Office of the National Investment Council, a nongovernmental organization that partners with government to lure investors to Ukraine.

All Ukraine needs, she says, are several success stories: big foreign companies, like IKEA, entering the country and being satisfied.

“Then it will be like a snowball,” Kovaliv says, “And it’s crucial to start it rolling in the period of 2017–2018.”

However, the current situation leaves little room for optimism.

In the past year, the Ukrainian government has failed to kick-start the privatization of 1,800-plus state enterprises or lift the long-standing ban on agricultural land sales. Cutting the deficit in the pension fund and restoring trust to the judicial system, including creation of an anti-corruption court, are also on the to-do list. Meanwhile, law enforcement agencies have raided the offices of high-profile information technology and investment firms on dubious grounds.

But Kovaliv argues that there were successes that outweighed these failures: electronic value-added tax refunds started in April, the long-anticipated visa-free travel regime with the European Union started on June 11 and the gas sector showed signs of healing thanks to the reorganization of Naftogaz and new tariff regulation.

That’s not enough, but it is a promising foundation to build on, Kovaliv believes.

Outsiders to run state firms?

In 2016, when Kovaliv was still at the Economy Ministry, she said the privatization of giant state enterprises was the No. 1 priority.

However, it wasn’t a priority for everyone. A year later, privatization is at exactly the same place: Giant state enterprises and monopolies that generate little to no profit and give endless opportunities to enrich insiders through corrupt schemes remain under state ownership.

The ambitious privatization plan stumbled at Odesa Portside Plant. It was put up for sale in 2016, yet attracted no bids due to mismanagement and interference from oligarchs.

“We shouldn’t have chosen such a complicated object as a privatization symbol,” Kovaliv admits now.

Today she has another priority project: concessions. Since the summer of 2016, Kovaliv has been in charge of an effort to develop new concession legislation to allow foreign companies to operate state-owned enterprises, pay to modernize them, and collect profit.

The rationale is that the concession model is the only way to quickly attract money to modernize crumbling enterprises in crucial areas like infrastructure, energy, and utility services.

$60 billion in energy needs

For example, to get Ukraine’s energy sector in shape would require $50–60 billion in investment through 2035, according to the experts that put together the country’s energy strategy, Kovaliv points out. That’s the kind of money Ukraine just doesn’t have.
The utilities sector is another problem.

“In a couple years our municipal utilities system will either fall apart or… well, it will just fall apart,” Kovaliv says.

Concession deals could be saviors for these areas, she believes.

According to Kovaliv, two French companies, Veolia and Engie, are interested in entering the Ukrainian utility services sector through concessions, and are traveling the country looking at the sector. They are focusing on water and waste management, and electricity distribution.

To enter though, they would need not only concession legislation, but also a change in tariff regulations. The current legislation, according to Kovaliv, works in such a way that when a utility company decreases its costs, the government then lowers the prices that they can charge consumers. This would have to change to attract investors, which means Ukraine faces another legislative hurdle.

The Black Sea ports will likely be among the first objects up for concession. International port operators Hutchison Ports and DP World are eyeing them, waiting for legal obstructions to be cleared.

Based on the similar deals in Europe, these two companies are expected to invest $1 billion within five years, according to Kovaliv.

The draft legislation on concession is being finalized now in a joint effort by Kovaliv’s office, the Ministry of Economy and Trade and the European Bank for Reconstruction and Development. Kovaliv hopes to see it submitted to the Verkhovna Rada in fall.

However, getting the bill through the Rada could prove tricky.

Concession isn’t that much different from privatization in the sense that control of an enterprise passes — for 30–50 years — from the state to a private company. That won’t appeal to lawmakers that are influenced by oligarchs or those who sincerely believe that such enterprises should be run by the state.

Unfriendly law enforcement

But any incoming investment, via concession or not, could be scared away by the recent activities of law enforcement agencies, which have been launching investigations into businesses and carrying out searches of their offices.

This is a big concern for Kovaliv and everyone else working to lure investors to the country.

Selling Ukraine as an investor-friendly place is hard when one of the country’s biggest investment banks, Dragon Capital, are searched by the Security Service of Ukraine, better known as the SBU, because its computers, the security service claimed, use Russian-made employee-monitoring software.

And while Kovaliv is careful when commenting on the issue, saying that the SBU’s actions might be justified by the security concerns with Russia, she says she condemns the methods that the service has used.

“Why do you need two buses of masked men with guns when coming to search a white-collar company?” she says.

She says that one such surprise visit by the SBU took place at an agricultural enterprise in Odesa Oblast that is owned by an Asian company that she won’t name. Armed SBU fighters in black masks arrived during a visit by representatives of the company’s head office. Needless to say, the Asian visitors were shocked.

Negative experience of dealing with law enforcement and financial control services can easily repel potential investors.

“If a case like that gets reported in the Financial Times, it can hurt Ukraine’s economy more than the suspected violation that they’re investigating,” Kovaliv says.

Law enforcement agencies stopped raiding businesses for the first two years after the EuroMaidan Revolution that drove President Viktor Yanukovych from power on Feb. 22, 2014. However, they went back to such raids in 2016.

Yulia Kovaliv, head of the Office of the National Investment Council, talks to the Kyiv Post in her office on June 2. (Oleg Petrasiuk)

Yulia Kovaliv, head of the Office of the National Investment Council, talks to the Kyiv Post in her office on June 2. (Oleg Petrasiuk)

Two-year lull ahead

Still, cases like that of Dragon Capital, where law enforcers use a security-related pretext to investigate a company, are rare. The agency that businesses complain about the most is the tax police.

This much-criticized investigative agency was nearly liquidated in error, when at the end of 2016 parliament passed new tax legislation that accidentally left out any mention of the tax police.

The parliament quickly announced that the tax police would continue operating, but the praise that the error got from reform-oriented lawmakers and within the business community was proof of the bad reputation of the agency.

The problem of law enforcement and tax police raids on businesses will be solved — at least partly — when the long-anticipated Financial Investigations Service is created. It will take over the power to make such checks on businesses.

The new agency has been in the process of being created since 2015. In March, the Cabinet of Ministers approved a draft law that would establish it. But the law is yet to be submitted to the parliament.

When she talks about law enforcement, Kovaliv’s optimism gives way to realism.

Once the Financial Investigations Service is created, business will have a grace period of up to two years. That’s how long employees of a new agency are usually careful not to do anything rash, according to Kovaliv.

But by that time, Kovaliv hopes that the “snowball” of foreign investment will already be rolling at full speed in Ukraine, and not even bad press about law enforcement raids on business will be able to stop it.