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| Ukraine In Brief A Ground Floor
Investment |
| December 2005 |
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| Walking around Kiev, you have to
keep reminding yourself - 20 years ago this place was home to hordes of
Communist masses training to take the Fulda Gap and standing in breadlines
yearning to breathe free. While echoes of the past are plainly obvious
in some areas of town, these days, the city appears almost gushingly cosmopolitan
in many neighborhoods. The distinction can be remarkable. |
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| Last year Ukraine was thrust into
the international spotlight during the Orange Revolution of presidential
opposition candidate Viktor Yushchenko. His progressive rhetoric inspired
and mobilized thousands of Ukrainians from all walks of life to take to
the streets in support of their candidate - as you may remember the news
reports from last year, he was allegedly poisoned by his opponent (the
corrupt incumbent Mr. Viktor Yanukovich) causing hideous disfigurement
to his face. Yushchenko’s proposed agenda was bold - seeking to embrace
the West, he promised closer ties to Europe and the United States while
distancing Ukraine from Russia. He promised to strengthen the economy,
create jobs, modernize the infrastructure, and promote a free and democratic
society. |
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| The agenda sold, and
during weeks of turmoil, his supporters camped out in front of government
buildings protesting rigged elections and the corrupt regime. Their persistence
(and a little help from the international community) paid off, and Yushchenko
was sworn-in as the President of Ukraine. In my assessment of geopolitical
climate, any visible commitment to embrace democratic and economic reform
is a clear signal of growth potential and definitely warrants several trips
to the area. Over the last year, my experiences have convinced me that
Ukraine is a ground-floor opportunity. |
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| Fast forward. If you ask people
on the street today about the Yushchenko government, most will shrug and
wiggle their hand in that ‘so-so’ manner, indicating a neutral stance on
their man’s performance thus far. Western ties are stronger (Secretary
of State Rice recently visited the country), but economic growth has lagged
in many sectors. As I investigated the country’s foundations, I eventually
found myself asking the question ‘what does Ukraine actually do?’ |
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| If you go to a country, even as
small as Panama, you will easily notice which industries attract international
business - banking, transportation, tourism, etc. Ukraine still seemed,
as it was 20-years ago, a country that exists solely to sustain itself.
There is no famous Ukranian export, like oranges from Brazil or glassware
from the Slovak Republic. |
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| When you think of South Korea, many
images come to mind - electronics, Hyundai, Samsung, and of course the
DMZ. When you think of Ukraine…. Chernobyl? A country famous for a nuclear
reactor meltdown is in serious need of a marketing campaign. |
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| While Ukraine was the second
most important of the Soviet Socialist Republics in terms of economic output,
the mainstays of its economy remain, as then, agriculture and low-grade
industrial manufacturing - pipe fittings, bearings, steel moldings…. nothing
sexy about this economy, that is of course, unless you count their #1 export
- women. |
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| The streets are teeming with
some of the most beautiful women in the world,
the majority of whom flaunt their looks as openly as they flaunt their
desire to leave the country with a successful foreigner. Many westerners
have been told tales of such beauty, and it is quite common to see an American
or European in the seat next to you on the airplane in search of his next
wife. |
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| For those interested, there
are several agencies available to facilitate the match. Some more established
companies like Miss Russia International (www.missrussia.com)
specialize in custom tours for wealthier clients looking to meet the finest
Eastern European debutants-- professionals, nobility, supermodels, etc.
Others simply offer a database of email addresses for sale, though I’d
be cautious of their authenticity. |
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| While Ukraine is still lagging
behind nearby emerging markets such as Hungary and Estonia from a technological
and modernization standpoint, significant improvements have been made
as the country continues to upgrade. Since the .UA domain suffix recently
came online, businesses have begun to develop international websites. |
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| As an example, check out one of
the national airlines at www.aerosvit.com;
the website gives the appearance that the airline is modern, but in stark
contrast, they still rely on paper tickets! |
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| One of the more frustrating issues
is the lack of acceptance of major credit cards; high transaction fees
force most vendors to accept cash only, so be sure to check your ATM limits!
To improve the situation, the Central Bank of Ukraine recently unveiled
plans for a widespread encrypted electronic payment system. While certainly
making things easier for nationals with local bank accounts, foreigners
will have to wait for more widespread acceptance of major credit cards….
or to consider opening a local deposit account. Standard US dollar savings
accounts are paying out between 12–15%. You don’t even have to convert
your money to the local currency. |
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| Most problematic for investors is
the level of service. Like many emerging markets, customer service is not
to western standards. I have found over the last year, however, that even
relative to other emerging markets, the level of service in Ukraine is
absolutely pitiful. I have seen long lines of customers waiting to conduct
business, make payments, etc. while oblivious clerks carry on with personal
business. Standing in line at the supermarket being completely ignored
by cashiers is commonplace. Getting hung-up on when you call a ‘customer
service’ line is practically guaranteed. The Ukranian collective seems
to think businesses are doing their customers a favor by taking their money,
perhaps another vestige of Communist roots. |
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| Static economies like Ukraine require
significant foreign investment to grow… and as long as the level of service
in Ukraine remains low, international business will hesitate to invest.
Fortunately, younger Ukranians do not have the same mindset, so I predict
cultural change within the next 5-10 years. |
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| In the meantime, the society’s dedication
to genuine democratic and economic reform will create a climate for improved
infrastructure and future investment opportunity. Eventually, old Europe
will look to Ukraine to fill their ‘near-sourcing’ needs from its young,
educated, inexpensive workforce, and foreign capital will flow into the
country pushing prices up - currency, real estate, etc. |
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| For now, the real estate market
is already hot in many parts of Kiev; according to local information, returns
have been in the double digits for over two years. For the first six months
of 2005, average appreciation for apartments in Kiev was approximately
30%. Some locals are taking loans at 20% to achieve 30% returns on real
estate (not including rental income). |
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| If you’re looking for a short-term
Eastern Europe play, there may be better markets for your investment capital
- Estonia, Croatia, Hungary, Czech Republic. |
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| Ukraine has the potential, but significant
cultural change needs to raise the standards of service, and the government
needs to do more to seek international partnership. |
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| Its EU aspirations are a long, long
way off, but with the right proactive leadership, foreign investment will
flow into the country to take advantage of its inexpensive, educated workforce.
If you’re looking beyond 5 years, Ukraine is a great move and a great place
to visit your money at 12-15%. |
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| As always, feel free to contact
me with questions, comments, or your next crazy idea at james@blackknightgroup.com |
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| The following
are James's previous articles for the magazine: |
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