S&P Investment Risk Management Agency is one of the few companies in the Ukrainian market of risky investments, which helps foreign businesses to invest freely in Ukraine, store and increase their assets. Mykola Siutkin, the founder of S&P Investment Risk Management Agency, told LDaily how foreign businesses in Ukraine should manage risks and protect their assets.
LDaily: The investment climate in Ukraine is improving every year. In 2020, numerous international companies are considering entering our market. As a company that manages risks of any complexity and their minimization, what can you recommend to new investors planning to enter the Ukrainian market?
M. Siutkin: Ukraine is a high-risk country a priori. At the same time, we should not ignore the fact that the amount of profit that can be obtained in our country far exceeds the standard interest foreign companies can receive in other European countries. I am consciously focusing on European countries, as Ukraine is unique in its location for European investors, this is first and foremost but not the only benefit. When determining the investment attractiveness of our country, we can’t ignore the huge area of Ukraine (the largest in Europe): its population now is 39-43 million people, according to various data. This population is well-educated, and the cost of labor is minimal compared to European countries.
There are many advantages in Ukraine, but they are really offset by the risks that foreign and
Ukrainian business suffer from.
• We consider the loss of investments and/or assets in Ukraine the main risk.
• The second but not least point – conflicts with Ukrainian partners, which may also result in loss of assets and/or business.
• The third significant risk to date is conflicts with public authorities, especially with the involvement of law enforcement agencies.
The risk issue is broad and deep enough, and we even have a special training program for CEOs of foreign companies. We show the types of risks, their levels, and mistakes. And, most importantly, we teach foreign investors how to avoid possible risks and minimize already existing ones.
In any case, regardless of the currently present difficulties in our country, we can not ignore that large and medium-sized foreign businesses have been successfully operating in Ukraine for a long time. Moreover, they do business in completely different fields. However, I should note that only a business that spends time learning new business environments, conducts a risk analysis and minimizes risks can be successful. It is clear that businesses cannot carry out this huge work alone. Therefore, a successful business requires teamwork with the involvement of experts at all stages of the investment project, as well as close cooperation with local and international business associations.
LDaily: Protecting investors is a very important topic for our country right now. What are the most effective investor protection tools?
M. Siutkin: Unfortunately, there is no magic pill or universal tool that can effectively eliminate the company’s problem in one iteration. While building and implementing business protection, we use a variety of tools, such as GR, PR, crisis communications, crisis management, coaching, mentoring, management and legal tools that are mixed depending on the task complexity. Building complete protection is a multilevel process tailored to every individual case. Believe me, the tools that worked in one case can often be completely ineffective in another case.
Anyway, we follow the systemic fundamental approach that allows companies to feel safe in such a difficult business environment of Ukraine. I would also like to add that the current legislation of Ukraine gives business enough tools to protect its rights, the point is in the ability to properly use these tools. The latter often becomes a problem. I strongly disagree with the point of view that the current legislation of Ukraine is weak in protecting foreign investors. The legislation is quite progressive, but its implementation is very weak. Still, we can work with that.
LDaily: How can you comment on partnerships? What would you advise to investors when building partnerships?
M. Siutkin: Any business is looking for partnerships, especially when entering new markets. That’s common. Partnerships with local businesses make it easier for a foreign investor to enter new markets, help establish new connections, successfully complete projects, etc. Partnerships are simply necessary for some projects, but at the same time, rationalism and pragmatism must be included in both selecting and building partnerships.
My recommendation is – a partnership in Ukraine (and, probably, not only here) will only be successful if the right system of checks and balances is created, which simply will not allow partners to violate anyone’s rights or to make this partnership not profitable.
A sensible approach to partnerships is crucial for minimizing corporate and/or raider conflicts. According to our analytics, mistakes in partnership arrangements led to the loss of assets in 95% of cases. So, minimizing possible investment risks takes place at the “zero” stage – even before entering into an investment project. Proper entry into an investment project is the key to its successful implementation.
LDaily: What are the major mistakes made by foreign businesses at the entry stage?
M. Siutkin: The first mistake, in my opinion, is that when coming to Ukraine, companies seek to receive the so-called “blessing” of high-ranking officials. For some reason, there is a widespread belief among foreign investors that this kind of “communication” will help them avoid issues and make their newly created investment successful. I believe that such a position is nothing but an illusion. In Ukraine, both presidents and parliament, the heads of all authorities are changing so fast that this belief can only be fair about short-term communications and “guarantees”. We have a new government every five years. High hopes that the guarantees provided in the previous period will be fulfilled are at least unreasonable. What’s more, as experience shows, “guarantees” are not always fulfilled even within one short-term period. So, relying solely on the assurances of state officials when entering Ukraine is a mistake.
State or bureaucratic guarantees are not a legal document and are often not fixed on paper. Even if they are, how can the state fulfill them? The state is not an insurance company. We have often observed that companies “communicating” with political forces have experienced significant problems over time, sometimes even during the agreed by them period. So, I am strongly sure that a company should not “negotiate” with the authorities. You can get certain guarantees, have a dialogue with the authorities, but nobody canceled the “investor’s homework”. An investor simply cannot invest in an unverified entity without audit and analysis.
If a company wants to avoid problems with assets and controlling government bodies, it is necessary to establish a unified and consistent communication strategy for all authorities.
Only the business that continues to function and earn its intended profit in the face of any political changes will be successful in Ukraine.
The second major mistake of foreign investors is the lack of a risk calculation scheme at the stage of entering into an investment project in Ukraine. I’m not stating that investors make frivolous decisions. I am sure that almost all of them get recommendations from their advisers and conduct a legal audit before deciding whether to invest or not. Although experience shows, it is not easy to foresee and model the risks of losing an entity and/or corporate conflicts. That is why there are so many high-profile cases of loss of assets by foreign companies.
As business and investment advisors to foreign companies, we always recommend following a simple rule: before investing, clearly calculate whether an object will be problematic, model the risks of losing an asset, and find an answer to the question: “Do you need such an asset or not?”
You might argue that calculating all the risks is impossible. Some arise only after the asset acquisition or even in a few years. I fundamentally disagree with this statement. This is exactly something that can be modeled with a high probability: where, how, and when problems with an asset will begin.
The point is probably that quite a few people can calculate these risks. Keep in mind that the process of asset redistribution is ongoing, especially when there are changes in the country’s political situation or its government.
LDaily: How has S&P helped foreign businesses, for example, over the last 3 years? Are there any consolidated data?
M. Siutkin: In the last 3 years, we have managed to reduce the tax and levy charges to companies totaling ₴560 million. During 2018-2019, the VAT amount of ₴370 million was returned to businesses’ current accounts. Also, we have closed 26 criminal cases against business executives for tax evasion totaling ₴1018 billion.