Foreign Investors in Ukraine Face Rampant Corruption

Legacy of former Soviet Rule creates a Wild West atmosphere

Last month, Joseph Lemire's phone rang in the middle of the night. The anonymous caller had but a two-word message: "You die."

Thus far, threats have been the American entrepreneur's only return on a $500,000 investment in a Kiev radio station.

Doing business on Eastern Europe's wild frontier can be a dicey proposition. While Ukraine and its neighbors are minting a lot of young lawyers, locksmiths often decide more business disputes than judges by simply locking out all but one contestant. At times, bribery seems like a national sport. Last year, a World Bank study conservatively estimated that the black market accounts for a whopping 45 percent of Ukraine's gross domestic product.

Several Western firms have complained loudly during the past month of mistreatment by the government or local partners.

Two consortia developing mobile communications, one involving industry giant Motorola Corp., claim that Ukraine's government is trying to charge them outrageous license fees for digital frequencies after promising them free in exchange for prior investments.

Multinational chemical giants such as Monsanto and DuPont are miffed that an informal grain-export ban has held up payments for their products. Meanwhile, American investors in a television production company, the Perekhid Media Group, are accusing Ukrainian broadcasting authorities of trying to push them off national TV channels despite a contract guaranteeing them access.

This is exactly the kind of publicity Ukraine does not need as it makes a belated push for foreign investment. The country has attracted roughly $1.2 billion in foreign capital over the past five years - far less than many of its smaller neighbors. Reformers in the government say Ukraine needs $40 billion in foreign investment over the next few years to jump-start its stalled economy. Even the government itself acknowledges that corruption is reaching epidemic proportions.

The corruption in Ukraine is a legacy of Soviet rule across the region. The old regime left behind an orphaned, state-owned economy and a managerial class used to treating public assets as its own. These graduates of the Soviet school of doing business now fill Ukrainian ministries and regulatory agencies. Brisk black-market business is the result of punitive taxes and red tape imposed on legal enterprises.

Corrupt Ukrainian police officers often cause more problems than they solve. One recent Friday night local constables barged into an American businessman's office and tried to confiscate the man's passport and computer at the instigation of the businessman's erstwhile local partner.

Things have gotten so tense that the United States, Ukraine's main patron, is no longer saying encouraging things about the economic prospects of its third-largest foreign aid recipient.

"There are success stories," says Ihor Figlus, president of the US Chamber of Commerce in Kiev. "But they are few. When you can recite the successes by heart, it's not an indication that things are going great."

American businesses are not the only ones to confront such graft. But unlike most of their Western European competitors, Americans can be prosecuted under the Foreign Corrupt Practices Act, which makes bribery abroad a crime under US law.

"Other countries don't have those kinds of restrictions, and [foreign firms] typically have some kind of a small slush fund at the discretion of people here to use to take care of situations here and there," says Mr. Figlus.

The government's response has been half-hearted. "If there are cases of corruption, this is the jurisdiction of the courts," Deputy Prime Minister Viktor Pynzenyk said at a recent press conference.

But the case of Alexei Sherin, a partner in a small family-run computer assembly firm illustrates the fallacy of Ukrainian jurisprudence. Mr. Sherin's business relies heavily on kickbacks to purchasing agents, who in turn depend on middlemen who can launder bank transfers into cash without attracting the attention of tax authorities. This ensures that the vast majority of business disputes never reach the courts: The deterrent of blackmail cuts both ways.

Even when disputes do end up in court, justice often suffers. The monthly salaries of Ukrainian judges fall below the hourly rates of some lawyers who come before them. "The salaries of arbitration and common court judges ... do not approach the compensation a judge needs to receive to remain independent," says Vasil Kisil, an attorney whose Kiev law firm does work for such multinational corporations as McDonald's, DuPont, and R.J. Reynolds.

During a visit to Kiev last month, Richard Morningstar, the US ambassador-at-large for the former Soviet Union, handed Ukrainian officials a list of complaints by American companies, with the warning: "We can't expect large-scale investment while some of these problems exist."

Among the complaints was a plea for help from Mr. Lemire, the American investor in Gala Radio, Kiev's most popular FM radio station. In July, his station was pulled off the air in the middle of an Olympics broadcast in favor of a new station started by his former partner.

In response to US pressure, Ukrainian broadcasting authorities have made several promises to reinstate Gala's license, but have not followed through.

In the meantime, Lemire checks in daily with the US Embassy in an effort to ensure his safety. He says he wishes he had never invested in Ukraine. "It's not the risk," he says. "It's the corruption."

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