Saturday, May 14, 2005

The list

It has been reported that a list of twenty-nine companies has been compiled that the government will be looking at for potential reprivatization. That list was prepared on May 12th and will be released to the public soon according to Yuschenko. And he promised that there will be no other enquiries on any company not on that list.

That would be some good news for investors. It would not be the best news for investors, though. The problem with this whole incident is that it still shows the government has the power to renationalize businesses. (The fact that Yuschenko had to leave his assurance that no others would be targeted shows the problem.)What may be lacking is simply the political will to do it. There have been statements by others in the government that the figure should be higher and that certain strategic assets should be retained as government companies. This is from Yulia Tymoshenko and some others. That suggests at least that she and the others who have talked this way may not be real free market reformers after all. But it gives people pause when deciding whether or not Yuschenko is serious or whether he has the power to make good on his promises.

There are problems though. How do we know, for example, that the lower level bureaucrats will follow that list? Yuschenko says that these will be all and I take him at his word. The problem comes lower down. A business is not doing what a particular bureaucrat wants. Even in the face of what Yuschenko has said, what would be the most effective way for that bureaucrat to get that business to fall in line (or to get that business to pay the “fee”)? Do what he has always done or what he has always seen done: intimidate. “Did you see what we did to Crimean Widgets? Do you think that we cannot do the same thing to your business if we have a mind to?” In a country where business and everyone else has had to kowtow to the government--for some of them, their whole lives-- that kind of threat will be effective. The bureaucrat is the one with the power in the specific case, not President Yuschenko.

And foreign investors will see it for what it is: the government retains the power and some willingness on the part of certain ministers to look into many more companies than will be on that list. That they do not do so now doesn’t mean that there may not be a sea change and they would do it later. They still retain the power to do it. A slight change in the direction of the political winds might just give them the will to go ahead with it. This means that a continual cloud will remain hanging over the heads of any business that was obtained during the bad old days. And that is potentially a lot of businesses. This means that anyone looking to buy or invest will be very wary of doing either.

How do you remove that cloud? I don’t think it is ever removed completely without some sort of track record on the issue, especially not for a country like the Ukraine with its history. But there are some things that will serve to increase confidence.

First of all, clear guidelines need to be established to determine what businesses will be targeted and what won’t be. The business must meet those guidelines to be on the list. If it does not it should not be on the list and should not be targeted. It must be left alone. The important thing here is that the standards determine what business is on the list; the business doesn’t determine that. This is basic rule of law. Standards are set out and the businesses that meet those standards will be on the list and investigated. If the standards are not met by a particular business, that business will not be on the list.

I’m afraid though that that list may have been put together politically. This means that the business itself or the person or persons who own the business themselves determined whether the business is on the list or not. I hope I’m wrong about it but this is the way things have always been done here. To expect that it will change to a standards based system overnight might be expecting too much.

The other thing that is necessary is to have a prosecutor set up to investigate any claims made that the list has been exceeded or that any threat has been made to a company not on the list by any government official. If there is no legal basis for this kind of investigation, a law should be passed that provides the legal basis for it. That anyone dinking around with businesses not on this list will be prosecuted will give teeth to President Yuschenko’s promise that the list will not be exceeded.

The Ukraine needs investment if it is going to shed its poverty and claim a place in the world. And there is a trade-off in doing that; investors must be confident that their investment will be secure. There are a lot of companies that were acquired in the wrong way. There is no denying that. Was it unjust? Absolutely. Shouldn’t that injustice be remedied? It should ideally, but not if it stands in the way of a greater good. If that prosecution scares away the investment capital the Ukraine needs to modernize and to improve the lives of its citizens and to lift many of them out of poverty, then it will not be a good thing.

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