Business in Ukraine eyeing Russia but confident

KIEV (Reuters) - You might think war next door would make your average western executive take his money and run, but foreign business in Ukraine is still as concerned with red tape and inflation as a looming Russia.

France’s Foreign Minister Bernard Kouchner said on Wednesday that Ukraine could be Russia’s next target, after Moscow recognized the independence of Georgia’s breakaway regions South Ossetia and Abkhazia, populated mostly by Russians.

Investors, indeed, have responded to the regional crisis by driving Ukraine’s credit default swaps -- one assessment of risk -- to four-year highs and withdrawing cash from its currency and equities markets.

But while businesses say they are monitoring events in Georgia, they remain more concerned by stalled reforms under the divided government of President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, and inflation of close to 30 percent.

“For companies that are here, this is nothing new. It’s business as usual,” said Trond Moe, president of the European Business Association, which represents dozens of large foreign companies including Siemens, Raiffeisen, ArcelorMittal, E.ON, Fujitsu, Nestle and Volvo.

“Ukraine has to deal with Russia. In Ukraine there are sensible politicians who can deal with this, who are not hotheaded or irrational.”

Some observers said Georgian President Mikheil Saakashvili was rash to send in troops to Russian-dominated South Ossetia, providing Moscow with just the excuse to intervene militarily and reduce Georgia’s chances of NATO membership.

They draw parallels with Ukraine’s clashes with Gazprom over gas supplies, its aspirations to join NATO, which Moscow opposes, and the existence of the Crimea region, populated by mostly ethnic Russians.

“That’s reverberating down to new investors who are not yet here and don’t fully understand that this is part of a complicated relationship,” said Jorge Zukoski, president of the U.S. Chamber of Commerce in Kiev representing U.S. business.

“If you have done your homework, you’re in the market, have the relationships, you’d know this is part of the game but you will of course continue to watch it unfold closely.”


Moe also heads the local arm of Norway’s telecoms firm Telenor, one of a raft of investors who have been at the heart of Kiev’s drive to revitalize its former communist economy since its “Orange Revolution” four years ago.

International rating agencies warn that Ukraine’s economy could quickly be thrown off track by any slowdown in the flow of foreign cash, which has helped the country pay for steep rises in the price of Russian gas imports.

FDI jumped to $6.9 billion in the first half of this year from $2.6 billion a year earlier. Overall last year it rose to $7.9 billion from $4.3 billion in 2006.

Zukoski said “the jury is out” amongst investors drawing up budgets for next year. But he says many are more cautious.

“It’s a superstar market -- company boards were deciding to put money back into the country, to solidify their market positions, while their competitors are looking at entrance opportunities,” he said.

“Now they’re a little bit more conservative.”

The Georgian crisis adds another element to consider in Ukraine, where Yushchenko’s and Tymoshenko’s row has stalled privatization, prevented a unified approach to inflation and helped divide the central bank when it revalued the hryvnia.

“What is harming business now is inflation, which is partly due I think to the inability of the authorities to work in a united way -- the conflict between the president and the prime minister is contributing to that,” Telenor’s Moe said.

He said businesses have raised wages twice this year, the second time by as much as 15-20 percent, which harms profit margins, and if price rises continue they could cause a deeper economic crisis that would wipe out people’s purchasing power.

As for an actual conflict in Ukraine, few with investments on the ground are worried.

“I don’t see any new information. I see more reaction from investors,” said Jerome Booth, head of research at Ashmore Investment, which manages assets of $37.5 billion in emerging countries and has no plans to change its strategy in Ukraine.

“The Soviet Empire hasn’t suddenly appeared. There’s a geo-political stratagem in Russia which has reasserted itself, and some people weren’t aware of it.”