Category Archives: Eurasia

Donbas Entrepreneurs Reopening and Expanding Businesses in Ukraine

donbas-2

By Anastasiya Baklan

The war in Ukraine has been especially difficult for small businesses in the conflict-affected regions, despite a ceasefire agreed to in February 2015. According to the data of the State Statistics Service of Ukraine, communities in Luhansk, Donetsk, Kharkiv, Dnipropetrovsk and Zaporizhia suffer from a severe economic crisis, which is especially stressful for small and medium business owners.

Analysis of business owners’ attitudes in the Donbas region shows that the stressful situation provokes a fear of investing in illiquid assets such as real estate and land. So entrepreneurs in the region are revising their business models, leasing assets where possible and limiting immobile capital investment.

With the goal of assisting SMEs affected most by the economic downturn, as well as those businesses displaced by the conflict, CIPE recently supported at-risk entrepreneurs in six towns (Berdyansk, Pershotravensk, Slavyansk, Lozova, Svatovo and Kreminna) through a business training and mentoring program for 119 people. The USAID-funded project was based on strategies that promote specific business sectors in each of the target communities, which business owners are now beginning to operationalize.

Given the dire economic situation in Donbas, CIPE was pleasantly surprised to encounter several social impact business models. For example, Oleksandr Gadenko from the village of Osypenko near Berdiansk, has a business concept that will extend the public water supply to the villagers who suffer from a complete lack of water.

The business would bring fresh running water to residents of 800 housing units, which currently have no access to water at all. The novel business financing model, involving a mixture of state investment, private funding, and donor support, will allow villagers to access running water while earning a modest rate of return for the business owner.

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Democracy that Delivers #24: Karina Orlova on the Risks Reporters Face in Russia and Why She Had to Leave

Podcast guest Karina Orlova (right) with hosts Ken Jaques (center) and Julie Johnson.

Podcast guest Karina Orlova (right) with hosts Ken Jaques (center) and Julie Johnson.

The American Interest journalist Karina Orlova discusses the risks reporters face in Russia and why she had to leave. Orlova talks about her experience reporting on Russian politics and business, and the powerful forces that exert control over journalists and media outlets in that country.

She also shares fascinating insights into current living conditions in Russia and citizen attitudes towards corruption and governance. Follow Karina’s work at The American Interest or on her Facebook page.

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Privatization in Ukraine: Not So Fast

lugansk-factory

In Ukraine, thousands of companies are still owned and operated by the government — a legacy of Soviet central planning that bleeds money from the already strained state budget. With the country in economic crisis, there have been renewed calls for Ukraine to speed up its privatization process and sell these firms to private owners who can restructure them and run them more efficiently.

Ukraine’s former Minister of Economic Development and Trade, Aivara Abromavicius, recently made a well-reasoned argument for faster privatization on the Atlantic Council’s blog. Similarly, the IMF has also urged Ukraine to speed up the pace of privatization.

However, focusing on the pace rather than the quality of privatization will likely result in a botched privatization process — which will undermine the little bit of faith Ukrainians have left in the free market and state institutions, potentially leading to the growth of populist movements and destabilizing the current government.

Ukrainian state-owned enterprises (SOEs) remain a drag on the national budget. They serve as incubators for corruption and gray market deals and in some cases serve as piggy banks for Ukrainian politicians. While I agree with Abromavicius that “simplicity, clarity, and transparency,” must be maintained in order to successfully privatize Ukrainian state owned enterprises, his concept of creating a simplified privatization procedure (without advisers) through an online auction of over 1,000 smaller SOEs will likely lead to public anger over a process that would surely enrich insiders.

Without independent advisors overseeing the due diligence process and hiring independent auditors, bidders will not have transparent access to information about the companies listed. This would, in effect, be like buying from an unrated seller on eBay with only a vague description of what is for sale – something that would not inspire confidence in potential buyers.

A lack of independent advisors–and the transparency and investor assurances they would bring to an auction—can lead to lower realized prices for the Ukrainian government, attracting only those bidders with inside knowledge of the true status of the enterprises for sale.

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Ukrainian Business Community Comes Together to Develop Local Business Agendas

ukraine-BAs

By Bogdana Aleksandrova and Anastasiya Baklan

For the first time in Ukraine’s modern history regional business associations, in cooperation with Chambers of Commerce and Industry and think tanks, are developing and promoting local business agendas.

Historically Ukrainian business associations, chambers, and think tanks have not cooperated closely to form a single voice of business in advocacy efforts.  In view of this history, CIPE developed and delivered training programs to various business support organizations over the past several years, the latest of which occurred over the winter and spring.  The training, encouragement, and support from CIPE have helped to foster the development of coalitions of these organizations following the trainings in several regions around Ukraine (see CIPE’s Bogdana Aleksandrova speak about the advocacy campaigns – in Russian).

The most recent participants in CIPE’s training program will receive ongoing consultations from CIPE experts, including Sergiy Pancir, Head of the Center of Social Partnership and Lobbying under the National University of Kyiv-Mohyla Academy, Denis Bazilevich, Director of the Institute of Professional Lobbying and Advocacy and Ruslan Kraplich, business trainer of the Ostrog Princes Foundation. Now these coalitions are taking the next step, applying their training, and are developing local business agendas.

CIPE recently announced that five regional coalitions, from Sumy, Mykolaev, Ivano-Frankivsk, Kirovohrad, and the city of Kyiv, each consisting of business support organizations and regional think tanks, would receiving small grants and ongoing technical support to develop regional business agendas.

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Russia’s Rent-Seeking Downward Spiral

It is clear that if we do not start taking action today, including by carrying out structural reforms, we could end up going into a lengthy period of economic stagnation tomorrow. Our economy is still based primarily on natural resources rather than on manufacturing. Our economic system has changed little in essence. Where does most of our money come from? From oil, gas, metals and other raw materials.

– Vladimir Putin, Annual Address to the Federal Assembly, April 3, 2001

Fifteen years later, the Russian economy envisioned by that progressive speech by Putin in April 2001 seems to be a distant memory. Russia’s economy, and budget, are still largely dependent upon the sale of oil and the majority of Russian industry is still based on extractive industries. The modern vision of Russia in that speech, one deeply embedded into the international system, where property rights are protected by the undiscriminating rule of law, has been replaced by a cynical “managed” system of crony capitalism where profits are skimmed off by insiders while Russia has isolated itself by its actions on the international stage.

Since 2001, record-setting commodity prices have supported increased social benefits, military spending, and infrastructure investments, each of which has supported corruption schemes where insiders profit off of the state’s largess (see the cost of the Sochi Olympics as Exhibit A). High commodity prices also allowed the Russian government to slowly smother individual rights and free speech at home and, largely through key investments in media, buy the country a larger voice in affairs abroad.

Rather than pulling away from a resource-based economy, Russia’s entire economy appears to now be moving in near perfect correlation with energy prices (see chart below).

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Ukraine Needs to Privatize its State-Owned Companies — But Rushing It Would Repeat the Mistakes of the Past

Storied aviation company Antonov, makers of the world's largest cargo plane, is in no position to be privatized.

Storied aviation company Antonov, makers of the world’s largest cargo plane, is in no position to be privatized.

 

The stakes for reforming Ukraine’s state-owned companies are high: these companies are the lifeblood of a corrupt, sclerotic crony capitalist system that scares away potential investors, drives off international donors, and robs the Ukrainian government of legitimacy. But  privatizing them as quickly as possible is not the solution.

Even after mass privatization in Ukraine in the 1990s, the government still owns a large portfolio of companies in a variety of sectors – from heavy industry to banking — that employ over 900,000 employees, far more than any private firm.  Reforming these state-owned enterprises (SOEs) has been a slow process and remains incomplete due to weak corporate governance, unmotivated management, and a near-total lack of transparency. None of these problems will be solved by simply speeding up the process.

The demand for rapid privatization is a familiar tune. Western “expert” advice in the early 1990s led to a huge transfer of wealth from the former Soviet Union to a handful of connected insiders, particularly in Russia: first through voucher privatization and later through the disastrously corrupt loans-for-shares schemes in the run-up to Russia’s 1996 election.

To get an idea of the scale involved, a 1993 paper by several Western economists who worked directly on the voucher privatization program estimated that most of the Russian Federation’s civilian industrial base – nearly every plant, factory, and mine in the country – was effectively sold off to insiders for between $5 and $10 billion, less than it would have cost to buy a single mid-sized Fortune 500 company (and roughly equal to the market capitalization of Whole Foods today). Still, at the time they regarded this program as a great success.

Unfortunately, the corrupt and predatory “oligarch” elite, created practically overnight, proved to be more interested in asset-stripping than in transforming their new firms into firms that could compete on world markets. What followed was the largest peacetime economic collapse of any country in recorded history. The sheer volume of banditry surrounding state assets during the 1990s led many average citizens in post-Soviet countries to believe that lower standards of living and a complete lack of justice were a natural part of living under democracy.

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Building Sustainable Feedback into Ukraine’s Economic Reform Efforts

Expert Discussion of SURE Draft_April, 2015

(Photo: CIPE)

This past year has been filled with both positive and negative news regarding ongoing reforms in the Ukrainian economy. Ukraine entered into a historic free trade agreement with the European Union that went into effect on January 1, 2016, which was met with the predictable implementation of retaliatory tariffs on Ukrainian goods by Russia.

Additionally, and in spite of raucous parliamentary sessions and infighting among the parties, the Rada (Ukraine’s legislature) has adopted various pieces of pro-reform legislation, some of which were proposed by CIPE’s partners under a recently completed USAID-funded program Supporting Urgent Reforms to Better Ukraine’s Business Environment (SURE).

The support of USAID allowed CIPE and partners to build a sustainable institutional framework for business associations representing SMEs to have direct input into legislation that effects SME operations specifically, and to improve the environment for doing business in Ukraine more broadly.

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