Download 1.7. Structure of the thesis

INDEX OF CONTENTS
1. INTRODUCTION ........................................................................................................................................................ 4
1.1. BACKGROUND ABOUT UKRAINE................................................................................................................................... 4
1.2. PRECONDITIONS FOR OUR PROBLEM AREA.................................................................................................................... 4
1.3. DEFINITION OF THE PROBLEM ....................................................................................................................................... 4
1.4. RESEARCH QUESTION ................................................................................................................................................... 5
1.5. PURPOSE....................................................................................................................................................................... 5
1.6. DELIMITATION ............................................................................................................................................................. 5
1.7. STRUCTURE OF THE THESIS........................................................................................................................................... 5
2. METHODOLOGY ....................................................................................................................................................... 7
2.1. A SCIENTIFIC VIEW POINT ............................................................................................................................................. 7
2.2. CHOICE OF METHODS.................................................................................................................................................... 8
2.3. CASE STUDIES .............................................................................................................................................................. 8
2.4. QUALITATIVE AND QUANTITATIVE DATA ..................................................................................................................... 9
2.5. PRIMARY AND SECONDARY DATA................................................................................................................................. 9
2.6. INTERVIEWS WITH ORGANISATIONS AND EMBASSIES .................................................................................................. 10
2.7. INTERVIEWS WITH FOREIGN COMPANIES OPERATING IN UKRAINE .............................................................................. 10
2.7.1. Making contact with foreign companies operating in Ukraine .......................................................................... 11
2.7.2. The population .................................................................................................................................................... 11
2.7.3. The development of the questionnaires............................................................................................................... 11
2.7.4. Distribution of the questionnaires ...................................................................................................................... 11
2.7.5. Decline in the population ................................................................................................................................... 11
2.8. VALIDITY AND RELIABILITY ...................................................................................................................................... 12
2.9. RESEARCHERS’ DIARY ................................................................................................................................................ 13
3. THEORETICAL FRAMEWORK ............................................................................................................................ 15
3.1. MARKET SCREENING .................................................................................................................................................. 15
3.1.1. Initial Screening ................................................................................................................................................. 16
3.1.2. Second Screening - Financial and Economic Forces ......................................................................................... 17
3.1.3. Third Screening - Political and Legal Forces .................................................................................................... 18
3.1.4. Fourth Screening - Sociocultural Forces ........................................................................................................... 20
3.1.5. Fifth Screening - Competitive Forces ................................................................................................................. 21
3.1.6. Final Selection of New Market ........................................................................................................................... 21
3.2. POLITICAL RISK - A DEEPER PERSPECTIVE ................................................................................................................... 22
3.2.1. Sources of political risk ...................................................................................................................................... 22
3.3. COUNTRY AND FIRM SPECIFIC POLITICAL RISKS ......................................................................................................... 22
3.3.1. Country specific risks ......................................................................................................................................... 23
3.3.2. Firm specific risk ................................................................................................................................................ 23
3.4. TRANSITION ECONOMIES ............................................................................................................................................ 24
3.4.1. Centrally planned economies and market economies ......................................................................................... 24
3.4.2. Basic elements of an economic reform program ................................................................................................ 25
4. A FURTHER DEVELOPMENT OF THE MARKET SCREENING MODEL ................................................... 27
5. UKRAINE ................................................................................................................................................................... 29
5.1. UKRAINE AND ITS HISTORY ........................................................................................................................................ 29
5.1.1. History ................................................................................................................................................................ 29
5.1.2. Geographic situation .......................................................................................................................................... 30
5.1.3. Population .......................................................................................................................................................... 31
5.1.4. Infrastructure...................................................................................................................................................... 31
5.2. ECONOMICAL AND FINANCIAL SITUATION ................................................................................................................. 32
5.2.1. Macroeconomic situation ................................................................................................................................... 32
5.2.2. Currency ............................................................................................................................................................. 34
5.2.3. Production .......................................................................................................................................................... 34
5.2.4. Financial system ................................................................................................................................................. 36
5.3. POLITICAL SITUATION ................................................................................................................................................ 37
5.3.1. Government ........................................................................................................................................................ 37
5.3.2. Political developments........................................................................................................................................ 38
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5.3.3. Legal developments ............................................................................................................................................ 39
5.3.4. Trade barriers .................................................................................................................................................... 40
5.4. ECONOMIC REFORM .................................................................................................................................................... 41
5.4.1. Price liberalisation ............................................................................................................................................. 42
5.4.2. Macroeconomic stabilisation ............................................................................................................................. 42
5.4.3. Privatisation ....................................................................................................................................................... 43
5.4.4. Foreign direct investment ................................................................................................................................... 43
5.5. POLITICAL RISK .......................................................................................................................................................... 45
5.5.1. Ethnic risk .......................................................................................................................................................... 45
5.5.2. Corruption .......................................................................................................................................................... 45
5.5.3. Expropriation ..................................................................................................................................................... 46
5.6. SOCIOCULTURE SITUATION......................................................................................................................................... 46
5.6.1. Culture ................................................................................................................................................................ 46
5.6.2. Religion .............................................................................................................................................................. 46
5.6.3. Language ............................................................................................................................................................ 47
5.6.4. Education ........................................................................................................................................................... 47
5.6.5. Employment and wages ...................................................................................................................................... 48
5.6.6. Income and standard of living ............................................................................................................................ 49
5.6.7. Crime and safety situation .................................................................................................................................. 50
6. POLAND - THE ECONOMIC REFORM ............................................................................................................... 52
6.1. INTRODUCTION ........................................................................................................................................................... 52
6.2. HISTORY..................................................................................................................................................................... 52
6.3. THE ESTABLISHMENT OF A FREE MARKET ECONOMY .................................................................................................. 52
6.4. THE RESULTS OF ECONOMIC REFORMS........................................................................................................................ 54
6.5. POLAND’S SITUATION TODAY ..................................................................................................................................... 55
6.6. POLAND’S INTEGRATION INTO WESTERN STRUCTURES .............................................................................................. 56
7. ANALYSIS .................................................................................................................................................................. 58
7.1. INITIAL SCREENING - SPECIFIC NEEDS IN UKRAINE ..................................................................................................... 58
7.2. SECOND SCREENING - ECONOMIC AND FINANCIAL FORCES ........................................................................................ 59
7.3. THIRD SCREENING - POLITICAL AND LEGAL FORCES ................................................................................................... 60
7.3.1. Political forces ................................................................................................................................................... 60
7.3.2. Legal forces ........................................................................................................................................................ 61
7.4. BASIC ELEMENTS OF AN ECONOMIC REFORM PROGRAM ............................................................................................. 61
7.4.1. Preconditions for the reform work ..................................................................................................................... 61
7.4.2. Price liberalisation ............................................................................................................................................. 62
7.4.3. Privatisation ....................................................................................................................................................... 62
7.4.4. Development of a financial system ..................................................................................................................... 63
7.4.5. Macroeconomic stabilisation ............................................................................................................................. 63
7.4.6. Foreign sector liberalisation .............................................................................................................................. 63
7.4.7. Is Ukraine a market economy? ........................................................................................................................... 64
7.4.8. The effect of the reform work on foreign companies .......................................................................................... 64
7.5. POLITICAL RISKS ........................................................................................................................................................ 65
7.5.1. Ethnic risks ......................................................................................................................................................... 65
7.5.2. Corruption .......................................................................................................................................................... 65
7.5.3. Expropriation ..................................................................................................................................................... 66
7.5.4. Unstable government .......................................................................................................................................... 66
7.6. FOURTH SCREENING - SOCIOCULTURAL FORCES......................................................................................................... 66
8.CONCLUSION ............................................................................................................................................................ 68
8.1. CONCLUSION .............................................................................................................................................................. 68
8.2. A CRITICAL EVALUATION OF OUR RESEARCH ............................................................................................................. 70
8.3. SUGGESTIONS TO FURTHER RESEARCH ....................................................................................................................... 71
BIBLIOGRAPHY .......................................................................................................................................................... 72
COMPENDIUMS .................................................................................................................................................................. 73
PERIODICALS..................................................................................................................................................................... 73
WEBB PAGES ..................................................................................................................................................................... 73
RESPONDENTS ................................................................................................................................................................... 74
APPENDIX A ...................................................................................................................................................................... 75
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APPENDIX B ...................................................................................................................................................................... 76
APPENDIX C ...................................................................................................................................................................... 78
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1. INTRODUCTION
1.1. Background about Ukraine
Ukraine is one of the largest untapped “emerging markets” in Europe. The country today is firmly
on its course towards democracy and irreversible market-based economic reforms. It has been a
struggle to get the country on the right course.
Soon after Ukraine’s independence 1991, several half-hearted reform programs were attempted but
then abandoned, mainly as a result of opposition in parliament and at local level. Since October
1994, Ukraine has broadly pursued macroeconomics stabilisation, price and trade liberalisation, and
has implemented a new mass privatisation program. However, structural reform, including largescale privatisation, has until recently, proceeded slowly, while land and agricultural reform has
been blocked by strong agrarian lobby in the parliament.
1996 was a breakthrough year for the country. First and foremost, a new Constitution was adopted.
It guarantees all basic freedoms and human rights, private and other forms of ownership. Secondly
a monetary reform was successfully implemented and the national currency, Hryvnia, introduced.
Thirdly, inflation has been “tamed” and the country’s export potential has expanded. Small
privatisation has been completed, whilst medium- and large-scale privatisation is on its way.
Investors and bankers from many countries are considering Ukraine as an interesting investment.
The country possesses pre-requisites to become an effective and competitive economy. It has rich
natural endowments and fertile arable soils, a skilled population as well as a well-developed
industry compared to the other countries of the former Soviet Union, and vast R&D potentials.
1.2. Preconditions for our problem area
At present Ukraine attracts the attention of researchers because of the troublesome political and
economical situation within the country. During our pre-trial investigation we learned that previous
conducted research about the Ukrainian market mainly dealt in the sphere of economics. We have
not been able to find any research that considered the Ukrainian business environment in the angle
of business administration. This was an incentive for us to begin a pioneer investigation that deals
with the Ukrainian business environment.
Our notion was confirmed when we got in touch with several companies. Some of these companies
were already established in Ukraine and the others were considering entering this market. The
interest for our field of research was shared by all of the companies and they were looking forward
to be informed of our result.
1.3. Definition of the problem
As an object for foreign investment Ukraine is a country of potentials, but also of great complexity
and uncertainty. In such an environment - characterised by potentially high returns but also
relatively high risks, and where many investments break new ground - it is vital that investors have
a good understanding of the opportunities and threats that exist.
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The authors are of the opinion that an identification of the opportunities and threats would be a
valuable contribution to the knowledge of the Ukrainian business environment.
1.4. Research question
What kinds of opportunities and threats does the Ukrainian business environment hold for foreign
companies?
1.5. Purpose
The purpose with this research is to analyse the Ukrainian business environment with the aspiration
to identify the opportunities and threats, which affects foreign companies in this market, using a
model suited for market analysis.
1.6. Delimitation
This research shall give a broad presentation over the Ukrainian business environment. We do not
intend to focus too deeply on details due to limited time and resources.
We intend to analyse the Ukrainian business environment from the perspective of foreign
companies.
In the analysis a comparison between Ukraine and Poland will be conducted within a limited part of
the market screening model dealing with the economic reforms.
The time period of this research will be focused on the period of transition from centrally planned
economy to market economy, i.e. from 1991 and onwards.
The research is primarily addressed towards all companies interested in Ukraine as a potential
market as well as those already operating there.
1.7. Structure of the thesis
To facilitate the reading of the thesis' outline we will briefly explain the basic structure and the
thoughts behind it. The numbering in the text below corresponds to the chapter numbers in the
present thesis:
Chapter 2. Following this introduction is a description of the methodology used for our purpose.
This part includes both a description of how our ideas emerged as well as the more practical parts,
such as the accumulation of data and interviews.
Chapter 3. This section contains a description of the theoretical framework behind our study.
Chapter 4. This section consists of a further development of the market screening model, which is
based on the theories in chapter 3.
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Chapter 5. In this section we will provide a general view of Ukraine, focusing on factors
concerning the business environment, which were identified in the further developed market
screening model. This chapter is based on existing literature and the results from our interviews.
Chapter 6. This chapter will consist of a brief presentation over the economic reforms in Poland.
The results from this chapter will be analysed by the authors within a limited part of the market
screening concerning the economic reforms.
Chapter 7. The empirical data that we have accumulated will be analysed in this chapter according
to the modified market screening model.
Chapter 8. The final part of the thesis will consist of conclusions drawn from our analysis. Our
research will be completed with a critical evaluation of our research and suggestions to further
research.
Figure 1: Structure of the thesis
2. Methodology
3. Theoretical
framework
4. A further development of the
market screening model
5. Ukraine
- dealing with all the steps
presented in the further developed
market screening model
6. Poland
- dealing with one step in the
further developed market screening
model, concerning economic
reforms
7. Analysis
8. Conclusions
- conclusions, critical
evaluation and suggestions
to further research
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2. METHODOLOGY
Following is a presentation of the methodology used to fulfil authors purpose. The chapter includes
a motivation of the chosen method, a description of how authors ideas emerged as well as different
techniques used to accumulate data and conduct interviews.
2.1. A scientific view point
In the field of social science there are two main traditions on how to conduct a scientific research.
They are called Positivism and Hermeneutics.
Positivism has its roots in an empirical/natural scientific tradition, with physics as its role model.
The scientists adhering to Positivism approach a social scientific research in the same manner as
they do in a natural scientific research. They believe that “...since human beings and societies
belong to the natural order, a single method, broadly defined, will serve for all sciences”. (Hollis, p
16) The underlying assumption here is that humans are rational beings.
According to the positivists, scientists adhering to Positivism, the researchers should strive to build
up knowledge consisting of general laws of causal nature, laws from which a cause-effect
relationship can be described. Further on the positivists believe that the correct approach is to start
with a theory which results into hypothesis. These hypotheses are then put to the test empirically
through scientific methods.
Positivists tend to favour quantitative methods before qualitative and seek to explain human
activities in terms of cause and effect. Much like natural scientific research they avoid personal
influence in order to reach objectivity, setting a distance between the scientist and the object. It is
considered that the researcher as a person, as well as his/hers political, religious and emotional
sentiments should not in any way influence the result. The ideal situation for a positivist would be
when researchers are switched yet the result is the same. The aim of the positivists is to reach
generalities.
The hermeneutic tradition is different from the positivistic tradition. The hermeneutics explain their
standpoint as following. Each phenomenon in the society is interpreted by humans, each
phenomenon is given a meaning. To understand the phenomenon the researcher can not distance
himself from the object, as suggested by the positivists. Instead the researcher should try to enter
the phenomenon he/she is studying through the use of empathy. (Lundahl & Skärvad, 1992) The
researcher is able to understand the studied phenomenon only if he/she understands the context in
which it exists. The hermeneutics, scientist adhering to the hermeneutic tradition, therefore claims
that the social world should be understood from within, rather than explained from without. Instead
of seeking the causes of behaviour the Hermeneutics seeks the meaning of action (Hollis, 1994).
The aim is to interpret and understand rather than to explain.
As our research deals with a market, which is a social construct, we believe that we share the same
scientific point of view as the hermeneutics. We do not believe that humans are rational and in
order to explain the process we believe that an understanding of the human nature and behaviour is
of consequence.
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2.2. Choice of methods
We have chosen to use qualitative case studies as the method for our research. We believe that it is
the most appropriate method for us as the other methods did not really fit our purpose. The choice
of method is dependent on the problem definition and the purpose of the study. We ruled out
experimental research since it is a method that allows the researcher to make strong claims about
causality, that one thing has an effect on something else (Bryman, 1989). That is not the purpose of
our research. We want to study the Ukraine through a business point of view in order to create
better understanding of this relatively new market.
Our research is not an action research, as we do not intend to find a solution for a specific problem.
We did not intend to make a fieldtrip to Ukraine either so we ruled out ethnographic research,
which is a participating field research. The participating nature of this method is the main reason
why it is not suited for our purpose since we can only observe but not influence our subject.
Surveys came close to what we are doing but it still did not fit our purpose entirely. Our research
includes interviews and questionnaires in order to gain greater validity as well as gather
information. There have been articles and books written about Ukraine through the point of view of
economics, which we have adapted to our research. Our research is therefore based on both primary
and secondary data. The reason is to capture as many variables as possible for the identification of
opportunities and threats. As such we had to eliminate survey as a method as it is a method which is
limited on the amount of variables it can handle (Merriam, 1994).
2.3. Case studies
After eliminating all the other methods we will here try to justify our choice of case studies as the
method for our research. A case study is an investigation of a specific phenomenon, such as an
event, a person, an institution or a social group (Merriam, 1994). This is very appropriate to our
research as we are analysing a market.
The qualitative case study that we have chosen does not exclude quantitative data. All kinds of data
can be used in a case study. This suits our purpose very well. We have used both qualitative and
quantitative data in our research to gain as much understanding of the Ukrainian business
environment as possible, since not much has been written about it from the business administrative
point of view. By using both types of information a form of triangulation is implemented and
greater validity is achieved (Merriam, 1994). This kind of flexibility, the lack of any formal
structure, which allows the combination of several different methods and different kind of data, is
what makes case studies so appealing.
Unfortunately there are drawbacks to case studies, as with all other methods. According to Guba &
Lincoln, case studies can oversimplify or exaggerate facts in a situation, which can lead to readers
drawing false conclusions. This is an inherit problem among all qualitative methods. The solution
would be that the researcher is aware of this and points out this fact to the readers.
Flexibility, which is the advantage of case studies, is also its drawback. The researcher is given a
lot of freedom in the gathering and analysis of the information as well as the presentation of the
result. Therefore great demand is put on the researcher’s ability and also his/hers integrity. An
unethical researcher can choose among the accessible information to present the kind of result
he/she wants. A detailed report concerning the gathering and analysis of the information can diffuse
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the problem concerning the researcher’s ability in gathering, analysing and presenting the results.
The readers are then given the opportunity to criticise the research. We will take these failings of
the method into account and give the readers a detailed report of our gathering and analysis of the
information. As for the problem of the unethical researcher, it usually arises when the research is
financed or ordered by someone else. We do not have this problem and instead, as students writing
a master level thesis, are encouraged to be as unbiased and truthful as possible.
2.4. Qualitative and Quantitative data
Authors have included both qualitative and quantitative data in the research. First, we will define
this two concepts and thereafter will explain their implementation in our research.
According to Sharan B. Merriam, data, or information, conveyed through words is called
qualitative. Qualitative data consist of detailed description of situations, events and people. They
also consist of direct quotations from different people about their experiences, attitudes and
thoughts.
In contrast, information that is presented in the form of numbers is called quantitative data. The
emphasis is put on measuring the extent of a certain opinion, attitude, event or a behaviour rather
than to describe them.
Our research is intended to be an analysis of the Ukrainian business environment with the purpose
of identifying the opportunities and threats, which affects foreign companies operating in this
market. Among our sources of qualitative data are different kinds of interviews that we have
conducted, as well as information from literature, articles, databases and others. The sources for
quantitative data came from statistical literature, concerning economic indicators in the investigated
country. It has been difficult for us to find detailed statistical data concerning Ukraine. We believe
that the reason is due to the economical turmoil that the country has experienced, which made the
acquisition of statistical data an act of low priority.
2.5. Primary and secondary data
Primary data are collected especially to address a specific research objective. They are timeconsuming to obtain. The advantage though is that the data are suited for the research and the
researcher has some control over its accuracy. Methods to obtain primary data range from
qualitative research to surveys to experiments ( Aaker, Kumar, Day, 1995).
Secondary data are information that was collected for purposes other than solving the present
problem/problems. The limitations, other than being collected for some other purpose, are that the
researcher had no control over the data collection. They may therefore be not very accurate. They
may also be outdated. The advantage though is that they require less time to obtain and needs less
effort. In some instances they may also be the only source of information available, such as
historical records. Examples of secondary data are information systems and data banks. (Aaker,
Kumar, Day, 1995).
The secondary data that authors have applied, after having it adapted to fit the purpose, are written
sources such as literature, Webb-pages, periodicals and compendiums. The reason why we used
these secondary sources is that it would be an inefficient use of our time to send questionnaires and
to do interviews on subjects that others have already accumulated information about.
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The primary data applied in the research consists of questionnaires and interviews. Authors
intention was to find more recent data or data that have not been available through secondary data.
Furthermore, we believe that obtaining information directly from the source is essential. Besides
serving as a confirmation of the secondary information that we have accumulated, it allows the
research to voice the opinions of the foreign companies operating in the Ukrainian business
environment. This will give our research a higher level of validity.
2.6. Interviews with organisations and embassies
Interviews with SIDA, the Swedish Trade Council and the Ukrainian Embassy were mainly
conducted during our pre-trial investigation when we were accumulating facts concerning the
problem area. The interviews were of an explorative nature. Before we go any further we shall
explain the different kinds of interviews that can be conducted.
Interviews can be divided into three different categories: structured, semi-structured and
unstructured (Merriam, 1994).
The structured interview is the oral equivalent of a survey: the questions and the order in which
they are asked are confirmed in advance. This type of interview is especially useful when a large
number of people are to be interviewed. The semi-structured interview is guided by a couple of
questions, but the exact formulation and order are not determined. In this way the interviewer can
adapt to the situation and take advantage of new ideas that may arise. The unstructured interview is
explorative, and there are no pre-formulated questions. The unstructured interview is used in the
initial stage of a case study in order to gain enough knowledge to be able to formulate the questions
for future interviews.
The questions directed towards SIDA, the Swedish Trade Council and the Ukrainian Embassy were
unstructured, since they were asked in order to achieve a better knowledge concerning Ukraine. As
mentioned earlier, they were conducted during our pre-trial investigation when we did not possess
much knowledge of the Ukrainian business environment. As our research proceeded we were able
to refer to the information obtained from these interviews. The majority of these interviews were
conducted by telephone.
The interview with Mr Marek Szczygiel, 2nd Secretary at the Polish embassy was a formally
constructed interview, where we had a basic guideline concerning what questions to ask. The
interview was conducted in the middle stage of our research and we knew what kind of questions to
ask. Therefore, the interview was semi-structured since we wanted to give our respondent the
opportunity to speak. In this way we could have a dialogue concerning essential aspects which
might come up as the interview proceeded. The subject of the interview concerned the Polish
reform process.
2.7. Interviews with foreign companies operating in Ukraine
When conducting research, the nearness to the investigated object is of an essential importance.
Therefore, the authors accomplished interviews with foreign companies operating in Ukraine.
These companies are daily affected by the Ukrainian business environment, which we intend to
analyse, and their experience is of great importance for our investigation. A complete summary of
the interviews is to be found in Appendix C.
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2.7.1. Making contact with foreign companies operating in Ukraine
During our pre-investigation the Swedish Trade Council informed us about the 1996 state visit to
Ukraine. The participants in the 1996 state visit were the Swedish Minister of Foreign Affairs and
six Swedish companies interested in the Ukrainian market. We contacted the participants and from
the following companies we received names of their contact persons in Ukraine: Alfa Laval, Atlas
Copco, Electrolux, Scania, Tetra Pack. The sixth company that participated in the 1996 state visit,
Esselte, did not conduct any business in Ukraine.
Furthermore, we had a contact in Russia, Mr Reshetov Nikolay, Managing Director for Russian
Maritime Register in St Petersburg, who introduced us to six further foreign companies operating in
Ukraine. These companies were Kross (USA), Oditel-Siemens (Germany), Hi Tech (USA), Transas
Marine (Denmark), Shevron (USA), and MacGregor (Sweden/Finland).
2.7.2. The population
The purpose with the interviews was to achieve information about the Ukrainian business
environment that would be applicable on foreign companies within different industries. Therefore,
authors premises concerning potential respondents for the interviews were foreign companies
operating within different lines of businesses. Based on our premises we contacted 11 foreign
companies.
2.7.3. The development of the questionnaires
The process of formulating the interview questions began when authors had achieved enough
knowledge concerning the investigated market. The interviews were conducted in the form of a
questionnaire containing 21 questions. The questions were formulated in such way that they could
be categorised as being open-response questions. This means that they could not be answered by
simply stating yes or no. The questions were general and dealt with the Ukrainian business
environment. They were divided into categories such as economical situation, political and legal
situation, cultural situation, and future prospects.
2.7.4. Distribution of the questionnaires
The questionnaire was distributed mainly through the use of Internet. We chose this approach since
we were not able to travel to Ukraine and conduct the interviews personally. The advantage with
distributing the questionnaires in this fashion is the possibility for a quick reply. To companies that
we had not received an e-mail address, we distributed the questionnaires by fax machine.
2.7.5. Decline in the population
The drawbacks when using questionnaire is the low response rate (Aaker, Kumar, Day, 1995). In
order to make sure that we achieved a high response rate we tried to address each respondent
personally, explaining how we obtained their address and the purpose with our research. We
informed them that their answers were essential to us and asked for a speedy reply, setting a
deadline. Furthermore, they were informed that they could answer in Swedish, English or Russian,
whichever language that they felt most comfortable using.
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We received answers from 9 of the 11 contacted companies. The decline in the population was
about 18 per cent. We believe that this small decline is explained by the companies’ interest for the
research. The majority of the respondents were interested in receiving a copy of our research.
At the headline Respondents at the end of this thesis we describe the appointments with the
interviewed contact persons at the foreign companies. Several of our respondents wished to be
anonymous.
2.8. Validity and Reliability
In a scientific research, the issue of whether the results are valid and reliable is of great importance.
Therefore a discussion about the validity and reliability of the research is often included in the
research paper to justify the results. As mentioned earlier we share the hermeneutic point of view.
This has a certain implication on the validity and reliability of our research.
The validity concerns whether the result matches reality. Is the result a reflection of the reality or
are there aspects that have not been captured by the research (Merriam, 1994)? To make sure that a
research has high validity the researcher utilises several different methods and information sources.
This is called triangulation. Validity is somewhat different in a qualitative case study. A qualitative
case study is influenced by how the researcher interprets the data. Different people interpret the
same thing differently. Therefore this might lead to issues concerning the validity of a research.
We believe to have tackled the issue of validity by using information from different sources. They
were primary sources such as different kinds of interviews conducted in Ukraine and in Sweden, as
well as secondary sources such as literature, Webb-pages, periodicals etc. Authors have gathered
opinions from many people and thereby avoided leaving things out and creating a distorted view of
reality. Furthermore, we have allowed a few independent individuals read our thesis and confirm its
validity (Merriam, 1994).
Reliability concerns the extent to which the results can be repeated (Merriam, 1994). If the research
is repeated again, the results should be the same as for the original research. The researcher often
includes a detailed description on how the research was conducted in order to achieve greater
reliability. The description enables other researchers to repeat the investigation.
The idea that the same result should be achieved when repeating a research is based on the
assumption that reality can not be changed. This is a positivistic point of view. Our statement
earlier of sharing a hermeneutic point of view might lead to issues concerning the reliability of our
research. This is because hermeneutic research is based on how the researcher interprets the data.
Since the interpretation is highly subjective and based on personal values and sentiments, no
researcher has been able to come to the exact same conclusions as the one before when repeating
the investigation. Therefore, reliability as described above can not be obtained in a qualitative case
study. It is more of a guideline, which should be followed rather than a goal that needs to be
attained.
We have attained reliability by using several sources for our research (Merriam, 1994). To make us
familiar with the subject we conducted extensive reading and interviewed several persons
possessing knowledge within the investigated field. The construction of questions and the
documentation of the answers have been done thoroughly. The purpose of using a variety of
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sources was to eliminate as many errors and biases as possible. Furthermore, we have described
how we conducted our research so that it can be repeated.
According to Guba & Lincoln reliability and validity are linked together. It is impossible to have
validity without reliability. By strengthening the validity it also leads to the research acquiring
greater reliability. The result is considered valid as long as no new information appears which
contradicts it.
2.9. Researchers’ diary
At the beginning of our research we all agreed upon the idea of analysing a transition economy. A
transition economy means a country, which is transforming from a centrally planned to a market
economy. Examples of such countries are Russia, Baltic States, Poland, Ukraine etc. Finally we
decided to investigate Ukraine. Our interest in this market was deepened when we learned that
there is lacking research concerning the Ukrainian business environment, conducted from the angle
of business administration.
In our research we aimed to analyse the Ukrainian business environment from the perspective of
foreign investors. Due the lack of research concerning this market we decided to investigate the
market as a whole. Our presented research will therefore be an interesting source for foreign
companies operating in different and unspecified industries. We came up with the idea, that
obtaining facts about threats and possibilities with the Ukrainian business environment would give
foreign investors essential initial information about the country.
Ukraine is on the way to become a market economy. The implementation of several reform
programmes has already been settled in the country. The process of implementing those reforms is
a determining factor for the future development of the country, and it plays an important role for
the Ukrainian business environment as well. We had a wish to develop an understanding towards
how efficient the reform work has been in Ukraine, and that is why we decided to compare the
reform process in Ukraine with Poland, since Poland is also a former centrally planned economy
that has succeeded with the reform work.
The sources of our information were interviews with different types of organisations, literature,
Webb-pages, periodical etc. Early in the writing process we decided to interview foreign companies
operating in the Ukrainian business environment. We viewed it as important to achieve the
information directly from Ukraine since we endeavoured to the nearness to the investigated market.
We obtained the address to companies established in Ukraine in two different ways. First, the
Swedish Trade Council informed us about the 1996 state visit to Ukraine. The participants in the
1996 state visit were the Swedish Minister of Foreign Affairs and six Swedish companies that were
interested in the Ukrainian market. Further, while we contacted those six companies, we obtained
names and addresses to contact persons at five of these.
Through our contact in Russia, Mr Nikolay Reshetov, Managing Director of the Russian Maritime
Register in St Petersburg, we could get in touch with another six foreign companies operating in
Ukraine. Those companies had different countries of origin and are operating in different lines of
businesses.
13
We received a quite high response rate on our questionnaire. 9 out of 11 companies answered. We
interpret this as the companies having a high interest in our research. The majority of our
respondents wished to receive a copy of our research report.
Early in the process, while we were discussing the purpose of our research, we wanted to find a
model that would help us through our analysis of the Ukrainian business environment. We went
through several models and eventually chose the market screening model. Thereafter, we added two
additional frameworks from the theory that would be useful in our analysis. In the end we had a
model that was mostly based on the market screening model, but adapted in such way that it better
suited our purpose.
Having obtained a further developed market screening model and gathered the information needed
we started with the analysis. The analysis follows the steps in the further developed market
screening model. This helped us considerably in structuring the research. Based on the analysis we
then drew conclusions about the opportunities and threats that affects foreign companies in the
Ukrainian business environment.
14
3. THEORETICAL FRAMEWORK
First in this section, authors will present a market screening model, which is suitable for analysing
a new market. Further, we will briefly describe two additional theories concerning political risk
and transition economies. These three theories will constitute the foundation for our research of the
Ukrainian business environment.
As a starting-point in the purpose of the research, which is to develop an understanding toward the
Ukrainian business environment, we searched for a model that would be suitable as a tool when
analysing this specific market. The models we found in the literature were similar in many ways,
consisting of the same factors. Though some models were more thorough and detailed than others
were as they were dealing with specific industries. We did not have the opportunity to make a too
thorough analysis of Ukraine and, initially, we did not possess much knowledge concerning the
market. Therefore, we believed that a general analysis of the Ukrainian business environment as a
potential market for foreign companies would suffice.
In accordance with our premises we chose the market screening model. The market screening
model consists of different factors that are distinguish for a national market in specific as well as it
is suitable and easy to apply on different enterprises. The model deals with six environmental
components. To begin with the model aims for an investigation in order to locate the basic need
potential for a specific product in a new country, as well as analyse the need for import in the
country. The following steps in the model aim to investigate the economical, political and
sociocultural factors in the country. The last step in the model treats the visit to the country in
question and a direct investigation at place.
3.1. Market screening
Market screening is a method of market analysis and assessment that permits management to
identify a small number of desirable markets by eliminating those judged to be less attractive (Ball,
1993, p. 487). This is accomplished by subjecting the countries to a series of screenings based on
the environment forces.
15
Figure 2: Market Screening model
Market screening
Initial screening
Basic need potential and/or
foreign trade and investor
Second screening
Economic and financial forces
Third screening
Political and legal forces
Fourth screening
Sociocultural forces
Fifth screening
Competitive forces
Final selection
Personal visits and, in some
cases research in the local
market
Source: International Business, Ball et al, 1993, p 487
3.1.1. Initial Screening
An initial screening based on the basic need potential is a logical first step, because if need is
lacking, no reasonable expenditure of effort and money will enable the firm to market its goods or
services. For example, the basic need potential of certain goods is dependent on various physical
forces, such as climate, topography, or natural resources. When a basic need is clearly indicated,
most experienced researchers will still investigate the trade flows to have an idea of the magnitude
of present sales.
Imports alone are rarely a measure of full market potential. Myriad reasons are responsible, among
which are lack of foreign exchange, high prices, and political pressures. Import data indicate that a
country has been buying certain products from abroad and are not guarantee that it will continue to
do so. Management knows that a competitor may decide to produce locally, which in many markets
will cause import to cease. Change in countries political structure may also stop imports.
16
The result from this step will be analysed by the authors to find out what specific needs there are in
the investigated market. As an example, the geographic situation and climate in the market can
result in different consequences for different enterprises. To develop a wider understanding of the
investigated country we proceed to step number two.
3.1.2. Second Screening - Financial and Economic Forces
After the initial screening, the analyst will have a more limited list of prospects. A second screening
based on the financial and economic forces may further reduce this list.
Financial data
Trends in the rates of inflation, exchange rates, and interest rates are among the major financial
points of concern. The analyst should consider other financial factors such as credit availability,
paying habits of customers, and rates of return on similar investments.
Economic data
Economic data may be employed in a number of ways, but two measures of market demand based
on them are especially useful. These are market indicators and market factors. Other methods for
estimating demand that depend on economic data are regression analysis, trend analysis, and cluster
analysis.
1. Market indicators
Market indicators are economic data that serve as yardsticks for measuring the relative market
strength of various geographic areas. The indicators include population, GDP, various categories of
private consumption expenditures, and the production or consumption of steel, cement, electricity,
and energy. These indicators are weighted and combined to form composite indexes of (a) market
size, (b) market intensity, and market growth (c).
a). Market size shows the relative size of each market as a percentage of the total world market.
The percentages for each market are obtained by averaging data on population (given double
weight), urban population, private consumption expenditures, steel consumption, cement and
electricity production, and ownership of telephones, cars, and television sets.
b). Market intensity measures ”the richness of the market” or the degree of concentrated purchasing
power as compared to the world intensity of 1.00. The intensity for each market is calculated by
averaging per capita consumption of energy, ownership of passenger cars, and telephone access
lines. Double weight is given to overall private consumption expenditures. The proportion of urban
population is also included and double-weighted because in many developing countries, much of
the rural population does not actually participate in the money economy.
c). Market growth is an average of percentage growth of the following indicators over the past five
years: population; steel consumption; electricity production; ownership of cars, trucks, buses, and
television sets; private consumption expenditure; and real GNP.
An analysis of these three indexes will show which major regions and major markets were the
fastest growing, what their growth rates were, and which have a highest degree of concentrated
17
purchasing power. By comparing the values of the indexes with the sales results of the company’s
subsidiaries, management can quickly judge their performance.
2. Market factors
Market factors are similar to markets indicators, except they tend to correlate highly with the
market demand for a given product. If the analyst of foreign market has no factor for that market,
he or she can usually use one from the domestic market to get a reasonable approximation.
Moreover, an analyst who works for a multinational firm may be able to obtain market factors
developed by comparable subsidiaries. To be able to transfer this relationships to the country under
the study, the analyst must assume that the underlying conditions affecting demands are similar in
that market.
In this step we shall take a closer look at the country specific conditions typical for the country
investigated, as well as the financial factors typical for the country.
Financial data will show us how the financial system in the country works. It might as well be
interesting for us to look at the development of financial indicators during the recent years.
Indicators such as: inflation, exchange rate, interest rate, credit availability and paying habits of
customers might be of common importance for all foreign investors. Rates on return are more
company specific and therefore not in our interest to investigate.
Based on market indicators, that is economic data, we intend study the country specific indicators
in the country. To study such indicators from the latest years might clarify the development in the
country.
Market factors are more company specific, since they correlate with a demand for a specific
product. Therefore, we will not further investigate these factors at this stage.
3.1.3. Third Screening - Political and Legal Forces
Political forces
The political climate within the country a company operates, is as essential as the topography, and
meteorological climate of the country.
Many of the political forces with which business must cope have ideological sources. Such names
as socialism, capitalism, liberal, conservative, left, and right wing are used to describe
governments, political parties, and people. These names indicate ideological beliefs. But there are
also a large number of other sources. These include nationalism, terrorism, traditional hostilities,
unstable governments, international organisations and so forth.
Legal forces
International business is affected by many thousands of laws and regulations on hundreds of
subjects that have been issued by states, nations, and international organisations. Some of these
forces concern every business, whereas others involve fewer firms.
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 Taxation
Multinational companies, unlike a domestic firm, which is based in one country, come under the
jurisdiction of more then one tax authority. Each country has its own taxation rules and regulations
and as such the MNC’s are subjected to various taxation treatments concurrently.
Countries differ in their position towards foreign companies. Some would like to encourage
incoming foreign direct investment, and use tax incentives to this end while others use high taxes in
order to discourage the repatriation of foreign firms’ profits.
 Entry barriers
Entry barriers vary for the company, depending on whether management is considering exporting
or setting up a foreign plant. In certain lines of business where the host country tries to defend
domestic companies those barriers can be very large. In other lines of business that are under
growth and development those barriers are less bothering.
 Profit remittance barriers
When there are no objectionable requisites for entry, a nation may still be excluded if there are
what management believes to be undue restrictions on the repatriation of earnings. Limits linked to
the amount of foreign investment or other criteria may be set, or the nation may have a history of
inability to provide foreign exchange for profit remittances.
 Tariffs, Quotas, and other trade obstacles
The purposes of tariffs are to raise revenue for the government and to protect domestic producers.
Tariffs are either ad valorem, which means they are a percentage of the value of the imports, or
they are specific. The specific tariff is based on the weight or number of items imported.
Quotas, which limit the number or amount of imports, are for protection.
There are many other forms of protection or obstacles to trade in national laws. Some are health
and packaging requirements. Other concerns language.
 Price and wage controls
Price and wage controls are prohibitions or limits on upward movements of prices or wages that are
imposed by governments to combat inflation when the government has been unable or unwilling to
slow or halt it by fiscal or monetary measures.
This step is very important for us since we are investigating a country that is in an economic
transition. Political forces might be strong in former communistic countries. The countries that are
now transforming to market economies can still in some extension be bonded to the communistic
ideology. New political parties might also affect the political thinking in the country. We are
interested to see the impact of those ideologies on the business environment in Ukraine.
Legal forces might affect all the foreign enterprises and they can be more specific depending on the
line of business. We want to investigate the legal forces that affect all different types of foreign
investors.
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3.1.4. Fourth Screening - Sociocultural Forces
Culture is defined as historically involved values attitudes and meanings which are learnt and
shared by the members of a given community, and which influence their material and non-material
way of life. People that live in the same culture learn these shared characteristics through different
stages of the socialisation process of their lives in institutions such as family, religion, formal
education and the society as a whole. A culture in a certain country has an implication for business
environment and foreign companies acting there. It is important for foreign investors to know the
culture, customs and what is and what is not accepted in the country. Knowledge about those
factors will help enterprises to act adequately in the new market.
A screening of the country on basis of sociocultural factors is difficult because these are highly
subjective. The analyst, unless he is a specialist in the country, must rely on the opinions of others.
It is possible to hire consultants, but they are expensive. Reading Overseas Business Reports (US
Department of Commerce), international business publications (Business International and The
Economist), and specialised books will improve the analysts sociocultural knowledge. The use of
the checklist of the principal sociocultural components will serve as a reminder of the many factors
the analyst must consider in this screening.
Checklist of the principal sociocultural components
1. Aesthetics
Aesthetics is a culture’s sense of beauty and good taste. Aesthetics is expressed in the culture’s
art, drama, music, folklore, and dances.
2. Attitudes and beliefs
Every culture has a set of attitudes and beliefs that influence nearly all aspects of human
behaviour and help bring order to a society and its individuals. Among the wide variety of
subjects covered by attitudes and beliefs, some are of prime importance to the businessperson.
These include attitudes toward time, toward achievement and work, and toward change.
3. Religion
Religion, an important component of culture, is responsible for many of the attitudes and beliefs
affecting human behaviour. A knowledge of the basic tenets of some of the more popular
religions will contribute to a better understanding of why people’s attitudes vary so greatly from
country to country.
4. Material culture
Material culture refers to all manmade objects and is concerned with how people make things
and who makes what and why.
5. Education
Formal education, especially in those societies where there is a well-developed educational
system, contributes to the formation of culture, both through the value system and the priorities
on which it is based on as well as the teaching practices and styles.
6. Language
Communication or language is probably the most apparent cultural distinction that the newcomer
to international business perceives. Differences in the spoken language are readily discernible,
and after a short period in the new culture it becomes apparent that there are variations in the
unspoken language (manners and customs) as well.
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7. Societal organisation
Every society has a structure or an organisation that is the patterned arrangement of relationships
defining and regulating the manner by which its members interface with one another.
In this step we will try to get an understanding of the culture in the investigated country. Having
done that we shall see how it affects business environment and foreign companies operating there.
After the fourth screening, the analyst should have a list of industries for which a demand appears
to exist. The two following steps that are described will not be taken into consideration in our
analysis. In step five a company shall investigate competitors and their strategies on the new
market. This implies that the outcome depends on the type of company and how the results differ
between companies and lines of business. We want to reach conclusions that could be essential for
all the foreign investors. Thereby we will not go further into this step.
In step six the company is recommended to make a visit to the country and get all the information
needed on the very market itself. This visit is the last thing the company is advised to carry through
before it decides whether to establish in the new market or not. This step is also company specific
and we therefore chose not to go further into this step.
Since these steps are included in the model we will give them a brief description.
3.1.5. Fifth Screening - Competitive Forces
In this screening, the analyst examines markets on the basis of such elements of the competitive
forces as the number, size, and financial strength of the competitors, their market shares and
marketing strategies, their pricing policies and so forth. Countries, in which management believes
strong competitors make a profitable operation difficult to attain, are eliminated. This will occur
unless: the management follow a strategy of being present wherever its global competitors are, or
believes a reason for foreign investment to be the entrance of a competitors home market to distract
the competitors attention from its home market,
3.1.6. Final Selection of New Market
An executive of the firm should visit those countries that still appear to be good prospects. Before
leaving, this person will review the data from the various screening along with any new information
that the researcher can supply. Based on this review and on experience in making similar domestic
decisions, the executive will prepare a list of points in which information must be obtained on
arrival. Management wants the facts uncovered by the desk study (the five screenings) to be
corroborated. Furthermore, the management will expect a firsthand report on the market, which will
include information on competitive activity and appraisal of the suitability of the firms present
marketing mix and the availability of ancillary facilities (warehousing, service agencies, media,
credit, and so forth).
The field trip should not be hurried, since as much time should be allotted to this part of the study
that would have been spent on a similar domestic field trip. Often time can be saved if the executive
can join the government-sponsored trade mission or visit a trade fair, because such events attract
the kinds of people this person will want to interview.
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3.2. Political risk - a deeper perspective
As we have already mentioned in step three in the Market screening model the political forces are
of essential meaning for foreign companies doing business in former communistic countries. The
risk from eventual political events can affect the business activity in a negative way. Our chosen
market, Ukraine, is in the middle of a complicated process of transforming the country into market
economy. As such we believe that further explanation of political risks than what has been
discussed in the market screening model would be appropriate. This because the transition requires
a lot of political support in orders to succeed. In these transition economies there are strong forces
that wants things to be returned to the “good old days”. This will result into disagreement between
the political leaders and greater turbulence and risks in the market.
Political risk can be defined as “...probability of domestic or foreign firms activities being adversely
affected by the actions taken by the state” (Tayeb, 1992, p. 28).
3.2.1. Sources of political risk
Political risk can occur at three levels: national, industry and firm.
At the national level, some countries seem to be more risk prone than others. Although it is difficult
to generalise, nations that experience a greater degree of political instability are more likely to
cause problems for foreign firms. A change in government through revolution or elections or just
change of leadership can lead to changes in the policies affecting foreign firms. These policies can
be related to such areas as foreign exchange controls, foreign investment inside the country,
taxation, price controls and profit remittances regulations, and shift of emphasis in foreign policy
towards certain countries.
At the industry level, the potential for political risk is greater for strategic industries, such as oil,
steel, power stations, arms and weaponry, and high technology, than for non strategic ones.
At the firm level, political risk is potentially great if, for instance, the company produces a large
amount of the host countries GNP; or if it is a subsidiary of a powerful multinational which can or
does exert political and economic pressure on the host country.
3.3. Country and firm specific political risks
Stephen Kobrin has classified contemporary political risks along two dimensions. The first
dimensions distinguishes between country-specific risks that affect all foreign firms in the country,
without regard to what they do, and the firm-specific risks that are specific to an industry, a firm, or
a project (Eiteman, 1998, p. 513).
22
Figure 3: Country and firm specific political risks
Political risk
Firm specific
risks
Country
specific
risks
Expropriation
(Directed toward
ownership of
foreign firms)
Ethnic strife
(Foreign firms
are only
bystanders, but
get hurt
Goal conflict
(Responsible
goals of governments and firms
diverge)
Corruption
(A ”way of life”
in many
countries)
Source: Multinational business finance, Eiteman et al., 1998, p 513
3.3.1. Country specific risks
 Expropriation risk
Expropriation is defined as official government seizure of private property. It is recognised by
international law as the right of any sovereign state, provided the expropriated owners are given
prompt compensation at fair market value in convertible currencies. Fair market value is in the eyes
of the beholder, with firms usually arguing for a ”going concern” value tied to the present value of
lost future cash flows.
 Risk from ethnic, racial, religious, tribal conflicts , or civil strife
The decade of the 1990s has seen the rise of a second type of country specific political risk, caused
by ethnic, religious, tribal, or civil strife within a country. Strife from these causes appears at this
time in history because of, among others, the sudden end of the overarching tension that had
previously existed between the Soviet Union and the Euro-American alliance, which had as a byproduct the supervision of ”minor” conflicts (Eiteman, 1998, p. 514). A recent example of these
new types of strife is a civil war in Yugoslavia.
3.3.2. Firm specific risk
 Goal conflict
The most important type of firm specific risk arises from a conflict between objectives of
government and private firms. Major areas of conflict may be economic and/or non-economic in
nature.
23
Economic conflict may arise including the following: monetary policy, fiscal policy, balance of
payments and exchange rate policy, economic protectionism, economic development policies.
Two common non-economic arguments against multinational firms are:
1. Economic imperialism. In many countries, for example in ex-colonial countries, a widespread
suspicion exists that multinational firms represent a new and insidious form of imperialism.
2. National security and foreign policy. Host countries sometimes become alarmed that foreign
control of key industry sectors will impair national security or an independent foreign policy.
 Corruption
The administrative machinery in the host country might be bedevilled with corruption and
incompetence. This can force foreign firms, in their efforts to obtain a license to operate in or deal
with a country, to be caught in a complicated web of bureaucratic procedures and paperwork. They
may also have to deal with corrupt officials who would manipulate the situation in order to extract
commissions from the firms before granting them permission to trade. Once the permission is
granted the firms have to co-exist with these people and procedures for as long as it intends to
continue its operations in that country. Not knowing the rules of the game is likely to jeopardise the
foreign firms successful operation and therefore be a source of risk and threat.
3.4. Transition economies
Ukraine is a former centrally planned economy, which is in transition toward market economy. If it
succeeds then it will become an important market due to its geopolitical situation, size and the
natural resources that it posses. But if it fails in its reforms and returns to being centrally planned,
the market will then be closed to foreigners. The government will then, most likely, expropriate the
foreign companies established there. There are serious risks involved here and we therefore believe
that it would be important to examine Ukraine’s transition towards market economy.
Besides assessing Ukraine’s commitment towards becoming a market economy, the examination
will also serve another purpose. It will give an indication as to how far Ukraine has changed from
being a centrally planned economy. This is important as transition economies usually experience a
turbulent period in the beginning when the old system is dismantled while the new one is still not in
place. This means greater risks involved for the foreign companies investing in the country.
In order to better understand the kind of changes that Ukraine has gone through a comparison will
be made with another former centrally planned economy which is in transition like Ukraine. What
follows here is some theoretical background of what market and centrally planned economies are
and the changes that needs to be implemented by a centrally planned economy to become a market
economy. The basic elements of an economic reform program are taken from several different
books written by Isachsen et al, Bosworth and Ofer, and Gros and Steinherr.
3.4.1. Centrally planned economies and market economies
Centrally planned economies are characterised by the centralisation of decision making. (Lipsey et
al., 1993). Central authorities, which decide what to produce and the procedure in producing,
determines economic behaviour. This involves an elaborate plan that encompasses every stage in
24
the supply chain. Each level of the supply chain must receive enough material to be able to produce
just the right amount ordered by the central authority for the next level of the supply chain. The
sheer quantity of data needed is enormous and the effort to analyse these data in order to produce a
fully integrated plan is staggering. Add to this the fact that the plan needs to be continually changed
and it is perhaps not so hard to understand the problems inherited in this kind of economy.
Centrally planned economies are also characterised by the issue of ownership. Most assets are
public-owned i.e. owned by the state.
In market economies the decision about resource allocation are made without any central direction.
(Lipsey et al., 1993). Instead they result from innumerable independent decisions made by
individual producers and consumers. This leads to better flexibility towards change. Even though
the decisions are decentralised they are still co-ordinated and the main co-ordinating device is the
set of market-determined prices. In market economies, most assets are privately owned.
So far there have not been any economies that are purely centrally planned or market economies.
Instead every economy is a mixture with different degree of the mix. The United States are often
considered as the prime example of a market economy but even there some principals from
centrally planned economies do exist. Minimum wages, rules and regulation for environmental
protection, restrictions on the import and such are prime examples. This proves that not everybody
believes that a pure market economy is the answer to abolishing inequalities. Though market
economies has proven to lead to a much better growth than centrally planned economy, which has
led to many former centrally planned economies implementing reform programmes in order to
switch to market economy. These economies are called transition economies.
3.4.2. Basic elements of an economic reform program
There is an agreement among the experts that a reform program should consist of these basic
elements: Price liberalisation, Privatisation, Development of a financial system, Macroeconomic
stabilisation, and Foreign sector liberalisation.
Price liberalisation: An efficient market requires a rational set of prices that can signal the
appropriate allocation of resources. Prices must be freely determined in line with underlying
resource costs before world market will open up to the products of the transitional economies. In
the old system, the price was determined by a central agency and did not necessarily reflect the real
value of the product.
Privatisation: The issue is not about private ownership but how to introduce an effective system of
governing and controlling the enterprises. One way is to have foreigners invest in the country,
bringing with them their expertise and technology. Unfortunately there are drawbacks to this
approach. The foreigners usually seek to limit competition as a condition of their entry. There is
also domestic resistance to giving away national resources. The advocates of privatisation consider
this as an important way of dismantling the old organisation and ensuring that the reform process
will not be reversed.
Development of a financial system: Under the old system of bureaucratic control, the financial
system played no allocating role in distributing savings to the most efficient investment projects.
Worse, it had no means to discipline firms to ensure that scarce capital was used efficiently. The
investment decisions were made and financed through the government ministries and thus the
financial system played no part in the evaluation of projects.
25
The new financial system will have two roles to play. On one hand they must finance the
enterprises. On the other hand they must discipline the enterprises and force them to conserve
scarce capital, as these enterprises did not have the problem of capital before.
Macroeconomic stabilisation: Macroeconomic stability involves a balance between public
expenditures and tax revenues (p 225). It sounds simple but it entails a lot of elements. Economic
reform brings with it a sharp decline in government revenues. The old fiscal system relied heavily
on the surpluses of state enterprises and turnover taxes to finance the state budget. The reform led
to a collapse of the state enterprise profits and the government has no effective mechanism for
collecting taxes from the newly emerging private sector. On the expenditure side they did not have
to subsidise the state-owned enterprises but a new social safety net program needed to be
developed. Also some responsibilities held by the state-owned enterprises, such as health care,
education, and housing, was transferred to the government.
In order to achieve price stability the increase of wages must be restrained. But this is hard to
accomplish, as the management of the enterprises is weak and do not have any incentives to do so.
Tax is on profit and not on the value added on goods or service.
Foreign sector liberalisation: An early opening of the external sector has generally been viewed
as critical to the reform process. The global market provides a most relevant guide to a rational
price structure. Foreign competition is considered the simplest way to introduce competition into
the domestic market. A convertible currency and free trade would assist in evaluating the
competitiveness of state enterprises. Although Western advisers encouraged this rapid opening it is
sometimes forgotten that the western countries have had several decades to evolve into its present
state.
Liberalisation in the foreign sector involves changing the trade policy and the exchange rate policy
and convertibility. A change in the trade policy entails allowing individual firms to engage in
foreign trade. The changes in the exchange rate policy entails establishing an exchange rate and
deciding on whether or not it should be a fixed rate, a floating rate, or a crawling peg (floating
within a set interval). Convertibility refers to the freedom to convert between national and foreign
currencies. There are degrees of convertibility. Current account convertibility allows foreign
exchange for the purpose of settling transactions involving the purchase of goods and services, the
payment of interest, and repatriation of profits. Full convertibility, also called capital account
convertibility, extends this principle to the purchase and sale of assets.
All of these elements are not separate issue but interrelated. In the beginning when the enterprises
still had a good supply of capital, the liberalisation of price led to a sharp rise in inflation and
threatened the country specific stability. Foreign sector liberalisation with increased competition as
a result led to bankruptcy and high unemployment. Privatisation of the financial institutions would
bring expertise and technology from abroad but might threaten the existing state owned banks.
26
4. A FURTHER DEVELOPMENT OF THE MARKET SCREENING MODEL
In this section we will modify the market screening model as well as adding further steps which will
consist of important aspects presented in our theoretical framework. The chapter will be concluded
with a presentation of The further developed market screening model, which will constitute as a
structure throughout the thesis.
Earlier we have stated that we will to limit our research to give a broad presentation over the
Ukrainian business environment. We do not intend to focus too deeply on details, which applies to
specific industries.We will rather deal with the business environment as a whole. Therefore we do
not intend to follow all the steps in the Market screening model. Instead we will use the first four
steps of the Market screening model and exclude the last two as they are aimed towards specific
companies.
As Ukraine is a relatively new market for foreign investors and is experiencing major political
changes in its transformation towards market economy, we intend to give more focus on the
political aspects compared to the Market screening model. As a result of this we have incorporated
some elements from Kobrin’s model, concerning political risks, into step three in the Market
screening model.
In accordance to our purpose and delimitation we have incorporated Kobrin’s country specific risks
in our model. We have also incorporated corruption into the model, even though it is classified as a
firm specific risk. The reason behind this is that we believe that corruption is a factor that affects all
the foreign companies established in Ukraine. Corruption is an aspect that is common in transition
economies. Most people will have it worse off in the beginning of the transition and some will seek
alternative ways to make a living. This will lead to corrupt government officials and strong criminal
elements, such as the Mafia, targeting the better off foreigners.
Earlier we have discussed that one important element which makes Ukraine interesting is that it is
striving to become a market economy. If it is successful then it will become a major market in
Europe. As such we thought that it would be important to look into how much they have done in
order to become a market economy. The reasons are twofold. First, it will give an indication to the
Ukrainian people’s commitment towards market economy as a reversal back to planned economy
would be a catastrophe for those foreign companies that have established themselves there. They
might then risk expropriation, as the government owns all assets in centrally planned economy.
Second, the analysis, when compared to another former centrally planned economy, which has
succeeded in its transition, will give an indication as to how far Ukraine has left in their
development before fulfilling its potentials. Entering early in the market can allow the company to
dominate the market towards other foreign companies but there are considerable risks involved.
Therefore it might be wise to wait until the country has developed more so that the risks involved
are minimised.
Due to this, we have decided to add another step into the model, entitled Basic elements of an
economic reform program. The reason for this is that all of the elements in the reform program are
political in nature. We chose not to incorporate it into the third step because we believe that the
topic of transition deserved its own attention. In our analysis we will take the results we have
acquired from the Basic elements of an economic reform program step and compare it with another
former centrally planned economy. We have chosen Poland, as we believe that they have succeeded
in their transition. They are considered a candidate for EU membership and many companies have
already invested in this country. Therefore, Poland is no longer considered as a “new market”.
27
The comparison is not about finding out which country is better to invest. We do not intend to
analyse the Polish business environment as we have the Ukrainian. The aim of the comparison is to
see whether or not we can determine how far behind Ukraine is in their reform program. As such
we will compare these two countries in those elements described in step alpha and no other.
After Basic elements of an economic reform program step we will return to the original Market
screening model and go through step four. We will then complete our analysis and draw a general
conclusion concerning the Ukrainian business environment, based on the results that we have
achieved. The further developed market screening model will therefore, as well, serve as a guidance
to the structure of our analysis.
Initial screening
Specific needs in
the
market, geographic
situation, imports
Second screening
Economic forces
(market indicators)
and financial
forces
Basic elements of an
economic reform
program.
Third screening
Political and
legal forces
Fourth
screening
Sociocultural
forces
Political risks
1. Ethnic,
Racial,
Religious
risks
2. Corruption
3. Expropriatio
n
risk
Conclusions about
the
investigated
market
Figure 4: The further developed market screening model
28
5. UKRAINE
The disposition in this chapter is structured according to the further developed market screening
model. The authors will focus on essential factors concerning the Ukrainian business environment.
The chapter consists of secondary data from different sources as well as primary data based on
interviews conducted with foreign companies in Ukraine. A complete summary of the interviews is
to be found in Appendix C.
5.1. Ukraine and its history
5.1.1. History
Recorded Ukrainian history is usually dated back to the Kyivan Rus in the seventh century. Kyiv
Rus was a powerful state in the 9th to the 12th centuries; its rulers introduced Christianity and
established Ukraine as a sovereign state. The collapse of the Kyivan Rus in the 13th century was
followed by centuries of instability until a treaty signed in 1654, which effectively divided the
territory between Poland and Russia.
Ukraine remained under foreign rule until 1917, when it enjoyed three years of independence in the
wake of the Bolshevik revolution. In 1920, Ukraine came back under Russian dominance. Industry
and commerce were nationalised, private property outlawed and in the 1930s agriculture was
collectivised, which took place at great human cost. As part of the Soviet Union, Ukraine was
supplying for much of its agriculture needs. Ukraine was also one of the Soviet Unions main
production centres, supplying much of the heavy industry. It expanded geographically, western
Ukraine was attached to the main state in 1939, and Ruthenia after 1945. Crimea was part of the
Russian Federation until 1954 when Khrushchev transferred it to Ukraine to mark 300 years union
between the two countries (Coopers & Lybrand, 1997).
Kyiv gradually became the focus for the independence movement that started in the west of the
country in mid 1980s. The cover-up following the Chernobyl disaster in 1986 together with the
activism of the independence group Rukh fuelled the demand for political mobilisation. National
awareness grew rapidly. Ukraine’s Prime Soviet, which was dominated by the communist party,
requested independence on the 16th of June 1990. They claimed that Ukrainian laws should be in
prior to Russian laws. Following the failed coup against President Gorbachev on the 19th to the 21st
of August 1991, Ukraine, in common with the other republics, declared independence on the 24th of
August the same year (Coopers & Lybrand, 1997). The December 1991 referendum found 95% of
Ukrainians in favour and former communist party Leonid Kravchuk became independent Ukraine’s
first president.
After the statement of Ukraine’s independence, many believed that the economical situation
automatically would get better. Instead, the overlapping period has been very difficult for the
majority of the population. The economy was still managed by the government, centrally planned
economy. The economical situation was a catastrophe, for example, during 1993 there was an
inflation with 10 000%. The dissatisfaction with Leonid Kravchuk was great.
Under President Kuchma, who became state president after winning the July 1994 presidential
elections, economic reform and boosting Ukraine’s appeal to foreign investors have become an
issue of high priority. 1996 was an extremely important year for the independent Ukraine: the
passing in June of a new constitution guaranteeing private property and the freedom of speech,
29
coupled with the introduction of a new national currency in September. Unfortunately, Kuchma´s
reform-approach is not in line with the communist-dominated parliament. Therefore, the conflicts
between the presidential and the parliament have had a restrained effect on the development (SIDA,
Ukraine, 1997).
Ukrainian is the official language although Russian is very widely spoken, particularly in the east,
and in Crimea. English and German are increasingly common, especially amongst the emerging
entrepreneurial class in the main cities.
5.1.2. Geographic situation
Area: 603 700 km sq.
Neighbouring countries: Russia, White Russia, Poland, Slovak republic,
Hungary, Rumania, Moldavia.
Capital City: Kyiv.
Other major cities: Charkiv, Dnipropetrovsk, Donetsk, Odessa
Most important rivers: Dnjepr, Danube, Dnjestr, Southern Bug,
Northern Donets.
Biggest lakes: Dnjestrovskij liman, several artificial lakes along Dnjepr and
Dnjestr.
Source: European Community, EU/Ukraine relations, 1998
Ukraine's area is 603,700 sq. km. The country is slightly larger than France. Ukraine is mainly a
vast plain with no natural boundaries except the Carpathian Mountains in the south-west and the
Black Sea in the south. The Dnipro River with its many tributaries unifies central Ukraine
economically, connecting the Baltic coast countries with the Black Sea and the Mediterranean Sea.
The mouth of the Danube River provides an outlet for Ukrainian trade with the Balkans, Austria,
and Germany.
Ukraine has extremely fertile black-earth soils in the central and southern portions exceptionally
well-suited for agriculture. In the east is the industrial heartland containing large reserves of
mineral deposits known as the Greater Donbas or Donetsk Basin.
Northern and western Ukraine is hilly forested areas with many mountain resorts. Enhancing the
topography of Ukraine are two mountain ranges, the Carpathian on its western border with winter
sports attracting visitors; and the Crimean range, which divides the Crimean peninsular, creating a
semitropical area on its southernmost tip. The Crimea is a favourite destination not only for
Ukrainian tourists, but also for citizens of other states of the former Soviet Union, as well as the
eastern and the western Europe.
30
5.1.3. Population
Population: 50.8 million (July 1996 est)
Population per km sq.: 84.5
Urban population: 36.5 million (71.6%)
Increase of population: -0,2%
Life expectancy: Men 64.2 yrs, Women 74.2 yrs.
Adult literacy: 98.4%
Ethnical groups: Ukrainians 73%, Russians 22%, Jews 0.7%, White Russians
0.9%, Romanians, Moldavians, Bulgarians, Polish, Hungarians, Greeks, Germans
etc.
Source: The World Economic Factbook
Ukraine’s population of about 51 million people consists mostly of Ukrainians and almost one fifth
of Russians. In Crimea the majority of the population are Russians and almost half of the
populations in the industrial area of eastern Ukraine consists of Russians. The minority of the
population consists of Polish, Hungarians, Romans, living in the west, and Bulgarians, Greeks and
Germans in the south.
The official language of Ukraine is Ukraine, which is closely related to Russian. Until 1991, before
the declaration of independence, Russian was the language spoken by the government officials. At
the same time there were few schools that spoke Ukraine. This lead to a majority of the population,
even those identifying themselves as Ukrainian, are only able to speak Russian (Länder I Fick
format).
5.1.4. Infrastructure
Transport
Ukraine’s principal international airport is Borispol, which serves Kyiv and the Kyiv region.
Refurbishment work was concluded in 1995. Irish partners supported the refurbishment with credit
from the European Bank for Reconstruction and Development (EBRD) and through the EU-Tacis
scheme (SIDA, Ukraine, 1997). There are regular flights from Kyiv to a number of western
capitals run by Ukrainian International Airlines (UIA) LOT, MALEV, Lufthansa, British Airways
and Austrian Airlines. Ukraine’s second and third airports are Odessa and Lviv to which Austrian
and Lufthansa fly.
In September 1995 international flights began to run from Khakiv airport, in eastern Ukraine. The
airport serves numerous destinations in the Commonwealth of Independent states (CIS) and is
connected to Kyiv and other Ukrainian cities by regular flights. UIA recently introduced regular
flights between the capital and Kharkiv linking on to its international flights.
State-owned Air Ukraine remains the country’s national carrier with a fleet of 240 mostly Soviet
planes. Air-Ukraine serves a number of cities in Russia and elsewhere in the CIS. It has problems
concerning the safety standards – between one third and a half of its fleet is grounded – and is
expected to purchase a number of western aircraft to replace its ageing fleet. Over 1996 Air
Ukraine entered into a joint venture with an Israeli company to form AeroSweet; the airline flies to
destinations in the near east and Levant.
31
Ukraine’s surface transport infrastructure is extensive – there is 22 630 km of railroad and 247 300
km of road. Though the actual quality of the roads are not very good and in need of modernisation
(SIDA, Ukraine, 1997). The rail system, on which around 20% of the transportation of food and
other cargoes are dependent, is bankrupt. The government is committed to improve the surfacing of
Ukraine’s roads. Currently some 45% are unpaved but shortage of money has made progress very
slow.
Telecommunication
With around 18 telephone lines per 100 inhabitants and a waiting time of around 7 years for a
phone, Ukraine’s telecommunication system is in critical need of modernisation and development.
The situation looks more promising if focused on the largest cities where there are around 40
telephone lines per 100 inhabitants. Though demand is far in excess of foreseeable supply,
especially in the cities but also to a growing extent in rural areas (SIDA, Ukraine, 1997).
Ukrtelekom, the state-owned national telecommunication operator, has launched a US$ 20 billion
programme to lay new lines and install digital exchanges. The goal is 35 telephone lines per 100
people by the year of 2005.
It has also established a joint stock company, Telekominvest, to help attract investment into the
network. A number of western firms have already contracts to modernise elements of the system
and are working with local telecommunication authorities to improve service and lay more lines.
These include AT&T (US), Siemens (Germany), Northern Telecom (Canada), Alcatel (France),
Ericsson (Sweden) and LG Group (South Korea). The EBRD has completed two of the
telecommunication projects.
Given the time-frame for the building up of surface telecommunication and the strong demand, it is
no wonder that mobile telecommunication firms have entered the Ukrainian market with
enthusiasm. Many of the above companies are directing their efforts to improve the availability of
mobile phones in Ukraine. In addition Ukrainian Mobile Communications (51% owned by
Ukrtelekom, 16.33% by Koninklijke PTT Nederland, 16.33% by TeleDanmark and 16.33% by
DBP Telekom of Germany) is committed to investing up to US$ 1 billion in a GSM 900 cellular
network (SIDA, Ukraine, 1997).
The majority of our respondents consider the transport system to be relatively undeveloped.
Though, they consider the main transport directions to be in a relatively sufficient condition. The
general opinion among our interviewees is that during the last years there has been some progress
in the development of the telecommunication system. They believe that Ukraine is approaching to
the standards of the southern European countries (Summary of interviews conducted in Ukraine
1998, see Appendix C).
5.2. Economical and Financial Situation
5.2.1. Macroeconomic situation
As a result of a combination of policy mistakes and a particularly unfavourable inheritance from the
Soviet era, Ukraine has experienced severe country specific instability over the past years. GDP,
industrial output and agricultural production have fallen steeply, and inflation has been
exceptionally high because of lax monetary and fiscal policies. Although the situation began to
32
improve during the second half of 1995, Ukraine failed to meet the targets agreed with the
international agencies in respect of stabilisation and the privatisation of large enterprises and those
with Russia and Turkmenistan in respect of payment debt on deliveries of oil and gas.
Consequently, in January 1996 the International Monetary Fund (IMF) postponed disbursement of
the two final tranches of 1995´s US$ 1.5 billion stand-by loan. However, the economic situation
improved markedly during 1996, inflation fell sharply, nominal depreciation of the exchange rate
slowed and foreign currency reserves increased. The improvement in the economic situation,
coupled with additional financial support from the IMF, provided favourable conditions for the
successful introduction of the country’s new currency, the Hryvnia, on the 2nd of September 1996
(Exportrådet, Kiev, 1997).
To reinforce the progress achieved towards country specific stability, the government will need to
maintain tight fiscal and budgetary policies. It will also need to finance the budget deficit through
non-inflationary means, which in turn will require foreign financial assistance. In terms of the
wider market reforms, it will be essential that deregulation of the economy continues. Furthermore,
the legal and regulatory environment needs to be simplified and made more consistent in its affects
on different sectors and companies. Finally, the enterprises have to be subject to greater financial
discipline in their dealings with their suppliers, employees and the government (Coopers &
Lybrand, 1997, p. 5).
The majority of our respondents claimed that the current economical situation in Ukraine obstructs
their business activity. The unstable economical situation makes it impossible to provide long-term
crediting for investment projects. The companies are limited to short-term crediting, which inhibits
their ability for strategically planning. Furthermore, the companies interviewed stated that the most
recent financial crisis in Ukraine, which was a consequence of Russia’s default, implied reduced
sales, difficulties to buy hard currency, violation of contracts, and increased control by the state.
Companies operating in the gas and oil industry were hardest hit by the crisis (Summary of
interviews conducted in Ukraine 1998, see Appendix C).
Figure 5: Economic Indicators
ECONOMIC FIGURES
1993
1994
1995
1996
1997
Inflation (%, end of year)
10155
401
182
40
25%*
Exchange rate (per US$)
25,000
60,750
1.47
1.83
1.86
X
X
122.7
79.9
49.1
Interest rate (% per annum, lending rate)
GDP (US million)
GDP per capita (US$ million)
GDP (% real growth)
Consumption (US$ million)
Consumption per capita (US$)
132,271.0 128,013.0 37,010.4 44,006.6 49,666.5
2,533.9
2,451.4
716.7
861.4
973.7
-14.1
-23.0
-11.0
-10.0
-3.0
97,483.7
1,867.5
94,345.6 25,246.1 30,598.5 34,679.6
1,806.7
488.9
598.9
679.9
Source: SIDA, Ukraine, 1997, and The World Economic Factbook, Euromonitor, 1998,
*estimation
33
5.2.2. Currency
On the 2nd of September 1996 Ukraine introduced the long-delayed new currency, the Hryvnia. The
Hryvnia replaced the interim currency, the karbovnets at a rate of 1:100,000 and an exchange rate
of 1.76 to the dollar. The karbovnets was trading at 176,000 to the dollar at the time of the
conversion. The currency, which is the sole legal tender of Ukraine, has since held steady against
leading western currencies. In mid March 1997 the Hryvnia was trading at around 1.84 to the dollar
(SIDA, Ukraine, 1997).
5.2.3. Production
According to data from the Ministry of Statistics, foreign trade turnover increased by 17% during
1995 to reach US$ 23.0 billion. Export increased faster than imports, 20% compared to 14%, and
the balance of trade was slightly positive. Raw materials and energy account for a very large
proportion of the country’s foreign trade. In 1995, for example, petroleum products accounted for
more than 50% of imports, while mineral products and ferrous and non-ferrous metals accounted
for more than 50% of exports. Ukraine is highly dependent on Russia for all oil products and on
Russia and Turkmenistan for natural gas. Although higher prices resulted in a sharp fall in energy
imports, Ukraine is still having difficulty paying for them. However, the structure of foreign trade
is improving as exports of manufactured goods grow strongly and imports of food and non-food
consumer goods decline. Another positive development during 1995 was the decline of barter trade.
In 1994 barter accounted for almost half of all foreign trade but in the first half of 1996 it had fallen
to less than 25% (Exportrådet, Kiev, 1997).
During the years of independence the total production in the state sector has declined with more
than 50%. The production of consumer goods and agriculture products has suffered the most. Only
a few of the state industries have increased their production, i.e. sugar- and alcohol manufacture
and fishing. An important task for the government to deal with is to decide what parts of the giant
state sector that can be saved and improved.
The reasons for the decline in Ukraine’s production are the following (Bekkers, 1993):

Ukraine uses obsolete machines from the 1960s.

The hidden unemployment is about 30% with a consequence of a low level of
production/worker.

During the central planned economy the government decided what and how much each
company should produce. Therefore, the companies lack knowledge when it comes to
identifying the demand for the products for example.

Ukraine has paid the market price for oil, which has resulted in increased energy debts. Due to
the great debt to Russia there has been a contraction of oil deliveries. Russia delivered 60
millions of oil at 1990 compared to 15 millions at 1993.
Nevertheless Ukraine has some production advantages. One advantage is that the country has a
skilled workforce. This is a consequence of a well-developed industry that Ukraine has possessed
for a long time, unlike the other former Soviet republics. There are a considerable number of
specialists among the workforce that are able to organise current production, solve complicated
34
tasks and master new processes and equipment (Doing business in Ukraine). Other examples are
the low cost for workforce due to the low wages and the great natural resources.
Industry
Compared to the other former Soviet republics. Ukraine has a well-developed industry with a high
level of industrialisation. Their industry covers fields such as mining, iron and steel, oil and gas,
chemical and petrochemical, manufacturing, building, textile and food.
The manufacturing industry used to account for about half of Ukraine’s total industrial production.
The reason is mainly Ukraine’s important position in the defence of the former Soviet Union (FSU)
concerning military electronic and shipbuilding. An important part of the Ukrainian industry is
owned by the military complex, which provides 20% of the labour with work. The manufacturing
part of the total industry has declined dramatically since the collapse of the former Soviet Union
(FSU) – from 30% in 1990 to 14% at the end of 1995. (Exportrådet, Kiev, 1997).
Ukrainian industry is heavily energy-intensive: after the United States and Russia, the country is the
third largest consumer of gas in the world. The reason for this is that it enjoyed heavy subsidies
when it was part of the FSU. At present, Ukraine’s energy debts, mainly owed to Russia and
Turkmenistan, topped US$ 6 billion by the end of 1996. As a consequence the dependence of
Russia and Turkmenistan increases. Ukraine has been trying to reduce its dependence on these two
suppliers through increasing exports from other sources, such as Uzbekistan. However to reduce its
overall dependence on foreign energy sources, which some estimates suggest could reach an annual
US$ 10 billion by the year 2005, Ukraine has to prioritise developing its own oil and natural gas
resources (SIDA, Ukraine, 1997).
A large part of the companies are at present dependent on government subventions. Ukraine lacks
established manufacturing of consumer goods. The production of consumer goods has been
neglected which implies that a giant structural rationalisation towards these industries is to be
expected, with a higher level of unemployment as a consequence. The production has declined in
practically all lines of business during the 1990s. A few signs of improvement have been
recognised since the implementation of the economical reform started in the end of 1994. The
industry production declined with 9% during 1995, but the electricity consumption declined with
only 3%, which can be seen as a sign of increased economical activity.
Agriculture
Ukraine has long and rich agricultural traditions. The country is famous for its extremely fertile
black earth, chernozern, which is unique to this part of Europe. Historically Ukraine was a major
exporter of agricultural products to most countries of the FSU, Russia and Belarus in particular.
Today agriculture accounts for an estimated 13% of GDP, though the figure used to be higher
(almost 25% in 1991). There is export potential in sugar, vegetable oil, meat, dairy products, and
fruit and vegetable products and sunflower oil.
The growth for the agriculture production has declined since 1989. This can be explained by the
fact that the soviet regime put priority in developing the heavy industry on the expense of the
agriculture sector. Other reasons are environmental pollution, poor watering systems, and
ineffective cultivation methods, lacking packing and stocking possibilities (Exportrådet, Kiev,
1997). Furthermore, many of the agricultural machines are unusable due to the increased cost for
energy. A major bottleneck in the system is food processing which uses outdated technology and
has low capacity.
35
Due to high prices for agricultural land and to continuing legal difficulties surrounding the sale or
purchase, private farms are only 3.2% of the total. State farms are 60.2% while the collective share
of the total is 36.6%. Some 60% of agricultural enterprises are now join-stock companies.
To date, the state has sustained soft subsidies to the sector. The Ministry of Agriculture has been
attempting to improve yields through western investments but this has not had much success due to
a failure to reform the land law. Privatisation of the agricultural sector has been hardest to
implement due to heavy resistance in the Parliament for “selling out the land”.
Natural resources
Ukraine completely satisfies its needs and has a considerable export potential when it comes to
natural resources. Ukraine contains about 5% of the world’s total mineral resources. There are
about 8,000 deposits of more than 80 types of mineral including iron core, coal, manganese, salt,
sulphur, graphite, uranium, titanium, magnesium, kaolin, nickel, zirconium, lithium, and mercury.
There is also a joint-stock company, created in late 1996 to co-ordinate exploitation of the
country’s gold deposits, called Ukrzoloto (SIDA, Ukraine, 1997). However, fuel resources are
lacking, although there are large coal, oil and gas deposits.
Almost 60 per cent of agricultural arable land are covered by highly productive black soil (Doing
business in Ukraine). There are various recreation resources throughout the country, including
forests, mineral waters, therapeutic slush, lakes, and seashores.
5.2.4. Financial system
Ukraine’s financial sector is at an early stage of development and an effective regulatory system is
only gradually being created. A two-tier banking system was introduced in 1991. At the beginning
of 1997 there were 229 banks registered in Ukraine, of which 14 have foreign capital. The banking
sector remains dominated by the five former state-owned specialised banks, two of which remain
state-owned although their share of assets has declined from 90% in 1994 to around 70% by early
1996. The largest banks have been subject to western style accounting procedures. A number of
banks ceased operations in 1996, including one of the larger banks, Credobank, which was placed
under administration by the NBU.
Credit to the private sector is still scarce as commercial banks are risk-averse; the spread between
lending and deposit is high and loans are mainly short-term. Regulation and bank supervision are
being tightened: the NBU is planning to introduce capital adequacy rations of 8%, while the
minimum capital requirement was raised to ECU 1 million (ECU 100,000 by July 1996 rising to
ECU 1 million by January 1998) according to a law adopted in February 1996. The minimum
capital requirement for banks with foreign participation is ECU 3 million and for wholly foreignowned banks ECU 5 million. A resolution of the NBU at the beginning of 1996 provided for the
establishment of a private deposit insurance fund. The authorities have also introduced prudential
ratios for banks, introduced a loan classification scheme, set exposure limits and introduced
legislation that prohibits insider lending.
Non-bank financial institutions in Ukraine include trust companies, investment funds, insurance
companies, and credit unions and pension funds. There are about 600 insurance companies, 265
investment funds, investment companies and trust funds and a large number of brokers, with some
36
overlap between these groups. The minimum capital requirement for investment funds is US$
20.000.
A comprehensive regulatory framework is still lacking. Activities of investment funds are regulated
by a February 1994 decree “On Investment Funds and Investment Companies”, amended in March
1995. Present supervisory functions are fragmented between various government agencies. In an
attempt to tighten supervision, the State Property Fund has revoked the licenses of some investment
funds.
The Law on Securities and Stock Exchange has been in effect since January 1992. In July 1996
new securities regulations were adopted by Parliament, establishing the State Committee for
Securities and Stock Market. The Committee has administrative and disciplinary powers over
brokers and trading activities. Most trade still takes place in Kyiv in an unregulated over-thecounter market. The more centralised trading systems include the Ukrainian Stock Exchange,
which was established in 1991 and presently has 67 brokerage houses registered as its members,
and the Central Depository system. At present only a small number of companies are officially
quoted on the stock exchange and weekly trading volumes are very small. As a result the exchange
suffers from low liquidity. Furthermore, there are no independent share registration and minority
shareholders rights are not protected.
Auctions for Treasury Bills were first introduced in March 1995. The auctions are now held on a
regular basis and sales, which were originally only to institutions, have now been extended to
individuals.
Until the introduction of the Hryvnia, Ukraine was very much a cash economy where credit, debit
and charge cards were used almost exclusively by foreign visitors. The situation is set to change.
Ukrayina Bank and Perkombank are negotiating with MasterCard and Aval Bank and Privatbank
with Visa to issue their respective credit cards to customers with good credit references. Progress in
introducing point-of-sales machinery is expected to be slow and expensive. Although the national
banking system is well prepared with an electronic payment system that should facilitate speedy,
paperless cash transfers, the new Ukrcard system comprising 22 banks, lacks the estimated US$
500m needed to introduce the state of the art equipment needed to make the system run smoothly
(SIDA, Ukraine, 1997).
The opinion among our respondents concerning the financial system is that the system is
undeveloped and ineffective. Due to financial instability credit rates are too high. Further
experienced drawbacks are restrictions on purchase of hard currency, slow money transfers, no
reliable credit regulation, and a complex accounting system (Summary of interviews conducted in
Ukraine 1998, see Appendix C).
5.3. Political situation
5.3.1. Government
Ukraine is a parliamentary democracy with separate executive, judicial, and legislative branches.
The president nominates the Prime Minister and members of the cabinet, who must be confirmed
by the parliament. The 450-member parliament (Supreme Rada) initiates legislation, ratifies
international agreements, and approves the budget. Its members were elected to five-year terms in
1994. Following free elections held on December 1, 1991, Leonid M. Kravchuk, former Chairman
37
of the Ukrainian Supreme Soviet, was elected president for a five-year term (Canadian Institute of
Ukrainian Studies, Ukraine in 1996). At the same time, a referendum on independence was
approved by more than 90% of the voters.
Political groupings in Ukraine include former communists, Rukh nationalists, the Congress of
National Democratic Forces, "New Ukraine" (combining economic reformers and
environmentalists), and the Civic Congress, which supports a federated structure and closer ties to
Russia within the CIS (Ukraine HRD, 1998).
Since becoming independent, Ukraine has named a parliamentary commission to prepare a new
constitution, which was adopted on the 28th of June 1996; has adopted a multi-party system; and
has adopted legislative guarantees of civil and political rights for national minorities. New
parliamentary elections were scheduled to take place following ratification of the new constitution,
but criticism of the draft constitution's allocation of presidential authority resulted in its being
referred to the parliament's constitutional committee. A coalition of parties, including the Rukh and
New Ukraine parties, failed to obtain sufficient support for a referendum to force parliamentary
elections in early 1993 (Ukraine HRD, 1998).
5.3.2. Political developments
After re-gaining independence Ukraine was initially slow to implement market reforms. This was
largely due to the conservative attitudes of members of the soviet era parliament and the country’s
former communist president, Leonid Kravchuk. Although some pro-reform policies were adopted,
they were often not put into practice because of political differences between the government and
parliament or because they conflicted with the interests of powerful groups such as the directors
and managers of large state-owned enterprises. As a result, policies changed frequently and
legislation was often contradictory or distorted to favour certain interest groups (SIDA, Ukraine,
1997).
The Communist party was forbidden immediately after the failed coup in August, and has therefore
changed name to the Socialist party. Former communists are still dominating the parliament. The
general opinion is that it is still the “old” communists that are running the country (Bekkers A,
1993, Taming the wild East – a business study of Ukraine). However, parliament became more
reform-oriented after the elections in spring 1994. Although left-wings parties obtained a majority
of seats, the pro-reform forces gained in strength. This process continued with the election of
Leonid Kuchma in the second round of the presidential elections in July 1994. President Kuchma,
who is a former director of one of Ukraine’s most advanced military-industrial enterprises, had
previously served as Prime Minister, and was known both for his commitment to market reform
and managerial skill. However, despite being granted stronger presidential powers, President
Kuchma still found it difficult to persuade parliament to approve measures to stabilise and reform
the economy. For example, in November 1995 parliament effectively blocked a major part of the
“rapid privatisation” program and other legislation (Coopers & Lybrand, 1997).
Most of the new political parties are issued from the Rukh, the national movement that during
1990-91 carried on the demand for independence. There are also important regional political
differences. The national parties have their strongest support in the west of Ukraine, while the
Socialist party finds it support in the Russian spoken industrial areas in the east of Ukraine. Several
communistic and strongly Russia-nationalistic parties have developed in these areas as well.
(Canadian Institute of Ukrainian Studies, Ukraine in 1996).
38
The foreign companies that we interviewed believe that the communistic regime still exists in
Ukraine and that it characterises the common sense and thinking in Ukraine. Even the people in the
present government, are more or less the same as before (Summary of interviews conducted in
Ukraine 1998, see Appendix C).
According to our respondents, Leonid Kuchma is not considered to be the best reformer possible.
None of the companies interviewed believes that the present government with Kuchma will be able
to turn the country into a market economy in a near future. Still Kuchma is considered as a better
alternative than the communist and socialist leaders who will also run for the Presidential post in
1999 (Summary of interviews conducted in Ukraine 1998, see Appendix C).
International organisations that give economic aid to Ukraine, in the form of loans and grants, also
pose as a great political force. These organisations are, for instance, International Monetary Fund
(IMF), World Bank and EU. The purpose with the aid is to support the economic reforms
implemented by the Ukrainian Government. Each loan is subject to monthly monitoring concerning
the performance of the Ukrainian government. In case the government should fail in their
obligations set by these organisations, the support and aid from them would then cease.
Ukraine recently received a new three-year loan package of more than 2,2 billion U.S. $ from IMF.
Of this amount, about 257 million U.S. dollars were available for Ukraine immediately. This
money is to support Ukraine’s economy during 1998-2001. IMF believes that lately Ukraine has
made considerable progress in its economy and in the first half of this year, for the first time since
the country regained independence, there was economical growth (Itar - Tass News Wire, Sep 6,
1998). The main objectives of the Ukrainian medium-term programme are the strengthening of
state finances and carrying out major structural reforms in order to ensure economic growth and
improve the quality of life in the country. The programme sets GDP growth at 4 % by 2001
compared to minus 3 percent in 1997 and inflation should drop from 10 percent to 7 percent.
Due to unfavourable developments in Russia in august 1998, the economic situation in Ukraine
grew worse. Ukraine is strongly dependent on Russia due to import of Russian oil and gas.
Representatives from the Ukrainian government believe that IMF should reformulate the targets of
its last economical aid to Ukraine. ”The loan is very generous, but many of the conditions IMF set
do not correspond to our situation,” said V.Chernyak, an economist from the Rukh Party (Financial
Times, Sep 23, 1998).
On 14 of June 1994, the European Union and Ukraine signed a partnership and Co-operation
Agreement (PCA) replacing the trade co-operation agreement signed in 1989 between the EC and
the Soviet Union. The PCA entered into force on March 1, 1998. The Agreement establishes a
political relationship with Ukraine grounded in democratic values and with provision for political
dialogue. It grants trade concessions such as most-favoured-nation status and access to the
generalised system of preferences, all of which should help develop trade and pave the way for a
possible free-trade area after 1998 (EU/Ukraine relations, 1998).
5.3.3. Legal developments
The greatest weakness in the Ukrainian legal framework is that it is unstable. New legislation and
norms are changing all the time. According to our respondents the situation with the Ukrainian
legal system is a major frustration. The laws have a short life span but during that time the
companies must abide by them. This leads to a constant adaptation to the new legal environment
(Summary of interviews conducted in Ukraine 1998, see Appendix C).
39
Lately there have been a lot of changes in the Ukrainian taxation system. During the early years of
Ukraine’s independence, taxes were based largely on gross revenues as in Soviet times, rather than
on net profits. Consequently, the tax system artificially favoured firms with low turnover and high
margins and generally discouraged investment. Cumulative rates for all taxes on gross income
could exceed 100 per cent of net profit, which encouraged false accounting and corruption. The
general profits rate applicable to residents and the Ukrainian permanent establishment of nonresidents is 30 per cent. Since adoption of the income and corporate tax laws of 1995 and
subsequent tax laws and amendments, particularly those in 1997, tax rates have been substantially
reduced. Taxes are now are based on profits after expenses (Doing business in Ukraine, 1998, p.
25).
Under another Ukrainian law all employees, except subcontractors or consultants are required to
pay payroll tax to the various Social Security funds. For instance, 32 per cent of an employee’s
monthly salary is paid to the Pension Fund, 4 per cent is paid to the Social Security Fund, and 10
per cent is paid to the Chernobyl Fund; a further 1,5 per cent is paid to the Unemployment Fund.
These rates have been lowered from earlier levels and reflect the government’s stated intention to
reduce tax on wages (Doing business in Ukraine, 1998, p. 224). These payments are made by the
employers in addition to the salary and therefore pose as another tax that the employers have to
pay.
During 1997 the government worked a package of reforms that would lead to further improvements
in the tax system. One of the intentions with these reforms is to reduce or eliminate some tax rates
(among others a payroll tax) to increase business activity in the country.
According to our respondents, the tax system in Ukraine is believed to be one of the greatest
problems faced by the companies since there is no possibility of working legally without suffering
sufficient losses. That is why tax evasion is very common resulting in shadow economy (Summary
of interviews conducted in Ukraine 1998, see Appendix C).
5.3.4. Trade barriers
Companies, which are interested in trade with Ukraine, should report themselves to the Ukrainian
ministry for foreign economical relations. They issue export and import licenses (Exportrådet,
Focus east, 1994, p. 8). The fees for export and import have been decreased. The fees vary
depending on the type of the goods. The import tax for luxury goods, such as cars and wine, is
about 30% and for tobacco and liquor it can get as high as 300%. The import fees also vary
depending on if the goods are raw materials or a finished product.
All interviewed enterprises are more or less affected by trade barriers in Ukraine. Some barriers
differ depending on what kind of company it concerns, and some are common for all companies. It
is interesting to point out that the larger the company; the more these barriers will affect it. The
most common trade barrier for all our respondents is the exorbitant custom taxes, since it makes the
final price incompetitive. Other trade barriers are imperfection of custom laws, custom procedures,
bureaucracy, the need to obtain certificates for selling products, and the very frequent change in
legislation. A summary of the respondents’ point of view is that ”everything takes 10 times longer
compared to normal Western countries” (Summary of interviews conducted in Ukraine 1998, see
Appendix C).
40
The largest threat for the interviewed foreign companies connected to the current political and legal
situation is presumed to be the possibility of bankruptcy of the main domestic clients, and - as a
result - a decrease in the business activity in the country. Another threat is a high probability of an
economical crisis - as in Russia. All our respondents agreed upon the fact that the instability of the
current legal and political situations is a threat to the business activity as a whole (Summary of
interviews conducted in Ukraine 1998, see Appendix C).
5.4. Economic reform
Since independence many basic changes have been accomplished: the institutions and practice of
central planning have been dissolved, many prices have been deregulated and the process of
charging for many hitherto free services initiated. An ambitious programme of privatisation has
been undertaken. However, much remains to be done, and even where the reform legislation has
been put in place, implementation often lags.
Since he came to power in July 1994, President Leonid Kuchma has demonstrated a firm
commitment to reform. Most importantly, he has sought to slowly build a consensus behind the
changes, both in government and in Parliament. Consequently, those placed in charges of
implementing the reform process have also followed a slow and steady path, rather than attempting
a rapid and radical restructuring. The approach is almost certainly a better guarantee of sustainable
change. However, progress is sometimes too slow and invites frustration.
The President's first important reform blueprint was delivered to Parliament in October 1994. He
made a further very important address to Parliament on 5 February 1996, in which he drew
attention to the poor legislative record of the reform process: of 62 draft laws submitted by the
Cabinet of Ministers only three had been adopted as of January 1996, while only another eleven
had been through their second reading (Ukraine HDR, 1998). Many of the remaining 48 - including
those dealing with taxation, banking, foreign investment and the privatisation process - were crucial
to the reform process. Taxation reform is particularly urgent, as citizens and enterprises are often
required to pay more than thirty different kinds of taxes and payments to the government, which
places undue burdens on the economy and hampers collection.
Privatisation is at the heart of the reform program. The process was officially launched in the
second half of 1992, when Parliament adopted the State Privatisation Program with a set of laws
stipulating the different conditions for privatising small, medium and large state enterprises.
Citizens' participation is based on the right to receive one free certificate of privatisation issued by
the National Bank of Ukraine and distributed by the State Savings Bank. From August 1993,
people were invited to open "privatisation deposit accounts" and within a year more than five
million, or 10% of the population, had done so. Employees in enterprises designated for
privatisation have certain privileges in acquiring the property rights of their enterprises. By the end
of 1995, 28 million citizens had received certificates, and five million had become owners of
shares, entitlements or portions of private property. Privatisation certificates will be given out until
July 1996, and must be used by the end of the year.
By the beginning of 1996 approximately 26,000 enterprises had been privatised, most of them in
1995. However, the targets for the year were not reached: 13,093 were small businesses (58% of
the target); 3,121 medium and large-scale enterprises (39%) were corporatised and began selling
their shares. Only 25% of the targeted industrial enterprises had been privatised and only 4% of
unfinished construction projects (Ukraine HDR, 1998). In January 1996, President Kuchma gave a
major speech at a conference on accelerating privatisation in which he reiterated the goals of
41
privatisation in Ukraine and spelled out a 12 point program to speed up privatisation, stressing "the
extraordinary socio-economic and political importance of completion of primary privatisation in
1996".
For our interviewees the economical reform has so far implied constantly changing conditions in
the business environment such as the continually introduction of new laws and norms. They claim
that the bureaucracy and the imperfection of the legal framework are strangling any form of
businesses and hence obstruct the activities of the foreign companies (Summary of interviews
conducted in Ukraine 1998, see Appendix C).
5.4.1. Price liberalisation
The government lifted most price controls along with most ceilings on profit margins in October
1994 – except for September 1996 when prices were frozen to accompany the introduction of the
new currency.
Since 1993, administered prices have been raised for energy, agricultural products and communal
services with the aim of moving towards cost/border prices (SIDA, Ukraine, 1998). The only goods
and services which remain subject to price controls are bread, utilities (gas, electricity, central
heating, water supply and sewerage), public transport and rents. Rents and the price for some
utilities (including gas and electricity) were raised twice in 1996 to reduce the subsidy share of the
national budget and lower price-cost disequilibrium in the economy.
Industrial users of gas have been charged border-prices since March 1995, with adjustment of the
local currency price being made regularly to reflect depreciation of the exchange rate (SIDA,
Ukraine, 1998). The prices paid by residential consumers of gas and electricity are subsidised, but
the subsidy element fell substantially during the course of 1995 and following the aforementioned
rounds of price increases in 1996.
5.4.2. Macroeconomic stabilisation
Because of lax monetary policy, consumer price inflation was exceptionally high between 1992 and
1994. A t 1992 the annual inflation was about 2,500% and during 1993 the monthly inflation
fluctuated between 50-100% (inflation reached the level of 10155 % during 1993). The situation
improved in 1995 and 1996. The annual inflation fell from almost 400% in 1994 to just under
180% in 1995. The 1996 figure of 39.7% was well below the target of 60%. In the middle months
of the year, monthly inflation reached a post-1991 low level of around 0.3%, enabling the
introduction of the new currency, and in the closing months of the year the averaged inflation rate
was around 1.2% a month (Exportrådet, Kiev, 1997).
A salary and price spiral can, among others, explain the extremely high inflation rate. The spiral is
caused by factors such as: the market reform has not yet been very successful, a heavy tax burden,
increased prices on imported energy resources, uncontrolled wage raises and increased
governmental expenses (Paris Organisation, 1993, p. 39).
Already in 1994 Ukraine managed to get a better control over the inflation, compared to their
neighbouring countries. This can be explained by the implementation of a tight monetary and
financial policy, under the supervision of the International Monetary Found (IMF). The new
42
currency Hryvnia, which replaced the karbovnets in the beginning of September 1996, has against
some expectations remained stable.
5.4.3. Privatisation
In 1992, the government of Ukraine formally launched privatisation, establishing a responsible
body, the State Property Fund, to handle asset sales. Over the first two years the pace was slow, due
to excessive bureaucracy but also to strong parliamentary opposition, particularly from the agroindustrial lobby. Privatisation was suspended in July 1994 pending an official review. A
Presidential Decree in November 1994 introduced a new voucher-based mass privatisation program
(MPP) where every Ukrainian citizen receives a privatisation-voucher, which can be changed for
shares in the companies that are being privatised (Exportrådet, Ukraina-Seminarium, 1997, p. 68ff).
President Kuchma has taken action for the privatisation reform to be implemented. Furthermore,
the World Bank demands a privatisation reform within the country; otherwise Ukraine will not
receive the loans offered. In the implementation of the privatisation reform, the majority of sales
have taken the form of preferential sales, share transfers and buyouts by management and
employees.
Aside from continued opposition from parliament, a further source of slowdown in the pace of
privatisation has been the setting of minimum prices in voucher-based auctions. Steps have been
taken to accelerate the privatisation reform. These include the decision to reduce the time required
to prepare enterprises for privatisation (SIDA, Ukraine, 1997). Furthermore, the people of Ukraine
fear that the privatisation reform will lead to higher unemployment and a worse social situation.
The unemployed, which will be affected by the privatisation, will receive a minimum remuneration
as compensation.
In response to criticism from foreign investors and, in early 1997, from the World Bank, President
Kuchma has indicated that greater transparency in privatisation, particularly where it involves
acquisition by strategic and foreign investors, will remain a priority.
Privatisation in agriculture has had less success, mainly because of opposition from parliament to
allow sales of agricultural land. The new constitution guarantees private property rights including
land ownership, but there is a six-year moratorium on land sales. State and collective farms still
account for some 85% of the total arable land area, although private farms provide a
disproportionately large share of the output of certain products (SIDA, Ukraine, 1997).
5.4.4. Foreign direct investment
Ukraine’s parliament, the Rada, passed the new law on foreign investment on the 19 th of March
1995. This replaced all previous legislation. Among the protections is to be find the guarantee
against the state confiscating property, compensation for incorrect interference by the government,
repatriate profits after tax and a 10-years protection against changes in the legislation concerning
expropriation and government confiscation. Ukraine has also signed several bilateral investment
treaties, including eight OECD members (OECD, 1997, Foreign direct investment in Ukraine).
Under the law, there are no restrictions on foreigners owing shares in Ukrainian companies.
Foreigners are prohibited from owning, although they may lease land for a maximum of 49 years
(Exportrådet, Ukraina-Seminarium, 1997, p. 69). A foreign investment is defined as an enterprise in
43
which at least 10% of the initial capital are of foreign origin. Capital assets imported into Ukraine
that are to be part of the founding capital are duty-exempt, while corporation taxes on foreignowned enterprises are left at 30%, the same as that payable by Ukrainian enterprises. Other taxes
are also payable – notably a payroll tax, currently 52%, and a 45% tax in intermediary and
wholesale businesses – but are also being reviewed. Profits may be converted into hard currency
and repatriated once all relevant taxes have been paid (SIDA, Ukraine, 1997).
Successful reform of Ukraine’s economy depends not only upon equalling the trade balance but
also on the active involvement of foreign investments. The implementation of the reform requires
substantial financial backing. Investment and credit resources of foreign investments could play an
important role in the renewal of Ukraine’s economy. According to data from the Ministry of
Economy of Ukraine the economies need for foreign investment now amounts to over US$ 49 b.
As of 30 June 1997, the total volume of foreign direct investment in Ukraine amounted to US$
1.690 bn (at the end of 1996, a cumulative amount of US$ 1.4 billion had been invested), of which
US$ 335 m was transferred into Ukraine in the first half of 1997 (Jolly. A & Kettaneh. N, Doing
business in Ukraine, 1998, p. 6ff). The United States remains the largest investor in Ukraine,
accounting for about a quarter of the total investment. Other important investors include Germany
10%, the Netherlands 9.7%, Great Britain 7.9%, Cyprus 7.0%, the Russian Federation 6.9%, and
Liechtenstein 6.2%. As of June 1997 5,858 businesses with foreign investments were registered. It
is clear that foreign investments made so far are very limited, considering Ukraine’s size and
population. Engineering and metal processing have attracted the most investment, followed by the
food industry (Exportrådet, Ukraina-Seminarium, 1997, p. 70).
Figure 6: Central Europe: annual inflow of Foreign Direct Investment (US$ million)
1990
1991
1992
1993
1994
1995
Czech Republic
112
494
1,004
654
569
2,562
Hungary
900
1,700
1,700
2,550
1,300
4,570
Poland
X
247
900
1,479
1,342
2,511
Russia
X
300
800
1,100
549
1,500
Ukraine
X
X
X
50
90
200
Source: Austrian Ministry of Economic Affairs and Vienna Institute for Comparative Economic Studies,
Foreign Direct Investment in Central and East European Countries and the Former Soviet Union, June
1996.
44
5.5. Political risk
5.5.1. Ethnic risk
The population in Ukraine consists of 73 % Ukrainians, 22% Russians, 0.7% Jews, 0.9 % White
Russians, 0.5% Bulgarians, 3.2% Polacks and other ethnic groups. There are no serious tensions or
conflicts between ethnic groups.
1997 witnessed a number of explosions and contract killings in Ukraine (1998 Crime and Safety
Report). Although Ukraine refers to these incidents as terrorist acts, there is no evidence that either
domestic or international terrorist groups were involved. Rather, the incidents appear to be a
manifestation of ongoing struggles between informal political and financial groupings over oil and
gas distribution and other commercial interests (Ibid.) Furthermore, there is a struggle between the
three most important churches: the Russian Orthodox Church, the Ukrainian Church and the GreekCatholic Church. The struggle for power is present mostly in the higher ranks of the church
hierarchy.
Despite the country’s difficult economic straits, Ukraine is largely free of significant civil unrest or
disorders. As in most democratic countries, political demonstrations and gatherings to mark
significant anniversaries and holidays, as well as to address specific political issues, are normal
parts of life in Ukraine and these have been largely peaceful.
Ukraine is considered to be a relatively stable country, with no risk for a civil war or a coup, but the
result from the last election for the parliament, Verchovna Rada, was not optimistic. The
communists are dominating with 113 seats of 450 possible. This expects to complicate the cooperation between the president, the government and the parliament; the economical reform in
Ukraine will be retarded and the dissatisfaction among the population in the west will increase.
5.5.2. Corruption
During the past years there has been a number of reports of business or investment disputes
involving incidents of harassment and intimidation directed against businesspersons and interests.
Physical threats have been recorded against foreigner investors or facilities, with the apparent goal
of restraining foreign business development, or excluding entrance to the Ukrainian market, or even
eliminating competition (1998 Crime and Safety Report). In some cases, it appears that local
commercial interests, who may have links to organised crime groups, are behind these incidents.
In other cases, local government entities have engaged in practices such as termination or
amendment of foreign investors license or contractual rights without warning or legal basis,
arbitrary dilution of corporate stockholding in order to diminish foreign investors shareholdings,
random implementation of unfavourable legislation, and delay of payment or delivery of goods
owed to foreign investors (1998 Crime and Safety Report). This has led to allegations that the
private sector, including foreign and local investment, is being manipulated at the impulse of some
government officials and their favoured business interests for personal gain.
In some instances, local judicial or law enforcement authorities may be unduly influenced in order
to justify or ignore illegal acts. Even in those cases where foreign investors have received
favourable judgement from Ukrainian courts, there is at present a lack of a reliable mechanism to
enforce legal judgements (1998 Crime and Safety Report).
45
At a question concerning the high criminality level in Ukraine non of the companies interviewed
claimed to neither have been in direct contact with the Mafia or that the Mafia has had a negative
effect on their activity. Most of the respondents though believe that the Mafia together with other
criminals practically controls the economical situation in the country (Summary of interviews
conducted in Ukraine 1998, see Appendix C).
5.5.3. Expropriation
In the past the legislation indicated that foreign investors occupied a special, privileged position in
the Ukrainian market. Thus the original draft of the Law provided qualified investors with certain
protections.
Among the protections in the Ukrainian legislation, is to be find: the guarantee against the state
confiscating property (expropriation), except in cases of natural disasters; compensation for
incorrect interference by the government; repatriate profits after tax and a 10-years protection
against changes in the legislation concerning expropriation and government confiscation.
5.6. Socioculture situation
5.6.1. Culture
During Ukraine’s history, the country has been independent for very short periods, which has
restrained its cultural life. The cultural life of Ukraine, and especially theatre and literature, had its
glorious days at the turn of the century. The Ukrainian culture was depressed during the
government of Josef Stalin. During the history of the country, authors have used the literature as a
tool to indicate the demands for Ukraine’s independence. To day the country has a need to reestablish the cultural heritage of Ukraine (Exportrådet, Focus east, 1994, p. 13).
The companies interviewed had different opinions concerning how the cultural differences affect
their business activity in Ukraine. Some considered it as a problem, and others did not. Overall, the
general opinion among the respondents was that the Ukrainian culture is not experienced as very
different compared to the western culture (Summary of interviews conducted in Ukraine 1998, refer
to Appendix C).
5.6.2. Religion
Law guarantees freedom of religion, although religious organisations are required to register with
local authorities and with the government's Council of Religious Affairs.
The dominant religions are the Ukrainian Greek Catholic Church and the Ukrainian Orthodox
Church, which retains its links to the Russian Orthodox Church. The Ukrainian Autocephalous
Orthodox Church is nationalist oriented and independent of Moscow.
46
5.6.3. Language
It is important to know that the official language in the country is Ukrainian although one can
manage with Russian, tendencies differ in different regions. For example, in West Ukraine, which
traditionally is of Ukrainian tongue you will be better received if you know at least a few words of
Ukrainian. This is because of the strong national sentiments since they were not able to express
their culture while being part of the former Soviet Union.
The knowledge in English and German is not very well developed in Ukraine. Therefore,
companies are dependent on an interpreter who can speak Russian or Ukrainian when doing
business with Ukraine. The current language barrier that exists between Ukraine and the western
countries is under processing. English has been given higher priority in the schools and there are
language courses for adults. Many claims that the situation has improved already.
All companies though agreed, and naturally so, upon the fact that the language barriers obstruct
their business activity. The problem concerns foreigners unable to speak the local language as well
as Ukrainian people with limited knowledge in English (Summary of interviews conducted in
Ukraine 1998, refer to Appendix C).
5.6.4. Education
Ukraine has inherited a developed and comprehensive educational system, which starts at early
ages. The three-tiered state education system remains in place, consisting of pre-school centres,
combined primary-secondary schools for grade one through to eleven and higher education
establishments. Currently, there are 50 508 educational institutions, of which more than half are
pre-schools. According to official figures, in 1995, 857 out of every 1000 Ukrainians had a generalsecondary or higher education as compared to 794 in 1989 (Ukraine HRD, 1998). In quantitative
terms, the current system is comparable to those found in most developed countries.
Whereas the number of institutions has remained stable or increased, the number of pupils has
decreased. The most significant decreases are the pre-school level. This drop in number can be
explained in part by the falling birth-rate; increasing unemployment among women, which is
keeping more pre-schoolers at home; and the development of private day care centres which are not
included in statistics (Ukraine HRD, 1998).
Primary-secondary institutions are also facing a serious drop in attendance rates. The general
worsening of socio-economic conditions and decrease in public expenditure on education have had
a negative impact in societal attitudes towards education. The growing number of the educated
under- or unemployed and the deterioration of teaching facilities through inadequate maintenance
have decreased the perceived value of education. There has been a steady drop in numbers of pupils
graduating with secondary level education (Ukraine HRD, 1998). The falling number of attending
pupils is accompanied by the problem of decreasing numbers of teachers. Again, economics is
largely to blame. Approximately one third of the payments arrears in the public sector are owned to
teachers (Ukraine HRD, 1998).
Higher education is experiencing the most wide-ranging transformations. Since 1991 numerous
new higher education establishments have opened, and the number of non-state run institutions of
higher education are increasing. Another innovation has been the opening of seven state-run centres
for retraining military officers throughout the country.
47
5.6.5. Employment and wages
During the communism regime the government decided how to manage the companies. The
employees were given directives concerning work procedures and how much to produce. To day in
accordance with the privatisation process, the employees have to make their own decisions. In
general they lack the knowledge and experience needed to manage a company. This causes
confusion and affects the success of the company. In many companies the implementation of the
market economy approach has been slowed down since several of the managers are former
members of the communist party (Bekkers A, 1993).
All the respondents agreed upon the fact that the old communistic regime stills influences the
Ukrainian people in their way of performing work. The interviewed companies claimed that ”there
is a tendency of Ukrainian people trying to work less but still earn much”. People have difficulties
with taking responsibility and working independently (Summary of interviews conducted in
Ukraine 1998, refer to Appendix C).
The labour market has been characterised by a low productivity/employee. The reason for this is an
unmotivated workforce as a consequence of the communism regime during the centrally planned
economy and the development of extremely low wages (Bekkers A, 1993). Under the centrally
planned economy of the Soviet Union, people were guaranteed jobs with state regulated wages, a
comprehensive and universal system of social protection for those who could not work, and a wide
variety of services and goods available at little or no cost through the enterprises for which they
worked. With the transition to a market economy, many of the benefits have been substantially
reduced, many people face unemployment for the first time in their lives, and all the old certainties
have been swept away.
Although officially employment has not fallen as much as production, many workers have been
placed on "administrative leave", usually without pay, and many others are being paid only
irregularly. Most try to avoid the tax collector, with the result that many transactions are conducted
in cash or barter. The employed include all those who are in registered employment, plus
entrepreneurs and some of the self-employed. It does not include those who work solely in the
informal economy. It can be seen that while total labour resources have remained constant just
below thirty million, the number employed has fallen by almost two and a half million since
independence. It is very hard to assess its importance, and hence to know what has been the true
impact of the transition on employment, wages and living standards (Ukraine HRD, 1998).
Disguised unemployment
The problem of keeping people on the payroll but putting them on administrative leave, thus
disguising the real extent of unemployment, has arisen from the laws on severance pay and the
desire of workers to stay attached to their workplace for the non-remunerated benefits. Currently
the law in Ukraine requires enterprises to pay three months of severance pay. But for companies
facing declining output and demand this is often impossible, and they resort to administrative and
maternity leave, which also reduces the wages fund on which employers must pay social security
taxes. From the workers' perspective it may be preferable to becoming officially unemployed,
particularly as unemployment benefits are so low; there is always the hope of being recalled and
meanwhile they have access to such amenities as health clinics, sports clubs and the like.
48
Wages
As of June 1997, the average monthly wage in Ukraine was US$ 98. By far the highest wages were
registered in the finance, banking and insurance sector, and the lowest in personal and household
services.
The main problem with these wage measure is that they represent the wages that should have been
paid, not what were paid; in other words, they are measures of wage rates, not of earnings. In fact,
many people are not paid their wages promptly, and sometimes have had to wait several months to
receive some, not necessarily all that they are owed.
Figure 7: Socio-economical indicators
SOCIO-ECONOMICAL FIGURES
Population
1993
1994
1995
1996
1997
52,200.0 52,219.9 51,640.0 51,090.0 51,008.3
Employment (1,000 persons)
X
X
23,726
23,232
22,500
Unemployment rate, reg. (%)
X
X
0.6
1.5
X
Average gross monthly wage (US$)
35
48
55
75
X
X
X
31.7
X
X
Poverty (% below the national poverty
line, 1995)
Source: The World Economic Factbook, Euromonitor, 1998, Countries in transition, WIIW Handbook of
Statistics, 1998, World development indicators, The World Bank, 1998.
5.6.6. Income and standard of living
Hyperinflation and the collapse of productive activity associated with the transition to a market
economy have had an immediate and serious impact on the incomes of Ukrainians. Their earning
capacity has been undermined at the workplace and their cash assets have virtually disappeared.
Furthermore, social benefits and services, often at little or no direct cost to the individual, have
been reduced. Apart from money wages, the wealth of Ukrainians has largely been in the form of
collective ownership. Although the privatisation program will eventually transfer ownership to
individuals, these assets will have little meaning as a form of wealth until the necessary market
institutions are in place, which enable trading to establish their value.
Income from the informal sector is not included in the estimates of income and wages, thus to this
extent official statistics underestimate income level in Ukraine. Estimates of the value of earnings
in the shadow economy vary enormously. Conservatively their value is put in the range of 30-40%
of legal incomes; but others believe that the combination of illegal and unreported incomes is as
much as the legal earnings, in other words actual incomes are twice reported levels.
Before independence Ukrainians shared in the collective wealth of the nation. As citizens of the
Soviet Union, this wealth was realised in the form of: rights to a comprehensive set of universal
49
social services and pensions; in the form of access to housing, transportation and many social,
recreational and cultural activities, which were provided at little or no cost to individuals and
families; in the form of privileges and services available to workers through the enterprises for
which they worked; and in the form of special rewards and dispensations awarded to certain groups
and individuals. In addition, many families had access to land plots on which they could grow food
for themselves and their friends, and some were able to build up their cash assets.
The hyperinflation associated with the transition has virtually wiped out the value of the cash assets
accumulated by the Ukrainian population. It has also caused serious erosion of the value of the
various pension programs set up by the new state beginning in 1992. Despite frequent increases in
the basic pension allowance, its purchasing power has fallen significantly. At the same time the
government has been introducing charges for many of the services which Ukrainians are used to
receiving free. For instance, in the last few years, some charges have been levied for medical care,
education, and holiday retreats; transportation costs have been raised in many localities. Rents,
utilities and maintenance have all increased substantially. A new housing subsidy program has been
introduced to mitigate the effects of these charges on those least able to afford them, old age
pensioners, the unemployed and families with a single female head.
Eventually the privatisation program will lead to the accumulation of wealth, both in the form of
the ownership of shares in privatised businesses and in the form of ownership of homes and
apartments. But at the moment it is very difficult for Ukrainians to realise the value of these
significant assets, as the market mechanisms are either not in place, or are at a very initial stage.
Almost no one has a current account at a bank, and most bills are paid in cash and in person. In
addition to the inconvenience of the lack of financial markets and credit systems, their absence
means that individuals and families cannot realise their assets as cash, nor even know the value of
what they own. In short, for the new forms of wealth to have any practical use, Ukraine needs a
stock exchange, a housing market, an insurance market and all the other financial mechanisms upon
which modern market mechanisms rely.
5.6.7. Crime and safety situation
The problem of crime remains an item of serious concern for Ukraine’s growing community, which
is continuing to be targeted by various manifestations of street crime, property crime, and organised
crime and corruption, which we have mentioned above. The country’s problems with drugs have
increased greatly in recent years. According to preliminary estimates, 35 000 criminal cases
involving narcotics were brought to court this year. The number of registered drug addicts is
expected to surpass 55 00 in 1998, up from only 8 000 in 1992. The number of unregistered is
estimated at close to half a million (1998, Crime and Safety Report). Russian officials claim to have
confiscated two ton of narcotics on the Ukrainian border over a ten-month period, and believe that
Ukraine is the main source of narcotics for the St. Petersburg region.
Ukrainian efforts to combat these trends continue to be plagued by low pay among law enforcement
personnel, and by the lack of resources available for the fight against drugs. Ukrainian drug
enforcement units remain inexperienced and understaffed. In addition, lack of co-ordination
between law enforcement agencies continues to put a damper on enforcement efforts.
The Chernobyl nuclear power station located ninety kilometres north-west of Kiev experienced an
explosion and fire, followed by an uncontrolled release of nuclear material, in 1986. The accident
resulted in the largest short-term release of radioactive materials to the atmosphere ever recorded.
The Ukrainian government has a program of monitoring fresh foods and meats sold in local
50
markets. Food that exceeds European norms for radiation is confiscated and destroyed (1998,
Crime and Safety Report).
51
6. POLAND - THE ECONOMIC REFORM
Following is a presentation of the economical and political developments in Poland during the 90s.
The chapter will focus on the economic reform making it possible for Poland to break free from
their economical crisis. The investigation is founded on secondary data from several sources as
well as primary data based on interview conducted with the European Commission Department
and the Polish Embassy. The result from this chapter will in our analysis be treated merely in one
section of the modified market screening model; the step entitled Basic elements of an economic
reform program.
6.1. Introduction
Poland was the first country to break free of the former Soviet block and from the command
economy. Poland today is the first Central Eastern European economy to show strong growth - the
fastest in Europe - after emerging from deep recession following economic restructuring. Gross
national product has been growing during last years and private sector is developing rapidly.
Poland’s economic development programme makes the assumption that exports and direct foreign
capital investment will act as the main driving forces for growth (Doing Business in Poland, 1994,
p. 19). The ultimate goal for Poland is full EU membership and integrating into the very
bloodstream of Europe’s economy. With this aim in mind, Poland is creating within its own
economy a comparable business environment, harmonising with Europe on issues like competition
law, intellectual property rights and other such aspects.
6.2. History
Modern Polish history starts around the ninth century when the country began gradually to form its
own identity. By the fourteenth century, Poland had become a European superpower, stretching
from the Baltic States to Hungary and all the way east past Kiev. Unfortunately, due to Poland’s
geographic location, the country was subject to many successive invasions. It was not until 1918
that Poland finally managed to reclaim its sovereignty.
After the Second World War Poland transformed into a Communist regime. In comparison to
elsewhere in Eastern Europe, Polish communism was relatively mild. The general population
always kept a cynical and suspicious attitude towards their communist leaders, and this led to
public demonstrations in 1956, 1968, and 1970 (Weclawowicz, 1996, p. 52). In 1980 there was the
rise of the Solidarity movement which united workers with intellectual dissidents, again
demonstrating the lack of public support for the government. By 1989 the combination of a swell in
popular dissatisfaction with the government, miserable economic conditions and the onset of
perestrojka in Russia led to the bloodless fall of Communism in Poland.
6.3. The establishment of a free market economy
The rejection in Poland began in the early 70:s. After labour protests 1970 the current regime tried
to modernise the industrial technique without economic reforms. Poland lent about 20 million
dollars from different states and banks (Sachs, 1994, p. 40). Due to an unchanged economic
structure the country did not raise its export, in spite the large loan from the western markets.
52
According to this the loans could not be paid back. Poland became one of the first countries in the
world that sank down in a loan crisis due to heavy loaning in the 1970:s.
The crisis in Poland and the economic rejection caused the protest, which in turn gave the country a
new political movement in the 1980:s, called Solidarity. The popularity of this new party grew
among the polish population during the entire 80:s, and the party later won a great victory in the
parliament election 1989. The Communists formed a Coalition Government together with
Solidarity. The Communists kept the governmental control and Solidarity got important economical
appointments.
In the late 1980s, after more than forty years of central planning, Poland’s economy was in severe
crisis. Especially in 1988 and 1989, it was in deep disequilibrium with regard to both goods and
factors markets, and suffered the beginnings of hyperinflation, widespread shortages, serious
distortions in prices, interest and exchange rates, subsidies, and tariffs. In 1989, just before the
macroeconomic reforms, basic economic indicators were deteriorating very rapidly. Prices was
rising at an accelerating rate - from 8,5% per month in the first half of the year to more than 30
percent per month in the second half (Kulig, 1994, p. 15). Decisions made by previous communist
governments to partially liberalise prices and fully index wages had triggered a typical wage-price
spiral. The budget deficit was increasing very rapidly.
One of the major problems was the deficit in the balance of payments; the import was bigger than
the export and emptied the reserves in the central bank. The severe situation in the country lead to a
new radical planning on how to get a successful state economy and how to strengthen the
communistic control in Poland, which was worked out by Solidarity. This was called the Shocktherapy. The 24th of August 1989 Tadeusz Mazowiecki became the first non-communistic Head of
Government in Poland since the 2nd World War. The Coalition Government consisted
representatives from Solidarity and the Communists. Vice Head of Government became the
brilliant economist Leszek Barcelowicz. And it was Barcelowicz who took the initiative to the
radical economic reform. The cornerstones in the reform were as follows:
 Macro economical stability, which means tight monetary and fiscal policy to lower the flow of
credits from polish banks.
 Liberalisation, abolition of the central planning and the setting of free prices.
 Privatisation, transformation of governmental assets to the private sector.
 Establishment of a safety net in order to defend potential victims during the transition to a
market economy.
 Mobilisation of international fiscal support for the transition.
The polish program for stabilisation and liberalisation was put in work at January the 1st 1990. The
fundamental goal was to move from a situation with an extreme shortage on commodities and
hyperinflation toward an equilibrium between demand and supply as well as stable prices. Another
goal was the achievement of positive real interest rate (current nominal rate minus inflation)
through a restrictive monetary policy. One of the steps in the as to keep the wages down. Wages
could be raised only as a set proportion of the previous month’s retail price index. The Government
introduced special tax on wages to reinforce transgressing defined norms. It implied that a company
for every 100 zloty of raised salary would have to pay 500 zloty to the Government. This wage-tax,
known as ”popiwek” gave the Government control over the wages during the period of transition
and slowed down the speed of inflation. Small wages and high prices made the population
exchange their foreign savings back for zloty, which raised the government’s currency reserves
markedly.
53
6.4. The results of economic reforms
As a result of the shock-therapy there was an initial burst of price rise, but already in March 1990
they began to fall. Nearly all the prices were freeing. In the beginning of 1990 the real wages sank
with an impact of 30% and the standard of living was changed for the worse. A lot of new
enterprises were established as a result of deregulation made for private activity. Export and import
raised markedly. One of the fundamental conditions for the market economical stabilisation was the
sharpness in the budget discipline and that the subsidiary credits to the industry ceased to exist.
Parallel to this the corporate taxes were raised. In 1989 there was a 7,1% deficit in the state budget,
but 1990 there was a surplus on 1,7% (Sachs, 1994, p. 84).
Due to the reform negative changes temporarily occurred in the standard of living, the
unemployment and production.
The standard of livings momentary changed for the worse soon after the beginning of the reform.
However it improved by time. An example is the statistics regarding possessing of durable goods
(TV, radio, stereo, car etc.) in Poland in 1989 and 1991. The part of households that was in hold of
durable goods raised considerable between those years in as near as every product category (Sachs,
1994, p. 82).
The unemployment has certainly risen and reached western measures, especially in the countryside.
It has risen from 1,5% during 1989 up to 14% during 1993. Though polish experts claims that there
is a large number of workers which states to be unemployed, nearly a third of the workers who
holds unemployment compensation, that are actually working black and, or get grants to complete
incomes (Ibid.). To lower the unemployment rate government tries to create positive conditions for
the entrepreneurship as well as tempting foreign investors to make investments in Poland, aiming at
their ability to supply the polish inhabitants with work. A more long-term policy is the investment
in vocational training courses for the unemployed. In special economical zones with extremely high
unemployment rates companies that employ more staff received a tax-reduction between 5 and 10
% (interview with M. Szczygiel).
The industrial rejection as well had also a temporary character. In 1990 the production sank with a
fourth in comparison with the former year. 1991 the production was 10% lower than in 1990. But in
1992 it began to rise with 3,5%. The largest reason to this rejection is the structural change in the
economy. All communistic countries have had a well developed industrial sector. During the
transition to a market economy the industrial production starts to sink and the non-industrial
production is raised, especially in the trade, fiscal and service sector. As a matter of fact: all east
European countries have had a deep rejection in the industrial production, independent of whether
they have been introducing their reforms rapidly, slowly or not at all. Poland shows the least
rejection in production in comparison with those other east European countries (Sachs, 1994, p.
97).
The Privatisation Law came into force in August 1990. It has led to a number of stock exchange
floating, trade sales to domestic and foreign buyers, joint ventures, and ”liquidation” of small and
medium-sized enterprises often resulting in the sale or lease of the assets of the enterprise to
employees and/or the management (Myant, 1993, p. 49). An important part of the process of
privatisation in Poland was the mass privatisation programme (MPP) which was enacted in May
1993. It involved a scheme for share ownership in which all adults are eligible. A large number of
state enterprises became part of this scheme.
54
Privatisation means not just sale of state assets but also the creation of private sector in Poland.
There are many indicators that suggest the private sector was developing increasingly actively.
According to polish official statistics in 1989 the number of private firms was 11 639 and this
number increased to approximately 41 450 by September 1991. The number of individual
establishments increased over the same period from 813 000 to approximately 1,4 million (Doing
business in Poland, 1994, p. 25). At 1991 the private sector employed 54 per cent of the labour
force, at 1997 this increased to 69 per cent (Country Profile, Poland, 1998). Here it is important to
mention that Poland had positive preconditions to develop the private sector. Even during the
centrally planned economy polish government encouraged people to build their own businesses,
and especially in the agricultural sector. By this follows that the polish people had an idea about
having their own businesses before the reform work. Those experiences enlightened the
privatisation process. (Interview with M. Szczygiel).
The following changes have occurred in the financial system. The system with one single bank was
left behind and its functions as both a central- and a business-bank were separated. A large number
of business-banks became active in Poland. The governmental politic has a purpose to support
foreign investments in the bank sector. Since this is believed to be supportive for the privatisation
in the bank sector as well as to strengthen the capital in the bank sectors. The bank activity has no
wide range and the transactions in the private sector are still done according to the contactprinciple, but the banking ability has clearly improved during the recent years. The Warsaw Stock
Exchange was opened in 1991 and there is a market for treasury bills and bonds as well.
The wage differences in the communistic Poland were minimal and many social services as health
care and education were free. Poland’s transition to a market economy led to high rates of
unemployment and poverty. A lot of corporate activities were settled and due to this, Poland
confronted high levels of unemployment. The introduction of job-centres and unemployment
subsidies were fundamental steps in the polish social safety net. A key long-term policy issue thus
is improving the quality of education as well as the coverage of basic education. Social assistance
transfers are available to households below the minimum pension level and where the family or
individual belongs to one of several eligible groups (Country Profile, Poland, 1998).
The support from western countries has been and still is of fundamental value for Poland. Within
implementation of market reforms, the country was in need of the chance to get a new financial
platform. The western countries began their economic support to Poland already in 1989 by giving
Poland two large loans. And apart from that the western banks withdrew parts of the polish state
loan. Those measures played an important part for the future of the country, since they helped the
economists to implement their reforms. Ever since the 80:s Poland has been aware of the need to
repay their loans. Poland tried to take as few loans as possible, as well as to pay the interest and
instalment on time. Those measures played an important role for Poland, since it lead to a greater
understanding and a greater confidence from west, as well as created positive expectations on the
future economy of Poland. As a result to this, foreign direct investments have made great
improvements in Poland (interview with M. Szczygiel).
6.5. Poland’s situation today
The polish economy has performed strongly since the transition process began. In 1997, real GDP
increased by an estimated 6,9% (up from 6% in 1996) and for the sixth consecutive year the
country experienced strong economic growth. Inflation (average 14,9% in 1997) and
unemployment (10,5% end 1997) remain high but are falling. GDP per capita now amounts to 37%
55
of the EU average (31% in 1995). Foreign direct investment (FDI) increased from 0,3 billion
dollars in 1991 to 6,6 billion dollars in 1997. More than half of total accumulated FDI now comes
from European Union Member States (Country Profile, Poland, 1998).
The greatest problem in the current polish economy is believed to be the agricultural and the
industrial sector. In connection to the entry into the EU Poland has to make sure that all the
companies in the country are able to compete with foreign competitors. Today companies in the
heavy-, steel- and mining industries, developed during the communistic era, are the ones least
adapted to the market economy. The agriculture is also badly prepared for competition of such a
degree. Today only a third of the agricultural activity has ability to compete with foreign countries.
(Interview with M. Szczygiel).
The privatisation is another reform process that is not fully accomplished in Poland. About 70
percent of the inhabitants are working in the private sector today (the average measure for Europe
is about 65 percent). All governmental companies that are left are now conversed into an
independent subsidiary company, and they will be privatised in the near future. Foreign investors
can participate in the privatisation process without emerging any limits for the amount of stocks in
the company, with exception for some certain industries, such as national defence. (Interview with
M. Szczygiel).
In September 1997 there was also a parliamentary election in Poland. It resulted in a new
Government composed of former Solidarity parties AWS (Solidarity Election Platform) and UW
(Freedom Union). The most important priorities for the new Government, outlined by the Prime
Minister himself, is as follows: lower tax rates; higher expenditure for health, education judiciary
and public safety; completion of privatisation; decentralisation of the budget deficit; combating
unemployment; and rural development.
Since 1990 the President is elected directly by the people. The Presidential elections are held every
five years and the president is only allowed to run the office for two mandate term. Alexander
Kwasniewski has been the President of Poland since 1995.
6.6. Poland’s integration into Western structures
Integration into Western political and security structures has been the main goal of successive
Polish governments since 1989. Membership of EU remains the overdriving strategic objective for
polish government.
The present contractual relationship between the Republic of Poland and the EU is regulated by the
European Agreement, which was signed on December 1991 and entered into force on February
1994. The EA is a preferential agreement, of which the trade parts aims to establish a free trade
area over a maximum period of 10 years. It recovers all subjects of common interest and some of
them among others are: political dialogue, trade in industrial and agricultural products,
liberalisation of payments and movement of capital, protection of intellectual, industrial and
commercial property, economic, cultural and financial co-operation (Country Profile, Poland,
1998). The EA takes the objective of future membership of Poland into account and provides a
framework for Poland’s gradual integration into the EU.
According to the Commissions approach of the European Council in Copenhagen June 1993, the
candidate countries of Central and Eastern Europe in preparations for membership in EU have to
fill the following conditions (Report from EU commission, Poland, 1998):
56
 The candidate country has reached an institutional stability serving as a guarantee for
democracy, legal safety, human rights and respect for protection of minorities.
 There is a functional market economy as well as an ability to handle competition and market
forces within the union.
 The country is able to undertake the obligations that follow with a membership and to join the
missions for the political, economical and the monetary union.
Regulations made at the EU meeting in Copenhagen gave Poland the opportunity to officially apply
for an EU membership. Poland applied for membership to EU on 5 April 1994. In the beginning of
1997 Poland announced a national integration strategy containing general outlines for the
preparations undertaken to join the EU. In the strategy several political areas of central value for the
association are mentioned.
The investigation made by EU in the year of 1997 came up with the following conclusions on the
Polish preparations toward an entry into the EU.
 Poland shows the characteristics that are distinguishing for a democracy.
 Poland can be viewed as a durable economy and ought to be capable of managing the pressure
of competition and market forces in the union in a middle-term perspective.
 Strengthened strategies in such areas as the legal system, agriculture, environment and transport
will help Poland to quicken the preparation work connected with the membership.
Today Poland is restructuring the legislative system in the country. The legislative system is
compared to the EU directives to locate which parts of the legislation system that are already
adapted, which adjusting that has to be made and which additional parts that has to be worked
through (interview with M. Szczygiel).
57
7. ANALYSIS
In this chapter an analyse of the Ukrainian business environment will be conducted through the use
of the further developed market screening model. To facilitate the reading, the structure of the
analysis will follow the structure of the model. The analysis consists of the authors’ findings from
the empirical section and the interviews.
7.1. Initial screening - Specific needs in Ukraine
There are two specific needs that are easy to discern from the empirical chapter. As part of the
former Soviet Union (FSU) Ukraine was a major producer of heavy industrial products and
agricultural products. The reason for this is simple. Ukraine is rich on natural resources and a large
part of its area is arable, consisting of extremely fertile black soil. Therefore it specialised in these
two areas of production and has most of its needs of consumer products and energy supplied by
other parts of the FSU.
Ukraine played an important role in the FSU’s defence programme by supplying vital goods. As
such, it enjoyed heavy subsidy of the energy that it needed for its productions. This lead to a very
intensive production system, which became the country’s legacy after the independence. The
country is in need of more energy for its productions than it is able to produce and therefore
imports a lot from Russia and Turkmenistan.
This is a business opportunity for foreign companies as the country itself has large deposits of coal,
oil and gas. The Ukrainian government has also shown that they are interested in decreasing the
country’s dependency of imported energy.
Besides energy, consumer goods are an further area where there is a great need. The country lacks
manufacturing of consumer goods such as household appliances, consumer electronics etc. as the
majority part of its industry consist of heavy industry. Even though attempts are being made in
restructuring the industry the results are far from certain.
Agriculture is a major opportunity for foreign companies, which have shown interest in this area.
There are major obstacles though, in the form of the government’s uninterested in privatising the
lands and the huge state owned companies, which subsequently dominates the market as a result of
this. One positive note is that international organisations such as the IMF and the World Bank have
stated privatisation as a condition for their continuing support in loans and such. As Ukraine is in
need of the help from these organisations, the authors believe a change in this sector is inevitable.
The question is when it will come to pass.
Telecommunication is further area where Ukraine has a great need to develop. With an average
phone line of 18 per hundred people and a waiting time of 7 years this is surely a sector with
opportunities for foreign companies. The same thing can be said about the infrastructure. Though
extensive it is of bad quality and therefore hampers business and the growth of the economy.
Consulting is another sector that needs to be developed. The transition from centrally planned
economies to market economies creates a new legal system and among others, new fiscal systems.
New competencies are needed.
58
To sum things up the major needs of Ukraine is to decrease its dependency of energy import and to
have more consumer products. The other sectors such as agriculture, telecommunication,
infrastructure, development of the financial sector etc. also offers business opportunities.
7.2. Second screening - Economic and financial forces
In this step authors will analyse the financial and economical forces of Ukraine. The forces include
GDP, inflation, population, consumption, distribution of income etc.
Unfortunately it has not been possible for us to acquire very detailed statistical data in the libraries
as well as on the Internet. We believe that the reason for this is that most countries do not prioritise
acquiring statistical data when they are experiencing economical turmoil. Ukraine has experienced
hyperinflation and economical turbulence. The priorities have then been set on battling the inflation
and establishing macroeconomic stability. Spending money on exactly how much money the
inhabitants spend on each product category is therefore not on the top of the list of things to do.
The inflation rate and the exchange rate has been stabilised and remained stable during 1996 and
1997 (refer to figure 5). This is a positive sign as it smoothes the business operation considerably.
Rational prices can now be set and plans can be made without fear of raging inflation rate and
fluctuating exchange rate eating up the profits.
The interest rate for 1997 was 49.1% for lending (refer to figure 5). Though inflation was around
25% it still meant that the real interest rate was around 24%. This shows that the Ukrainian market
is more risky than others are. This leads to banks and financial institutions dealing with short-term
loans as the risks are otherwise too great. The long-term strategic plans of the companies are then
upset, as they can not find the financial resources needed.
GDP/capita and, more importantly, consumption/capita show a low purchasing power. These
figures are a bit misleading though and do not say anything by themselves about the distribution of
income in Ukraine. Compared to the neighbouring countries Poland, Russia and Hungary, the
figures do show a considerable lower purchasing power (refer to Appendix A). The real rate of
GDP growth has been negative since independence, reaching its worst stage in 1994 of -23%. The
trend seems to have been reversed and in 1997 it experienced its best result of -3%. This is a good
sign, which shows that the economy might be on its way to recovery.
As mentioned above GDP/capita and consumption/capita can be misleading and the figures need to
be compared with statistics over the distribution of income in the country. The latest figures
available was from 92 and we do not believe it to be relevant as the economy has gone through a lot
of changes. We did find another figure that might give us an indication of the distribution of
income though. According to statistics from 1995 31,7% of the population lived below the national
poverty line. This shifts a considerable amount of the purchasing power to the rest of the
population. We interpret this as such that there is a group in Ukraine, which has a considerable
purchasing power, a higher than consumption/capita has indicated. This group is not small either, as
the total population of Ukraine is 51 million people.
Life expectancy and adult literacy do not differ too much with western standards (refer to headline
5.1.3. Population), which shows a quite high level of development. The official unemployment rate
is low but the real unemployment rate is estimated to be quite high. The average monthly wage is
quite low, which results in an educated and cheap workforce that foreign companies can take
advantage of.
59
From this analysis it has been shown that the purchasing power is not as bad as it seems from just
analysing consumption/capita. The lending rate is high but the stable condition of the interest rate
and the exchange rate, coupled with the positive development in the GDP foretells a possible
recovery of the economy and eventually even growth. Considering that Ukraine has a population of
51 million, should this scenario come true then Ukraine will become an important market in
Europe.
Despite the already given facts, the authors would like to point out one further aspect. In 1998 the
Asian crisis swept to other parts of the world and Russia and Ukraine was severely affected by it.
So far it is too soon to receive any figures of the damages the crisis have caused. It might be that
the positive signs that Ukraine has managed to accomplish might have been mitigated by the crisis.
Though we still believe that the inherit factors of Ukraine is a force to be reckoned with. This is a
view that our respondents seem to share too as all of them have stated that they plan to expand their
business activities in Ukraine. This even though they have stated that it is very difficult to operate
in Ukraine and that there are a several issues that hampers their activities.
7.3. Third screening - Political and legal forces
7.3.1. Political forces
The main political force in Ukraine consists of a disagreement between the leaders in the Ukrainian
government, leading to governmental instability. The reform work in the country has become more
complex since the government; the parliament and other powerful groups seem unable to cooperate. As a result of the conflicts between these parties, policies and legislation have frequently
changed to favour certain interest groups. We believe that this political force is very important
since the development of the entire country is extremely dependent on the interplay between
political groups of interest and political leaders. The business environment in Ukraine is also
dependent on this interplay. Each new outcome of this interplay affects the legislation in the
country and changes the ground rules for the business community. This is why all companies we
interviewed have claimed they are bound to continuously adapt themselves to the changes in the
Ukrainian legislation. It is our opinion that foreign companies should be aware of this instability in
the government, which is a political risk that greatly affects them.
Communism is another part of the political forces we count as important. The communist regime
was well established and held a strong position in Ukraine before independence. Even though the
Communist party was prohibited following the declaration of independence it did not mean that
communism ceased to exist. Former communist, which has joined other parties, is still a
dominating force within the Parliament. Those companies that we have interviewed do not believe
that the country will return to the communistic regime. But they are also of the opinion that it will
take a generation before the communistic thinking cease to be such an influence in politics. At
present, the presence of communism is slowing down the reform process and as a result hampers
the business activities of the foreign companies as they are used to perform in market economic
conditions.
We also consider international organisations such as the IMF and others to be a political force. The
IMF, the World Bank and EU finance the reform process of Ukraine and can stop lending money to
the country if they believe that it is handling the reform in a bad fashion. Unlike the previous
political forces discussed earlier, this one has a positive effect on the country’s business
60
environment. The international organisations strive to improve the legislation and the
macroeconomic conditions of the country. These efforts improve the business environment in
Ukraine for foreign companies.
7.3.2. Legal forces
Ukraine is a country, which have had an inefficient tax system all the way to the 1990’s. They were
set in such a fashion that they did not encourage the companies to show profit. As Ukraine started
its transition to market economy, a new tax system was developed. Due to the difficult situation of
the country’s economy, it was considered important to collect as much tax revenues as possible. No
thought was given to the human incitement in this. The high tax rates lead to the creation of shadow
economy (people evading taxes) and a decrease of the population’s entrepreneurial ambitions. The
tax revenues became slight as a result. Our respondents consider the exorbitant taxes to be the
greatest trade barrier as it made the final price look much too high. Since 1997 efforts have been
made to lower the rate on some of the taxes. This process will keep on continuing as the IMF has
set lower pressure of taxation as one of their conditions for their support. We believe that the tax
rate will be lowered in the near future and that it will keep on continuing until it reaches a more
reasonable rate.
Besides high tax rates, it is hard for us to point out any other specific trade barriers such as quotas
and tariffs. This is because they are specific for different industries. We can however distinguish
factors, which pose as indirect trade barriers. Such factors are a complicated fiscal framework,
frequent changes in the legislation, bureaucracy in such form as the necessity to obtain certificates
to be able to sell products, and other factors. They all make it hard for foreign companies to do
business in Ukraine, whether this is intentional or not.
7.4. Basic elements of an economic reform program
Ukraine is striving for a market economy; the recent reforms strengthen that fact. In this issue we
will analyse the economical reforms in Ukraine. A comparison will be made with Poland, a country
that could realise a rapid transformation and become a market economy. This will serve as an
instrument that enables us to determine how far beyond the actual state of development Ukraine is
compared to Poland. It is important to add that today the reforms in Poland are considered as
historical facts, that is they are accomplished and believed to have been successfully implemented.
The reform work in Ukraine is a continuo process and it is not always easy to see direct results
linked to it. We have done our best in order to discern and interpret the results of the Ukrainian
reform work, as well as to identify how the reform work affect the Ukrainian business environment
and thereby foreign companies.
7.4.1. Preconditions for the reform work
Starting with the material we have gone through, we find that Poland had better preconditions
concerning reform work. According to us the communistic regime was milder in Poland than in
Ukraine. Poland has had a well-developed democratic movement. The Solidarity was strong before
the reforms; the people relied on and had confidence with the political movement while they hated
the communists. Within the movement Poland had experienced economists as Barcelowicz, who
developed and implemented the reform program. In Ukraine we believe that the communistic
regime was stronger and it posed as a heavy break on the reform work. Another important point of
61
view is that private activity was allowed in Poland long before the proceeding of the reform work.
This made the privatisation process easier to implement. In Ukraine private activity is a new
phenomenon and we believe that this is one of the reasons why it is taking longer time than in
Poland to adapt to a market economy.
7.4.2. Price liberalisation
The politicians in Poland understood at an early stage that one of the preconditions in order to
enable transformation into market economy is to have a price mechanism at the market, that is
prices, which are set according to the law of supply and demand. This results in a demand driven
market where bad products and inefficient companies will have to leave. Poland set the prices free
from 1 January 1990. This was followed by an initial burst in price rise, but already after a three
months period of time prices began to fall. This is because the demand on some goods fell and
people had a buying-force allowing them to purchase the most essential goods only.
In the case of Ukraine, no radical reforms have been put into work following the declaration of
independence. Dominating parts of the economy continued to be centrally planned, that is the
politicians decided what and in which quantity different goods were to be produced and made
available to the market. The supply did not cover the demand and it eventually lead to staggering
inflation rates - 10 000% during 1993. The price liberalisation was put into practice only during
1994, when Leonid Kuchma became president of Ukraine. Having to wait for such a long time for
the liberalisation of prices have affected Ukraine negatively. The standard of living grew worse and
worse due to the inflation and governmental expenditures were still high, since it continued to give
subsidies to state-owned enterprises producing goods where there is no demand. Prices were
eventually set free. We believe that the losses for the Ukrainian society would have been much
smaller if price liberalisation was implemented at an earlier stage.
7.4.3. Privatisation
The privatisation process is quite similar in Poland as in Ukraine. One difference would be that
foreign investors were allowed greater transparency in the Ukrainian privatisation process only in
1997. The privatisation was realised much earlier in Poland than in Ukraine. Another difference is
that Ukraine does not seem to handle the privatisation by its own. Instead the World Bank is
keeping an eye on the privatisation process in Ukraine. In case of a badly implemented and lacking
privatisation process Ukraine would not receive any loans from the World Bank.
The agricultural privatisation was less successful in Ukraine than in Poland. We see two main
reasons for this. First, the Ukrainian agriculture has always been governmentally owned while
Poland have had private farms long before the time of agricultural reforms, coupled with a common
positive attitude work and private property. Second, the privatisation of the agricultural sector drew
forth an opposition within the Parliament with the opinion that one should not sell out the land. As
a consequence to this there are only 15% private owned firms in the present Ukraine. Some further
negative aspects are that the Government has to give large subventions to state farms, which lowers
the governmental income, as well as creating bad preconditions for competition in this sector.
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7.4.4. Development of a financial system
The development of a financial system means, among other things, that the banks shall be the ones
that handle the giving of loans to companies. Poland has succeeded to transform into a seemingly
well-developed financial system. A great part in this is played by the foreign banks, which were
given permission to establish in Poland. Foreign banks contributed to an increased cash-flow into
the country as well as to an improved competition within the entire financial system. In Ukraine the
development of the financial system has been slowed down by some reasons. First, the country
continued to persist as being centrally planned since after the implementation of the reforms.
Second, there were still many activities owned by the Government, especially in the agricultural
sector where these companies were receiving governmental subsidies and were therefore in no need
of loans. Third, as a result of a severe macroeconomic situation, especially high inflation rates and
saving risks, the Ukrainian population does not put their money in the bank. In situations where
people do not save their money in the bank, the bank can not give companies large loans. The
interest rate is therefore high and the enterprises mainly commit themselves to short loans, which
obstructs their activity and strategic planning.
Besides this it can be seen that Ukraine is slowly but surely adapting to the global financial system.
Among other things a stock exchange, a market for treasury bills and securities and a credit card
system has recently been implemented in Ukraine. But the entire financial system is still believed to
be inefficient. The companies we have interviewed claim that the loaning process, payments and
currency exchange is connected to different problems creating obstacles for their activity in
Ukraine.
7.4.5. Macroeconomic stabilisation
We believe that the Ukrainian government was less strict than the Polish government concerning
the implementation of economical reforms and consequently had to pay a larger price connected to
that. There has not been any shock therapy taking place in Ukraine. The reforms have been
implemented in sequences with sufficient breaks between the different stages. A macroeconomic
stabilisation means that there is a wish to keep the inflation rate down with strict monetary and
fiscal policy. Between 1991 and 1994 Ukraine has been hit by a salary-price spiral which later lead
to steering inflation rates. In Poland this spiral-development was broken by a raise in income taxes.
The fiscal policy was slack in Ukraine as well. The Ukrainian Government continued to give large
subsidies to companies not able to compete on their own. Together with a long-term decline in
domestic production, the badly performing fiscal policy resulted in a negative development of the
Ukrainian GDP. Only until 1997’s forecast was there a positive change in the development of the
GDP.
7.4.6. Foreign sector liberalisation
In Poland government realised at an early stage that foreign companies would give a sufficient
cash-flow to the Polish economy to support underdeveloped sectors in Poland as well as
contributing in making the domestic companies competitive. In Ukraine one was late with the
foreign sector liberalisation. Before Kuchma became the president of Ukraine, in 1994, foreign
investments were not viewed as important for the country. Not until 1995 did the new government
introduce the Law on foreign investment which among others guaranteed protection expropriation.
Authors believe that before 1995 the Ukrainian government did not consider foreign investment as
a high priority. One can identify the impact of this law in the FDI statistics in Ukraine. In 1995 FDI
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consisted of 200 US $ million and was many times smaller than in other eastern European countries
(refer to headline 5.4.4. Foreign direct investment and figure 6). In 1996 the FDI grew up to 1400
US $ million. The statistics in the figure 5 ”Economic indicators” shows that since 1995 the
inflation rate, exchange rate and the real GDP have improved.
It is hard to claim that the raise in the FDI is the sole factor, which lead to a better macroeconomic
situation in Ukraine. But we do believe that it has contributed to the improvement of the situation
together with other reform implementations. By that we can draw the conclusion that if Ukraine
had liberalised the foreign sector at an earlier stage, as in the case of Poland, the country would
have avoided many economical problems.
7.4.7. Is Ukraine a market economy?
We believe that Poland and Ukraine have had different preconditions and incentives to become
market economy. Poland was already strongly interested in becoming a part of Europe. They did
not use passive help in terms of loans, but actively helped by liberalising the foreign sector and
letting foreign companies compete with domestic companies. Poland had a strict way of carrying
through their reforms which has given the western countries confidence in Poland. Ukraine on the
other hand does not seem to have enough will or strength on its own to enable a transformation into
a market economy. The country is instead being pushed by different international organisations
encouraging it on its reform work. Ukraine is committed to large loans upholding the economy and
it took a great while before the liberalisation of the foreign sector. Ukraine has left the price
liberalisation reform and the privatisation in the industrial sector behind. With the help from loans
Ukraine has managed to stabilise the macroeconomic conditions in the country as well.
Unfortunately the crisis in Russia 1998 has lead to a deterioration of the Ukrainian economy and
showed that it is too early to claim that Ukraine is a country with a stable economy.
The majority of the companies we have interviewed mean that Ukraine is not a market economy
and that it will take quite a while before it will become one. We agree with the interviewees, but we
still believe that Ukraine has managed to fulfil a part of the preconditions needed to become a
market economy. The most important precondition is still left, consisting of Governmental
agreements concerning the reform work, tight monetary and fiscal policy, a continuous
liberalisation of the foreign sector, development of a financial system and privatisation of the
agriculture. The last loan from IMF is believed to give Ukraine favourable conditions concerning
future reforms and an eventual stabilisation of the domestic economy.
7.4.8. The effect of the reform work on foreign companies
By analysing the reforms in Ukraine we have found that the reform work makes the Ukrainian
business environment more complicated. All the companies that we have interviewed confirmed
our opinion and pointed out that the reforms have a negative influence on their activity. The largest
threat for them is the unstable condition of the Ukrainian economy. Norms, laws and regulations
changes rapidly and the companies have been forced to adapt to them over and over again.
Inefficient financial systems and staggering inflation rates obstruct the financing process and
strategically planning of the business community. The companies that we have interviewed also
believe that the reforms are carried out in a slack manner, hardly improving the economical
development in Ukraine.
64
In spite of all the problems Ukraine might face connected to the adaptation process becoming a
market economy, the companies interviewed did not believe that the reform work will cease, as
well as that Ukraine will not return to a centrally planned economy. We believe that one can
identify a positive tendency concerning the influence reform work has had on foreign companies.
As for example: The liberalisation of the foreign sector has facilitated the establishment for foreign
companies in Ukraine; foreign investors may join the privatisation process, and the inflation rate
has sunk to a reasonable level. The loan from IMF will serve as guarantee for foreign companies
that the reform work in Ukraine will proceed. Since all of our interviewed companies are planning
for a future expansion this tells us that the companies have a long-term confidence with Ukraine,
which overshadows the present difficulties they confront within the business environment.
7.5. Political risks
7.5.1. Ethnic risks
During the last years there has not been any severe ethnic struggles in Ukraine. Neither is there any
tendency for such ethnic conflicts to occur in the nearest future since there is no hostility between
the existing ethnic groups. The current disorders are not more significant than in any other western
democratic country. Therefore, we do not believe the ethnic risk to be of great importance for the
business environment.
7.5.2. Corruption
Corruption seems to be widespread in Ukraine. The companies that we have interviewed confirmed
the high level of corruption in the business environment but claimed that they were not affected by
it. We do not wish to draw a general conclusion stating that corruption does not affect all other
foreign companies in Ukraine, based only on our respondents’ answers.
According to other sources that we investigated, there have been a number of reports concerning
incidents of harassment and intimidation directed against foreign businesspersons and companies.
We consider one of the reasons for corruption to be disputes between central and local government
forces. Local government has shown a tendency to act outside of legal framework. The central
government establishes the laws. Unfortunately the local, regional, government do not follow them
explicitly. The corruption leads to the regional government following, or discarding the laws
depending on which is more profitable for them. Therefore, foreign companies are not always
protected by the legal system since the regional government has such power that they can entangle
the business in heavy bureaucracy. The legal system is not yet well developed. Laws are constantly
changing making the system complicated and ineffective. It is not an unusual situation when one
law is contrary to another. As a whole the insufficient legal system facilitates corrupted activities.
The authors believe that another reason for the high corruption level to be the existence of
commercial and governmental interest groups. These groups supervise and control certain sectors in
the Ukrainian economy for their personal gain. The interference of these interest groups makes the
business environment complicated and unstable, which affects foreign companies in a negative way
such as delay of payment, delay of delivery of goods owed to foreign investors, and prevention of
the distribution of the foreign companies products on the domestic market.
65
7.5.3. Expropriation
Foreign companies are by law protected against government expropriation, which means that
companies have a guarantee against confiscation of private property. Authors do not believe that
this is a completely safe protection due to the insufficient Ukrainian legal system. Recently,
according to our sources, the government has shown a tendency to tear up old laws. One such
example is the tax haven created for foreign companies in order to attract foreign direct investment.
This was abolished later in 1997. We therefore consider expropriation as a potential political risk
even though the law against such does exist.
7.5.4. Unstable government
We have analysed three types of political risks in accordance with our model. After our
investigation of the Ukrainian business environment we came to the conclusion that there is one
more type of political risk that is worth mentioning. This is the current unstable government.
At present there is political instability with disagreement between the different forces within the
central government. The political force that is currently dominating in the government affects the
business environment. Due to the disagreement within the government there is a constant shift in
power, which implies regularly new conditions for the business activity in the country. Our
respondents agreed upon the fact that the instability of the current political situation is a great threat
to their business activity in Ukraine. Based on these facts it is important for foreign companies to
be aware of this political risk.
7.6. Fourth screening - Sociocultural forces
During the former Soviet Union era, Stalin and the other communist leaders suppressed the
Ukrainian culture. After independence the Ukrainian was given the opportunity to express their
cultural heritage and a strong nationalistic sentiments was developed where they were proud to be
Ukrainian. Today Ukrainian is the official language and in the business environment it is preferred
before Russian. Though from our respondents we have been informed that it is greatly appreciated
when foreigners use Russian instead of English or German as a sign of good will.
As for the question of whether or not language poses as a barrier in the business environment, our
respondents have informed us that it does. Foreign companies seldom know Russian and even
fewer know Ukrainian. As for the Ukrainian themselves, their knowledge of English and German
are not extensive, though they do possess some knowledge of the foreign languages. The authors
have been able to discern a tendency from the Ukrainians to be more interested in knowing the
great business languages such as English and German.
The general attitudes among the population concerning work, achievement and other cultural
aspects are coloured by the communistic thinking. Our respondents have confirmed this fact.
According to them there is a tendency of the Ukrainian people in trying to work less but still earn
much. Even the governmental forces are considered to be communistic though they do not call
themselves communists. We believe that this attitude is common throughout the Ukrainian society
and a generation needs to pass before the society will change their attitudes. In our opinion this
communistic thinking affects the business climate greatly and the foreign companies needs to take
this in account when doing business in Ukraine. An example of this is the Ukrainian people’s
attitude towards taking responsibility. Taking responsibility is nothing new in the western countries,
66
but for the Ukrainian people this is something new. During the Soviet era all the decisions were
made in a higher administrational level. The lower levels in the administration only needed to make
sure that the directives were followed. Therefore, the foreign companies can not expect people to
volunteer in assignments and even if they do they might not take responsibility for it.
In Ukraine the inhabitants are free to practice any religions they wish. The authors do not think that
religion affects the Ukrainian in their behaviour and conduct of business activities. We believe
instead that it is similar to any west European countries in that the religions are respected but do not
affect the business life much.
The material culture in Ukraine used to be the same as the western countries, even though they did
not enjoy the same level of sophistication. The prices were subsidised by the state and therefore a
lot of people were able to live under good conditions. This made them used to a certain kind of
standard of living. After the independence the material standard was reduced for a lot of people.
This created a group of people that were very poor and another group that was very rich. In the
authors opinion a new social structure has been developed that the foreign companies need to take
into account. Even though there are many people who are poor there are also many that are very
rich and have both the ability and the willingness to pay in order to receive foreign products.
Although the statistics shows that 31,7% of the population lives below the poverty line, all of our
respondents have plans to expand their business which shows that there are business opportunities
now and even more when the economy has recovered.
The educational level in Ukraine is high, though the number of students seeking higher education
has fallen. One of the reasons for this decrease in student enrolment is that there are many highly
educated people that are unemployed. In our opinion, the impact this has on the foreign companies
is that they can hire highly educated people at low cost.
This concludes our analysis of the Ukrainian business environment through the use of our model.
What follows here is the authors’ conclusion of the Ukrainian business environment based on the
facts uncovered in the analysis. As to how we have come to these conclusions we believe that it has
already been explained in the analysis.
67
8.CONCLUSION
This chapter contains of the conclusions that the authors have drawn from the analysis. The thesis
will be completed with a critical evaluation of the investigation and suggestions to topics for
further research.
8.1. Conclusion
In our problem formulation we have stated that we want to identify the kinds of threats and
opportunities that the Ukrainian business environment holds for foreign companies. From our
research we have been able to draw the following conclusions.
Threats in the Ukrainian business environment:
The main political threats in Ukraine consist of a disagreement between the leaders in the
Ukrainian government, leading to governmental instability. This instability has resulted into
frequent changes in the legal framework. As a result, the business environment has become very
confusing. The foreign companies constantly have to adapt their business activities to the current
legislation.
The legal framework is still on the process of being adapted to market economy. Old and new laws
co-exist and often they contradict each other, which makes it difficult for the foreign companies to
know which is applicable. Another example of the insufficient legal framework is the tax system,
which is currently being modernised to suit market economy. The initial tax rate was set
unrealistically high and inhibits business activities. High tax rates are considered as a trade barrier
to foreign companies and affects their activities negatively.
Laws have been established to protect foreign companies from expropriation. Though the threat of
expropriation can not be excluded due to the constantly changing legal system.
As a whole the confusing political situation has facilitated corrupted activities. The corruption may
be a threat to foreign companies. It can result into restriction on their business or hindrance of their
entrance on the Ukrainian market.
The extensive bureaucracy in the country is also a threat to the daily business as it slows down the
business operations considerably.
The infrastructure can create problem with transportation due to its bad quality. The
telecommunication is underdeveloped and hampers business operations. The underdeveloped
financial system creates difficulties in payments and obtaining of loans.
The implementation of the economical reform has so far been conducted in an insufficient way.
The disagreement within the government has led to that different reform programmes are being
delayed. Once they have been commenced the implementation takes unnecessarily long time. Since
the economy is neither market economy or centrally planned, the foreign companies are forced to
conduct their business in a grey zone where the conditions changes constantly. This instability is a
threat to the foreign companies as no one can foresee what will happen next.
68
Another threat is the communistic thinking which affects the workforce in their way of
performing. Ukrainian workers are not used to taking responsibility on their own, in contrast to
western workers. A cultural misunderstanding can be created in the work process, which can lead to
lower productivity.
The Ukrainians do not possess enough knowledge in foreign languages, which complicates
communications. Misunderstandings can easily arise. This makes the conducting of business more
troublesome.
Opportunities in the Ukrainian business environment:
Despite the threats that have been presented we still believe that the business environment has a lot
to offer foreign companies.
The initial reason as to why Ukraine attracts the attention of foreign companies is that the country is
a large untapped consumer market of 51 million people, making it one of the largest national
markets in Europe. The country is also richly endowed with natural resources. This creates
opportunities for foreign companies, which operates within the heavy industry as well as those
requiring these resources for their production.
Ukraine has an important strategically position as a bridge connecting the East with the West. Its
infrastructure, though undeveloped, is extensive which creates opportunities for foreign companies
concerning the transportation of goods to the East as well as the West.
There is no risk for ethnic strife and the religions do not affect the business climate in Ukraine.
The Ukrainian culture is not much different compared to western cultures. This simplifies the
business activities for foreign companies.
During the communist regime the priority was put on the development of the heavy industry, at the
expense of all other industries. Due to this industrial structure the country is in need of help to
develop the other sectors such as: the consumer industry, the telecommunication sector,
infrastructure, financial sector etc. These pose as opportunities for foreign companies operating in
these sectors.
The privatisation of the agricultural sector is still in its initial phase. So far only 15% of the total
arable lands has been privatised. Eventually, when the government proceeds with the privatisation
process, this sector will offer great opportunities for foreign investors.
Even though a large part of the population is considered to be poor, more than half is considered to
have enough purchasing power to make the market interesting for foreign investors.
The workforce in Ukraine is highly skilled and educated. Compared to western standard the
Ukrainian wages are low. This gives the foreign companies access to a low cost workforce of high
quality.
Future perspective:
At present the reforms are at an early stage though they have been initiated. We believe that
Ukraine will continue with its reform programme. The country relies heavily on the support of
international organisations such as IMF and the World Bank. A condition for their support is the
continuation of Ukraine’s reform work. Ukraine also understands that in order to have economical
69
growth it needs foreign investment. For the foreign companies to invest in Ukraine, the country
must make itself attractive by for instance lowering the tax rate. This is also one of the conditions
set by the international organisations.
We have also noticed a tendency in the country of giving foreign languages higher priorities in
general. This will simplify the business activities with the foreign companies and can most
probably lead to increase dealings with the rest of the world.
The latest figures have shown that the country has been able to stabilise its economical situation.
Inflation rate and exchange rate has been stable. The negative growth of GDP has reduced and
growth of the economy seems possible in the near future. This will most certainly increase the
consumption in the country, which is beneficial to foreign companies. We believe in the potentials
that Ukraine holds for foreign companies and that once the economy has recovered, these potentials
will be realised. According to all of our respondents they intend to expand their business activities,
despite the negative critique they have had on the current business environment. This indicates that
they also believe in the future potentials that the market holds.
8.2. A critical evaluation of our research
The authors of this thesis believe that critique concerning our research could be directed towards
the following three areas: the model developed in this thesis, the research procedure, and the
conducted interviews.
It is possible that there might be factors that authors have overseen while modifying the market
screening model. Though, the authors opinion is that all the important aspects needed in order to
fulfil the purpose of this research has been covered.
Another object of critique is the chosen research procedure. Authors could have made a field trip to
Ukraine to raise the validity and reliability of our research. Though, we believe the information we
received was enough for us to enable an identification the opportunities and threats in the Ukrainian
business environment.
Readers might consider the results of the interviews to be based on too few respondents. Authors
are of the opinion though, that the results were valid despite the number of respondents. The
respondents came from different industries and originated from different countries. As such we
were able to cover a large part of the business environment. In addition we were able to discern
similar tendencies in their answers. Therefore, we believe we have achieved a sufficient level of
reliability and validity in our research.
Readers might criticise, why authors did not analyse a specific industry or even a single company
operating in Ukraine. The reason for our choice of research is that we wanted to analyse the
Ukrainian business environment as a whole. We would not have been able to draw generalised
conclusion concerning the entire business environment based on an analyse of a specific company
or line of business. Furthermore, the choice of our problem area is motivated by the lack of existing
research in this investigated field.
Finally, we want to defend ourselves against arguments claiming that the perspective of our
problem area is close to economics. We maintain that we have dealt with the problem from a
business administration point of view. Authors have chosen to analyse the problem area in the
angle of foreign companies. Throughout the whole research we have made sure to connect the
70
investigated market with the foreign companies. Furthermore, our empirical chapter, analysis and
conclusions are based on interviews conducted with foreign companies operating in Ukraine. The
research is focused on the concept the Ukrainian business environment, which is repeated in the
title, research question, purpose and throughout our reasoning. The Ukrainian business
environment includes all aspects affecting companies conducting business in this market, which
firmly establishes this research in business administration.
.
8.3. Suggestions to further research
These are the suggestions authors have concerning topics for further research.
In what way do these threats and opportunities that we have identified, within the Ukrainian
business environment, affect the foreign companies within a specific sector?
Considering the role that the political situation has on the Ukrainian business environment, a further
research could be done focusing on the political risks affecting the foreign companies.
71
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73
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Respondents
Following are companies operating in Ukraine. The interviews were received from Ukraine
during November and December 1998. Several of our respondents wished to be anonymous:
The Director of MacGregor, (Sweden/Finland)
The Director of Kross, Motorola distributor in Ukraine, (USA)
The Commercial Director of Oditel-Siemens, (Germany)
The Director of Hi Tech (USA)
The Technical Director of Transas Marine (Denmark)
The Director of Electrolux, Peder Westerlund, (Sweden)
The Managing Director of Scania Ukraine, (Sweden)
The General Manager of Atlas Copco Compressor Division, Antoine Santiago, (Sweden)
The General Manager of Shevron (USA)
This interview was conducted in Sweden at the Polish Embassy:
Marek Szczygiel, 2nd Secretary of the Polish Embassy in Stockholm, Karlavägen 35,
2 December 1998
Following interviews were conducted by telephone in Sweden:
Sigrid Johansson, Europeiska kommisionen in Stockholm, 25 November 1998.
Pontus Förberg, Area Manager, Department for Central and Eastern Europe, SIDA, 20 October
1998.
The department of Information, Exportrådet, 15 October 1998.
The Ukrainian Embassy, 23 October 1998.
74
Appendix A
Figure: Economic indicators, GDP per capita and consumption per capita, in four transition
economies
ECONOMIC FIGURES
1993
1994
1995
1996
1997
GDP per capita Ukraine (US$ million)
2,533.9
2,451.4
716.7
861.4
973.7
GDP per capita Poland (US$ million)
2,236.0
2,431.8
3,062.8
4,076.0
4,097.9
GDP per capita Russia (US$ million)
4,615.5
4,805.6
2,372.8
2,746.6
3,389.1
GDP per capita Hungary (US$ million)
3,508.3
3,727.6
4,419.6
4,383.6
4,438.5
Consumption per capita Ukraine (US$)
1,867.5
1,806.7
488.9
598.9
679.9
Consumption per capita Poland (US$)
1,409.5
1,457.7
1,949.8
2,594.8
2,608.7
Consumption per capita Russia (US$)
2,197.0
2,287.4
1,276.8
1,616.7
1,625.5
Consumption per capita Hungary (US$)
2,182.7
2,201.6
2,900.0
2,875.9
2,912.0
Source: The World Economic Factbook, Euromonitor, 1998, Countries in transition, WIIW
Handbook of Statistics, 1998, World development index.
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Appendix B
Interview guide for foreign companies operating in Ukraine:
Company description and establishment in Ukraine
Name your rank/position in the company.
Describe your business in short terms. (For example: country of origin, size, year of establishment
and products.)
What kind of experience do you have from the eastern market?
What was the reason for establishing in Ukraine?
Economical situation
In what way has your company been affected by the current economical situation within the
country?
Has the implementation of the economical reform led to any changes for your company and the
business environment in general? (Regarding for example legislation and the privatisation
program.)
What effects have the past years high inflation rate had on your activities and what actions have
you taken against these effects?
What do you think about the Ukrainian banking-system?
In what way are the Mafia and the high level of criminality affecting the market and business
environment in general?
Have your company been affected and what actions have you taken against it?
How well developed is the transportation- and telecommunication-system in Ukraine?
Political and legal situation
In what way has the Law of Foreign Investment affected the company?
What kind of trade barriers exist and do you consider them as a great problem?
What threats and possibilities have the current political and legal situation imposed on you
company and the market in general?
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Cultural situation
Do you consider the language and the culture differences as a barrier when doing business with
foreigners?
In what way has the old communist regime influenced the Ukrainian people in their way of
performing work and doing business?
What do you consider to be the main problem at present?
Future prospects
Do you believe that Ukraine will keep its present course towards market economy and what
changes in the business environment do you believe that the economical reform will lead to?
What actions do you believe has to be taken to improve the business environment?
What are your expectations on the president Leonid Kuchma and the government?
Have you considered expanding your business in Ukraine?
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Appendix C
A summary of interviews conducted with foreign companies in Ukraine
We were interested in achieving information from foreign companies in different lines of business
represented in Ukraine. We aimed to achieve an overall apprehension of how the foreign companies
understand and interpret the Ukrainian business environment. Following is a summary of the
interviews conducted by the authors, by e-mail and fax, during November-December in 1998.
Company description and establishment in Ukraine
The responding companies operating in Ukraine are established in different forms - foreign-owned
subsidiaries, joint ventures and representative offices. The enterprises are operating in different
lines of business as for example telecommunication, sea-transport, white goods, cars and mining.
The number of employees in Ukraine varies from 3 to 22 persons, foreign as well as Ukrainian
personnel included. The earliest and most employee-intense foreign establishment in Ukraine took
place in 1991. Other companies were established later during the 90’s.
According to the respondents, a reason for establishing in Ukraine is the fact that the country is the
second largest in Europe after Russia, and is number four concerning inhabitants. Above that,
educated workforce is much cheaper in Ukraine compared to the foreign company’s home-markets.
These are the characteristics that underlie whether or not foreign companies choose to establish in
the Ukrainian market. More concrete reasons for establishing in Ukraine were of varying
importance to the enterprises: ”A wish to try a new interesting market”, ”Following company’s
customers overseas”, ”Contribute to some sector’s development in Ukraine” and even ”The
necessity to survive physically”.
Economical situation
The majority of the interviewed companies claimed that the current economical situation in
Ukraine obstructs their business activity. The unstable economical situation makes it impossible to
provide long-term crediting for investment projects - which normally is the utmost effective way
from an income point of view. The companies are limited to short-term crediting, which inhibits
their ability for strategically planning. Furthermore, the respondents stated that the most recent
financial crisis in Ukraine, which was a consequence of Russia’s default, implied reduced sales,
difficulties to buy hard currency, violation on contracts, and increased control by the state for
foreign companies. Companies operating in the gas and oil industry were hardest hit by the crisis.
The implementation of the economic reforms in Ukraine has so far implied constantly changing
conditions in the business environment such as the continually introduction of new laws and norms.
The respondents claim that the bureaucracy and the imperfection of the legal framework are
strangling any form of businesses and hence obstruct the activities of the foreign companies.
During the last two years the inflation in Ukraine has been reasonably stabilised. Hence, as a
consequence of the Russian financial crisis in August the inflation fuelled. This rise in inflation has
made the current business activities more difficult for the foreign enterprises interviewed. The
respondents claimed that due to the Russian default the rise in inflation and other difficulties
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virtually reduced their efforts to ''zero''. Furthermore, their clients’ ability to pay has decreased as a
result of the inflation, whereby the interviewed companies has been forced to suspend contracts
regarding payment periods lasting longer than 6 months. Despite the rise in inflation due to the
Russian default, the majority of the respondents shared the opinion that the inflation has been
stabilised during the last few years.
According to the respondents the tax system is insufficient and causes great problems. The problem
is founded in the situation that it is not possible to work legally without suffering sufficient losses.
Lately most lines of businesses have been affected by the realisation of increasing import taxes.
The situation affects any kind of imported goods as well as laws concerning international relations
forced in the present Ukraine. Recently the Ukrainian Government supported sectors in
development by releasing goods on the market, which were produced in VAT. This privilege was
cancelled at the 22nd of September 1998.
The opinion among the respondents concerning the financial system is that the system is
undeveloped and ineffective. Due to financial instability credit rates are too high. Further
experienced drawbacks are restrictions on purchase of hard currency, slow money transfers, no
reliable credit regulation and a complex accounting system. One definite point of view was that the
banking system stays under the government.
The majority of the interviewed companies consider the transport system to be relatively
underdeveloped. Though they consider the main transport directions to be in a relatively sufficient
condition. The general opinion among the interviewees is that during the last years there has been
some progress in the development of the telecommunication system. They believe that Ukraine is
approaching to the standards of the southern European countries.
At a question concerning the high criminality level in Ukraine none of the companies interviewed
claimed to neither have been in direct contact with the Mafia or that the Mafia has had a negative
effect on their activity. Most of the respondents though believe that the Mafia together with other
criminals practically controls the economical situation in the country.
Above this it should be mentioned that all the companies interviewed agreed upon one important
thing that they have learned on the new market - to continuously adjust their activity to the
unstable and constantly changing environment.
Political and legal situation
Law of Foreign Investment has had no affect on any of the companies interviewed. The
respondents claim that all new legislation and norms have short-time effect on the foreign
companies’ business activities. This is a consequence of the constantly changing legal system.
All enterprises are more or less effected by trade barriers in Ukraine. It is interesting to point out
that the larger the company; the more these barriers will affect it. The most common trade barrier
for all our respondents is the exorbitant custom taxes, since it makes the final price incompetitive.
Other trade barriers are imperfection of custom laws, custom procedures, bureaucracy, the need to
obtain certificates for selling products, and the very frequent changes in legislation. A conclusive
point of view was that ”everything takes 10 times longer compared to Western countries”.
The largest threat for foreign companies in Ukraine connected to the current political and legal
situation is presumed to be the possibility of bankruptcy of the main domestic clients, and - as a
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result - a decrease in the business activity within the country. A further threat is a high probability
toward an economical crisis - as in Russia. All our respondents agreed upon the fact that the
instability of the current legal and political situations is a threat to the whole business activity in the
country.
Cultural situation
The companies interviewed had different opinions concerning how the cultural differences affect
their business activity in Ukraine. Some considered it as a problem, and others did not. All
companies though agreed, and naturally so, upon the fact that the language barriers obstruct their
business activity. The problem concerns foreigners unable to speak the local language as well as
Ukrainian people with limited knowledge in English. Overall, the general opinion among the
respondents was that the Ukrainian culture is not experienced as very different compared to the
western culture.
All the respondents agreed upon the fact that the old communistic regime stills influences the
Ukrainian people in their way of performing work. The interviewed companies claimed that ”there
is a tendency of Ukrainian people trying to work less but still earn much”. People have difficulties
with taking responsibility and working independently. During the communistic system there was no
need to concern about private property since everything at the place of work belonged to the
government. It is this particular feeling of private property that is missing among the Ukrainian
people today when the country is transforming into a market economy.
The responding companies believe that the communistic regime still exists and that it characterises
the common sense and thinking in Ukraine. Even the present government is considered to consist of
- more or less – the same communist members as before.
Future prospects
Leonid Kuchma is not believed to be the best reformer possible. None of the companies
interviewed believe that the present government, with Kuchma, will enable the country to transform
into a market economy within a near future. However, Kuchma is a good alternative to communist
and socialist leaders who will fight for the President seat in 1999.
None of the companies believe that Ukraine is a market economy, nor do they consider that the
reform process is proceeding well. However, the interviewed companies believe that there is no
way back to communism. The country still needs heavy economic reforming in almost all the
existing business sectors.
The respondents believed that it is impossible to predict what will occur in Ukraine in the future
and even what will happen in a week time from now. It is all about being alert and to adjust oneself
to the changing environment. The permission of a second trance of the International Monetary
Fund (IMF) loan to Ukraine, as well as a loan from the World Bank and EU, commits the
Ukrainian Government to fulfil agreed targets regarding economical reforms.
The majority of the interviewed companies believed that the most important thing for their business
activity in the future would be that the following events occurred: decreasing of the tax pressure,
hindrance of foreign investments, continuos development of private business, an upgrading of the
legislation system and organising of new working places.
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However, despite the negative aspects given by the respondents, their plans for future are positive.
Most of the companies interviewed have a long-term strategy in the Ukrainian market and they are
planning to expand their activity in a near future.
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