Ukraine - an Emerging Growth Market
Ukraine, a country which celebrated its fifth anniversary of independence this year, has planted its mark firmly and emphatically on the map of the world as a nation determined to follow the course of democratic development, social stability, and economic reform. In this short period of time, Ukraine has managed to demonstrate that it can change governments, hold parliamentary elections, draft and pass a Constitution, eliminate its inherited nuclear weapons, create necessary new governmental institutions, curb inflation, introduce a new currency (the "Hryvnia"), spread a network of diplomatic missions throughout the world, and gain the respect of the international community. A tremendous amount of work still lies ahead -- particularly in the area of economic development and the creation of true market forces. The path is riddled with problems symptomatic of all nations that are transforming themselves from command structures to free enterprise -- but the trek has begun. The country, a land of 52 million people with tremendous human, technical, and natural resources, is an important emerging market at the crossroads of Eastern Europe, Russia, Central Asia, and the Middle East and holds great potential for becoming an important new market for U.S. trade and investment. A significant number of both large multinationals and smaller foreign investors are present in this challenging market, which is on the way to developing a strong, transparent trading mechanism. Ukraine's ultimate trade and investment potential will depend largely on the success of its attempts to accelerate the movement toward a market economy. Ukrainian economic reform began in earnest in October 1994, when President Leonid Kuchma laid out his economic credo in a speech to the Ukrainian Parliament and set the country's course on the definitive direction toward a free market. While Ukraine still has much progress to make in the areas of privatization, tax reform, and contract enforcement, the government has made great strides in achieving macroeconomic stability. Inflation, for example, has been curtailed from a rate of over 400% in 1994 to a projected 35% for 1996. Monthly inflation rates in 1996 have declined steadily, reaching 0.1 percent in June, the lowest monthly rate since July 1994. The exchange rate (vis-a-vis the U.S. dollar) has been steady, and actually improving, since the beginning of this year, as compared to astronomical deterioration in rates of the previous years. The currency reform process, carefully prepared and timed by the government's macroeconomic authorities and the National Bank of Ukraine, was implemented smoothly in the very short two-week period of early September 1996. The "Hryvnia" is in place now at the rate of U.S. $1 to 1.75 hryvnias. Efforts that Ukraine is taking in adapting its trade regime to conform to the World Trade Organization's (WTO) entry requirements will have a very positive effect for U.S. investors and exporters. Also, the course of economic reform was strengthened resolutely with the Ukrainian Parliament's June 28, 1996 acceptance of a new Constitution. The Constitution recognizes the right to private ownership of property, a fundamental legal breakthrough for reformers. It also strengthens provisions on the rule-of-law and provides for a more independent judiciary, promising more effective legal protections for investors. Implementing legislation and the creation of appropriate institutions, such as a revamped court system, are in progress based on constitutional requirements. Although Ukraine is today the third largest recipient of U.S. AID funds, government assistance programs alone, from the United States and other donors, will not be sufficient to sustain Ukraine's transformation. It is widely recognized that the vast sums of capital that Ukraine requires to restructure and modernize its economy to meet the needs of its population can only come from the private sector. Current estimates place those needs at a level of $40-60 billion in total investments, both domestic and foreign. However, Ukraine requires not only investment funds, but also technology, management expertise and access to international markets that only private business can provide. U.S. Commercial Presence and Prospects in Ukraine U.S. presence in the Ukrainian market is a relatively new development, as is that of other countries that have discovered the vast economic potential of this young independent nation. American commercial interests in Ukraine can and will experience significant expansion based primarily on three factors. First, the Ukrainian people, both in the public and private sector, expressly recognize the United States as a strong ally on their path to full democratic and free-market development. Second, they fully appreciate the hand extended by the U.S. thus far, as evidenced by the very frequent highest-level government contacts from the very first moments of independence, by the size and high-quality activity level of the U.S. Embassy in Kiev, and by the fact that Ukraine is now the third largest recipient of funding from the U.S. Agency for International Development (AID). Third, Ukrainian current and developing entrepreneurs recognize that U.S. technology, marketing expertise, and investment potential are critical to appropriate and rapid development of their business ventures. According to official Ukrainian statistics, total foreign investments in Ukraine were valued at over US$ 1 billion through June 30, 1996. The United States accounts for 22% (or about $225 million) of the total and Germany is second at 19%. Some private estimates place the U.S. figure as high as US$ 500 million. Regardless, U.S. investment in Ukraine is in its infancy compared to American presence in other reforming economies in this region. Poland and Hungary, for example, have attracted roughly US$4 and 3.5 billion respectively in U.S. direct investment. U.S. exports to Ukraine are also just beginning to take off. The $220-million total of 1995 is expected to increase to about $400 million on the strength of growing exports of agricultural equipment and high-tech informatics equipment. Within the new and challenging Ukrainian commercial environment, about 250 U.S. companies are currently active in the market, either as investors, exporters, importers, or members of the legal or consulting sectors. The more active larger American firms include: Arthur Andersen, Altheimer and Gray, Apple Computers, AT&T, Baker and McKenzie, Cargill, Coca-Cola, Digital Equipment, Dupont, Eli Lilly, Ernst & Young, FMC, General Electric, IBM, John Deere, Merck, Monsanto, Motorola, PepsiCo, Price Waterhouse, Proctor & Gamble, SC Johnson, R.J. Reynolds, Squire, Sanders and Dempsey, Tambrands, and United Technologies. Many smaller U.S-Ukrainian firms, such as C.I.L. Limited (meat processing) and Frishberg and Partners (legal) are very active in this strategic market. The Commercial Service of the U.S. Embassy in Kyiv stands ready to assist American companies in each step of the way to successful exporting to and investing in Ukraine. Our offices provide a variety of services that range from assessing the market through our research services and consultations to actually providing effective advocacy support for finalizing investment or sales projects. We also offer facilities and business infrastructural support through our American Business Center (ABC), bring Ukrainian business persons to the major trade exhibits in the United States through the International Buyers Program, develop structured one on-one meetings through our Gold Key Service, conduct "Trade and Investment Days" throughout the oblasts of Ukraine, provide training opportunities in the United States to Ukrainian business managers through our SABIT program, and actively pursue contacts through our BISNIS "Search for Partners" program. In addition, the Kyiv Commercial Service participates in the Showcase Europe program and plays an active role in the U.S.-Ukraine Committee on Trade and Investment.
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