Foreign Firms Push into Ukraine
Despite a difficult beginning, the year 1997 saw many U.S. and other foreign firms pushing into Ukraine to make the most of the country's varied trade and investment opportunities. Successful macroeconomic policies have enabled the Ukrainian Government to reduce inflation dramatically and stabilize the hryvnia, the national currency. The country received its first international credit rating in October, and investment is rising, albeit from very low levels. Nevertheless, the Ukrainian economy continues to contract and the country remains a problematic place for foreign companies to do business. Later Successes The economic problems that plague Ukraine were offset somewhat in 1997 by a number of successes. The government's successful I monetary policies have brought the overall inflation rate to 8.3 percent in the first 11 months of the year, a major improvement over the 40 percent recorded in 1996. The hryvnia, with strong support from the Central Bank of Ukraine, was valued at roughly 1.89 to the dollar in late November, a stronger position relative to the dollar than in January of this year. On October 28th, Ukraine received its first international credit rating from Nippon Investor Service. The bond issue that will be based on the BB+ rating follows an initial Ukrainian international offering led by Japan's Nomura Securities in August. The Ukrainian Government hopes to attract $450 million by issuing Samurai bonds on the Japanese market. U.S. and European ratings will be necessary, however, before Ukraine can issue bonds in U.S. and West European capital markets. Foreign investment in Ukraine continues to rise. As of August, Ukraine had received $335.5 million in foreign direct investment in 1997, a 46 percent increase from the same period in 1996. Cumulative foreign direct investment in Ukraine is now at $1.75 billion, and an additional $2.45 billion in foreign credit lines have been extended to Ukrainian banks and corporations. U.S. companies still constitute the largest investors in the country, representing about 25 percent of total foreign investment. For the most part, U. S. investments have been in sectors such as finance and insurance ($45.6 million), retail trade ($42.6 million), engineering and metal working ($35.8 million), and food processing ($35.6 million). In November, Qualcomm, Inc. of San Diego, California announced a contract for the sales and service of telecommunications equipment worth an estimated value of $200 million, to Telesystems of Ukraine, Ltd. Also in November, Morrison Knudsen Corporation of Boise, Idaho announced that it would begin a dismantling and storage program for nuclear missiles located in Ukraine. Companies from Europe and Asia, even with lower amounts of investment, are moving into Ukraine as well. The largest European investors--from Germany, the Netherlands, and the United Kingdom--have entered the food industry. There are also newcomers from Asian countries. Unknown in Ukraine just a few years ago, Korea's Daewoo is now practically a household word. The firm is close to finalizing an agreement worth more than $1 billion with the Ukrainian car manufacturer AvtoZAZ in Zaparozhie. In November, Daewoo also announced the construction of a $280 international business center in Kiev. The company is also said to be interested in manufacturing buses in Lviv, television production, and a foundry to supply the automotive project. Business Climate Still Difficult Despite these successes, Ukraine lagged behind many of its NIS neighbors in various respects in 1997. While most other NIS countries have reported annual GDP growth, according to the European Bank of Reconstruction and Development (EBRD), Ukrainian GDP is expected to decline by about 4.1 percent this year. The EBRD anticipates growth of 1.1 percent in 1998. Also, official figures used to measure Ukrainian GDP do not take into account the 'shadow economy' that is widely believed to account for up to 60 percent of actual production. A number of commercial issues have also complicated Ukraine's relations with both foreign companies and their governments. U.S. and other foreign firms were concerned in April when Ukraine's Verkhovna Rada--its parliament--passed an amendment nullifying the five-year tax holiday for companies with foreign investment. The decision also introduced duty liabilities on goods imported for domestic production. President Kuchma has drafted a measure reinstating the benefits, but it has been rejected by the Rada on several occasions. In March, Motorola NMG, citing changing competitive conditions, pulled out of Ukraine after it had been chosen as one of the three companies to provide GSM-900 services to Ukraine. Ukraine has also been involved in disputes with several of its trading partners. In April, the Russian Government introduced duties and the VAT on sugar and alcohol, two major Ukrainian exports, to protect Russian producers. Trade slowed until November, when Ukrainian President Leonid Kuchma personally met with Russian President Boris Yeltsin and finally negotiated a solution. Ukraine was also the subject of an investigation by the U.S. Department of Commerce into alleged "dumping" of Ukrainian steel in the United States. In general, the commercial climate in Ukraine remains quite difficult: Ukrainian markets are far from transparent, the regulatory regime is onerous, and contract enforcement can be difficult. For more information on doing business in Ukraine, visit BISNIS Online at http://www.mac.doc.gov/bisnis/country/ wstnis.htm#Ukraine.
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