Interview Ukrainian macroeconomics

I have always been and still remain very optimistic about investments in Ukraine

Taras Lukachuk is the Head of the regional office of one of the world’s largest corporations, Jacobs Douwe Egberts. Taras is a graduate of the Kyiv-Mohyla Academy, and he became the first Ukrainian to head the JDE regional office in his 38. Today, he leads the business in 20 EEMEA countries – Eastern Europe, Middle East and Africa. Taras told about Ukraine’s place in the JDE universe, the peculiarities of investing in the Ukrainian economy, cooperation with the state and the most urgent problems and challenges the company has to face in our country.

: How long has the company been working in Ukraine? What values does the company have? What are its further plans?

T. Lukachuk: The company is named Jacobs Douwe Egberts or JDE. On the one hand, this is a relatively new formation in the business environment, on the other hand, it is a company with a great history. Kraft Foods (Jacobs) has been working in Ukraine for many years. JDE separated from the Kraft Foods in 2015, and merged with the Dutch company Douwe Egberts. A new large company specializing in coffee named Jacobs Douwe Egberts was founded.

Thus, on the one hand, while the company as titled today is 3 years old, its brand portfolio dates back to 1753 (Douwe Egberts) and 1895 (Jacobs). On the other hand, the Ukrainian branch starts its history from the mid-1990s. Kraft started cooperation with this specific coffee category in 1998, if I am not mistaken. So, we can either say 3 years, 20 years or 265 years depending on how to count them.

: Do you work in the company from the very beginning?

T. Lukachuk: I work with the company almost from the very beginning. Kraft came to Ukraine at the end of 1994. I have been working here since 1995. I was still studying at the Kyiv-Mohyla Academy and combined my studies with the work for two years. I have been working here for more than 20 years since those times.​

: What criteria did the company consider when choosing Ukraine?

T. Lukachuk: The criteria were simple 25 years ago. We were exploring Eastern Europe and many companies from the Western world decided to take a certain risk and expand to Eastern Europe’s markets. The Ukrainian market was one of the largest among them. So, they are working since those times. There were no specific criteria while creating JDE. They simply merged the coffee businesses. It happened so historically that Kraft’s coffee business in Eastern Europe has gone to a new company. It was a natural evolutionary progress.

: You have probably faced difficulties and problems while acting on the Ukrainian market for many years. How have you solved them?

Lukachuk: The biggest challenge was the market volatility that could increase for five years, sometimes at an incredible pace, and could drop by half during the sixth year, as it happened in 1998 or 2008, or in 2014. The volatility was the biggest challenge. It was not a problem but a challenge. In the western world and at Europe, the dynamics around 2-3% causes a sense of instability. Here, it can be around 50-100% in any direction. So, when people ask: “What problems did you face?”, they usually mean whether we had problems with the state authorities. You know, there were not critical ones.

Historically, we were part of a large American multinational company. First and foremost, we were doing business transparently and honestly. In the 1990’s, being a product of the post-Soviet system, we had no understanding that it was possible. That is why I like this part of the corporate environment – it requires compliance with the certain company rules in terms of the business ethics. These rules are applied wherever you do business as a company in the whole world. Due to the fact that the interpretation by Ukrainian legislation offers unusual perspectives, western companies are saying: “No, we will act according to the rules that work for us everywhere”. We functioned and lived this way, even in the worst situations with the most complex authorities, they saw they had nothing to do with us, and they did not want to stir a loud conflict with a large multinational company.

I would say that the economy was our greatest challenge. There were a competitive environment and the ability to build an organization, attract talents into it, and hold those talents. It was the biggest challenge.

Whatever people say, in my view the business climate has become more transparent over the last few years. Perhaps, it has become even not so complex and unpredictable as it used to be 5-10 years ago. However, there are still other challenges. We have a problem and we are trying to solve it quite actively now. It is not smuggling but counterfeit. We hear statements from the government regarding combating the smuggling issue, but they tell nothing about counterfeit. A recent study on the trademarks protection and counterfeiting gave Ukraine one of the last positions among other states and this is an ongoing concern for us and causes confusion and disappointment amongst our consumers.

: So, is your product often falsified? Do people complain about low quality, and so on?

T. Lukachuk: Yes, this is not a new phenomenon for Ukraine, but for us, it is a relatively new for the last few years. It is a big problem for us and the industry in general. Products are faked the quality of fakes’ appearance and their packaging is drastically increasing. Large retail stores don’t sell counterfeit in the modern trade, it is present mainly on open markets. Many consumers buy falsified products there. This issue is not only ours, it is the entire industry’s problem. Unfortunately, we see that it is getting worse not better. We are trying to demonstrate this issue with authorities at the tactical level. We know what gave it a chance to become a greater problem, we know the possible solutions to it, but this does not lead us to any decisions so far.

Along with other manufacturers, we have been struggling with this problem for over 1.5 years. Together with the European Business Association, we are negotiating with the authorities. We are communicating with the government and the Ministry of Internal Affairs, indicating that there are exact places where products are faked. It becomes absurd when upon respective police raid and respecting court rulings counterfeited products/equipment are returned to, so called, claimed owners within a week. If we have some more cases like this, we are definitely loosing the battle and I will not be able to explain to shareholders why such things are still possible.

I am responsible for a large region in this part of the world. There are many countries except Ukraine: the Middle East, Africa, Turkey… But the same is possible nowhere. It is not thinkable that there would be no reaction from authorities to the continuation of rising of such criminal activity. This is impossible in almost any other country in the world, but hear it’s rampant.
Unfortunately, the situation looks like there is lots of disorder and lawlessness behind the facade of economic freedom and democracy.

: You have completed 2017 profitably, but this profit was by 14% lower than in 2016. May it be caused by counterfeiting?

T. Lukachuk: It is possible. We have to understand that there is a set of factors. Perhaps, it will not be a great news to say that from the economy point of view, two-three years after the Revolution of Dignity were among the most difficult years for the Ukrainian economy and the Ukrainian consumer for the last 20 years. Unfortunately, 2014, 2015, 2016, 2017 were not positive for Ukrainian consumers and for the whole industry. Counterfeiting may be a reason for that as well.

I would not comment on the profitability question, as there are certain differences between Ukrainian and European accounting. Today, the economic situation is generally improving. I am pleased to note that there is a positive trend in the entire consumer goods industry during almost the last three quarters. It is obvious to everyone. I rather associate this trend with the fact that we have passed the lowest point. We have fallen so low that growth was only way out. Now, we see the growth, but it is not the growth we were expecting. Economists and market players assumed the 3% growth as great, but the question is what we compare it to. If we compare it to ourselves in terms of the GDP growth, this is wonderful, as we are finally expanding after several years of decline and a year of a double-digit decline. However, if we compare it to Central Europe, where many countries – Poland, Slovakia, Czech Republic, Romania – have grown by 4-6% over the past few years, while we were falling, the 3% growth won’t lead us anywhere. So, we must grow at least as much as the central Europe does.

: How do you assess the investment climate in Ukraine?

T. Lukachuk: I have always been and still remain very optimistic about investments in Ukraine and their results based primarily on my own experience. I want to share a story with you. Some years ago, while still managing Kraft Foods in the region of Ukraine, the Caucasus, and Central Asia, I talked to a group of potential investors from Austria. We invited them to the factory. They also visited either the Kyiv School of Economics or one of the economic institutes. They spent several days in Ukraine. By the way, it was probably in 2010, 2011, when the economic situation was mainly stable enough. I asked them: “Based on the results of your visit, how many of you are sincerely willing to invest in Ukraine?” There even were no press representatives. No one raised their hands. I replied: “I understand you. What you have seen and what you may have heard leaves many questions about stability, the supremacy of law, and growth potential. I will tell you the story of Kraft Foods in Ukraine. Since 1995 (let it be 2010 at that moment), in 15 years, we have increased the turnover almost x100 times. The profit has been also increased x100 times. We started with a very low base. Where else in the world can you find such an opportunity?”

So, what do I mean? For a long time, the rules of the game in Ukraine, the formula, was as follows: “high risk high potential”. Due to the fact that the economy as well as consumer confidence and revenues were drastically falling over the past few years, the formula became unattractive: “relatively high risks and very low returns”. There wasn’t any growth. Thus, we need to switch this formula to “low risks and great opportunities” for changing the situation.

For achieving this, there should be an economic growth, an increase in household incomes that will attract investments to Ukraine. Sure, most people will say that without the rule of law, a well-functioning judicial system, the right to property, we won’t see a breakthrough.

It is the question of evaluation. If we compare ourselves to ourselves or say that our neighbors are doing worse, it will be one case, which is false, to my mind. If we compare ourselves to the best performers, and take a look at Central Europe – not even Singapore or South Korea – the comparison will be more relevant. Here are the Poles, Slovaks, Czechs, Romanians. W we will at least make an effort and try to overtake them, thought they have sharply grown in 20 years.

I remain an optimist. When we see the growth for 2018 which we have been observing during the last three quarters and, hopefully, for 2019, we will notice a significant improvement of the investment climate. Sure, this assumes the situation in the east doesn’t destabilize. This is an entirely new factor that has never been in Ukraine before. Historically we have focused only on economic factors. Now, there is a huge military factor, which, unfortunately, remains an open wound on the body of Ukraine and has the potential to be used with the worst intentions.

: When have you become a member of the Board of the European Business Association?

T. Lukachuk: I have been working for a large corporation for many years. I was able to communicate with the authorities and the government regarding many cases. We had GR resources and specialists who managed them. Most companies do not have such an opportunity. I am fully convinced that people can care only about their individual business interests, but not about industries’ and general state economic interests. The longer you act within this environment, the more you understand it. You can be a big fish in a small lake, but you can be a small fish in a huge ocean that is even more interesting. To my mind, the Association and the majority of business associations are enabling a large part of the business environment to unite in committees, industries, sectors, and eventually to convey their ideas in a comprehensive manner. I mean small, medium-sized companies, which otherwise would not be able to convey their questions, proposals or problems to the authorities.

You probably know the rules of the Association: we do not lobby individuals. And this is correct. In case an industry or companies that are part of committees and sectors, negotiate with each other, they finally have to agree on a common position. By the way, it doesn’t always happen, as they often compete and can’t simply agree with each other. However, the point of their agreement is a position of a certain sector or a group of companies. So, we lobby if we notice the sense for the economy. This is a very reasonable way of communicating with the government. This is the feedback from business, as well as an indicator of what works and what does not.

This is an indicator of the most actual issues. The more companies there are in such associations, the stronger is their ability to process the issue and change its status. Take this as the economic patriotism, as a desire to work not only at the level of one large company but also at the level of the economy in general. For me, this is a small contribution to the overall picture.

: How do you assess the effectiveness of your work in the Association?

T. Lukachuk: It is not me who should estimate this. The Supervisory Board is not an executive authority. It doesn’t deal with the day-to-day management of organizational or operational issues. Its main function is ensuring that the goals, principles, norms of the business association acting correspond to those that have been approved and declared. Therefore, it is such a constructive supervision from aside – and many of business public companies have them – supervisory boards representing shareholders’ interests. It seems to me that we are able to negotiate with the government in a correct way.

Some people are skeptical about this and state that the government is making more indicative things, but I believe that the reality differs. They need to listen and hear, in the positive sense. It is possible to pretend that something will be done and do nothing at a certain number of times, but business will not tolerate this for a long time. Finally, there is the press and public communications – thank God, no one has abolished the freedom of speech in Ukraine. So, it is difficult for me to estimate myself. Probably, others should give me an assessment at the next elections. This is the same to the politics – if you are elected or re-elected, the business environment evaluates you positively. I have been re-elected to the supervisory board for the third time, so, obviously, others evaluate me positively.However, I would rather estimate not myself, but the management effectiveness. It seems to me that this is a well-formed, structured and quite effective organization with a correct process.

: How often do the elections take place in the Association?

T. Lukachuk: Half of the members of the Board are re-elected every year. So, you are elected for two years, respectively.

: For how many years you have been in the Association?

T. Lukachuk: I cannot even say. I have been its member for a long time already, probably, for more than ten years.

Please read: To be successful in Ukraine, you need to forget everything you’ve ever known before entering its market

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