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Risk management and asset protection is a top priority for any business in Ukraine


02.04.2020 (№ LDaily #11)

Risk management and asset protection is a top priority for any business in Ukraine

Nataliia Osadcha, the co-founder of S&P Investment Risk Management Agency, shared with the most common mistakes companies make while working on the Ukrainian market and advised on how to minimize these mistakes.

: Nataliia, tell us about S&P Investment Risk Management Agency. How does it help business?

N. Osadcha: S&P Investment Risk Management Agency is a consulting agency that helps foreign investors at the stage of entry or implementation of investment projects to identify and reduce investment risks, protect assets in conflicts, create a legally correct and optimal business model in Ukraine, restore communication with government agencies. We help investors, who have been doing business in our country for a long time, become winners in difficult conflicts with tax, state or law enforcement agencies, including complex criminal proceedings against company executives. Besides, we show businesses how to take preventive measures, we point out the main mistakes leading to the crisis, and also develop and implement strategies of minimizing business risks.

We often work as an external adviser and consultant to CEOs and/or business owners, because only at this level it is possible to minimize business and investment risks, implement new strategies and rules.

Why does large foreign business in Ukraine need us? In short, companies are lacking staff who practice risk and crisis management. They do not have focused knowledge and experience in minimizing business risks. Our company has been working on the market for more than 12 years. Our specialists have more than 20-year specialized experience in the field of minimizing investment, financial and reputation losses. We help our clients not only become winners in crises but also win even during difficult political changes in our country. Most importantly, we help businesses freely operate and receive planned profits, regardless of external circumstances and the state.

: What services does your company provide?

N. Osadcha: Our company provides business consulting services. What do we offer our customers?

Crisis Management. Getting companies out from crises and business conflicts:

  • We develop strategies to minimize and prevent business conflicts.
  • We model risks and consequences of crises and various types of conflicts.
  • We help companies get out of crises, business conflicts of any level of difficulty.
  • We develop and implement post-crisis preventive measures.

Risk Management:

  • We model and identify existing and/or possible risks.
  • We analyze and assess identified or potential risks.
  • We pick up tools for risk management, develop and implement risk minimization strategies.

Reputation Protection:

  • Analyzing the existing information field.
  • Building a communications plan. Establishing messages.
  • Defying target audience, channels, tools.
  • Refuting false information.
  • Legal services. This year, the legal activities of the company were highly appreciated by an independent study of the Kyiv Post newspaper, according to which S&P Investment Risk Management Agency took 4th place in the Transparency and Responsibility category of the TOP Law Firms rating.

Our company’s main value is that legal services are developed and provided to clients in symbiosis with a risk minimization strategy. The legal strategy is just a part of the toolkit, which can be picked up only after an anti-crisis analysis. Only this combination grants the success of legal activities we provide for our clients.

We also conduct corporate and practical training sessions for business.

: What are the features of the Ukrainian market? What are the main risks for the business?

N. Osadcha: Foreign business needs to accept the fact that the business environment in Ukraine is quite complicated. Ukraine is a developing country and it is still in the process of transformation. This cannot be completed in 5 or even 20 years. It’s long and rather painful, as in addition to reforms and changing plenty of laws, they also must introduce a procedure for their actual implementation. It is no secret that the main risks of our country are corruption, raiding, the loss of assets, the absence of the rule of law and lacking transparent judicial system.

In my opinion, the first mistake of companies is looking for the so-called “blessing of officials” when entering Ukraine or already being here. For some reason, the belief that this kind of “communication” will help avoid problems, and that a new investment or business will be successful is very common among foreign investors. I am sure that such a position is just an illusion. In Ukraine, the president, parliament, and leaders of all executive and law enforcement bodies are changing so quickly that in this case, we can only talk about fairly short-term communication and “guarantees”. After all, we have a new government every five years, and hoping that the previously guarantees provided will be fulfilled is unreasonable. Also, experience shows that these guarantees are not always fulfilled even within a short-term period. Thus, relying solely on the assurances of government officials in Ukraine is a mistake.

State or government guarantees are not legal documents and often are not documented. But even if they are documented, how can the state fulfill them? The state is not an insurance company. We often observed how companies “negotiating’ with political forces faced big problems in a certain period, sometimes even when their agreements were concluded. That’s why I am deeply convinced that businesses should not “negotiate” with the authorities. That is, you can get certain guarantees, establish a dialogue with representatives of the authorities, but nobody has canceled the investor’s “homework” so far. An investor simply cannot invest in an unverified object without an audit and analysis or just trust the authorities that “an issue has already been resolved”. Still, unfortunately, this is exactly what is happening in real life. Business understands that “trust work” was a mistake only when the situation becomes uncontrollable. And this is the very last stage, so, it is extremely difficult to help businesses when the conflict has worsened too much.

For 20 years of work in such a difficult market as Ukraine, I can state with absolute impairment: “One has to build a single consistent communication strategy with all state bodies to avoid problems with assets and conflicts with controlling state bodies”. A business which continues its work and receives the planned profit within any political changes will be truly successful in Ukraine. To be and become so, you need a unified strategy of external communication with the government — and this is a question of the rule of law, not of an “agreement”.

The second important mistake of foreign investors is the lack of a risk calculation scheme. This happens both at the stage of introducing an investment project in Ukraine and at the stage of its implementation. I am not noting that investors make frivolous decisions. No, I’m sure that almost all of them receive preliminary consultations from their advisers and undergo a legal audit before deciding whether to invest or not. Although experience shows, it is not so easy to see and model the risks of loss of an object and/or corporate conflict. There are now so many high-profile cases of loss of assets by foreign companies.

Acting as business and investment advisers to foreign companies, we strongly recommend you to follow a simple rule: before investing, calculate whether the object will be problematic, simulate the risks of asset losses and answer the question: “Do you need such an asset or not?”
You can argue that it’s impossible to calculate all the risks, some arise only after the acquisition or even in a few years. I fundamentally disagree with this statement. This is something that can be simulated with a fairly high probability/ You can forecast where, how, and when problems with a certain asset will begin.

The problem, probably, is that quite a few people have a background of years of practical experience in this area. Due to this, they can’t only notice, but also calculate such risks. Also, keep in mind that the process of redistribution of assets always exists, especially when a change in the political situation starts or corresponding changes in the country’s political power take place. Therefore, constant monitoring of risks in Ukraine is simply necessary. This is like checking a map and a compass, checking the correct direction of movement if you want to get to a certain place at a certain time.

: In your opinion, how has doing business lately changed for foreign companies? Can you acknowledge that it has become easier for foreign companies to work in the Ukrainian market?

N. Osadcha: Sure, undoubtedly, a record number of reforms, changes in legislation, and simplification of procedures have been carried out over the past five years. We can highlight the following significant changes:

  1. An electronic register of VAT refunds has been introduced. The VAT refund procedure is carried out almost automatically, due to which the number of complaints about its untimely compensation has been reduced several times.
  2. An electronic account of taxpayers has been developed. Tax reporting is filed online now.
  3. The Prozorro electronic trading system has been introduced. The level of corruption in the field of public procurement has significantly decreased.
  4. The procedure for the extension of special permits for water use has been simplified.
  5. An electronic auction for the sale of permits for the use of subsurface resources has been introduced. This has reduced corruption risks.
  6. The ban on mixing grains of different varieties at elevators has been lifted.
  7. The procedure for creating a limited liability company has been simplified. There is now an actual model statute, and a company can be registered online.
  8. Banks have received access to state registers. This will protect both their activities and assets. This will also complicate the life of fraudsters, as well as create the conditions for reducing the cost of lending.
  9. The government has simplified the registration of the declaration of readiness of the construction project for operation. Such a declaration of category CC1 (of the least complexity), which will be submitted in electronic form, will now be processed automatically in one day using a special algorithm.
  10. The environmental control in ports has been brought into line with legislation, although the abuse of local officials still continues.

However, I would not expect any magic changes. Changing the business climate is a lengthy procedure. It is associated not only with the deregulation of legislation or changing government officials. There are still many issues related to the abuse of government officials, the corruption component that is present in government and business processes, as it was before. The issue of criminal prosecution of the business remains challenging: law enforcement agencies still remain a “reliable tool” for creating problems for businesses. Moreover, large foreign companies often suffer no less than Ukrainian ones. They suffer even more. Fear of criminal prosecution remains the main instrument of pressure on business and, unfortunately, it always works. Only a few are ready to fight back and prove their cases within the legal framework. Many companies simply do not believe in this. Although only legal norms can help in complex conflicts with the state and law enforcement agencies.

: What advice would you give to foreign companies planning to do business in Ukraine?

N. Osadcha: When coming to another country with a different mentality, an imperfect system of state administration, you first need to understand your risks. Our experience gives us reason to convince businesses that it is possible and necessary to minimize investment risks even at the “zero” stage before investing. First, you need to research the investment conditions, legal grounds for ownership, the corporate structure of your planned enterprise (for example, in partnership with the Ukrainian side). Based on the information received and analysis, we forecast of the probability of loss of property and/or the onset of a corporate conflict, approximate terms of such losses, as well as a list of existing shortcomings in protecting the business. If it is possible to minimize the risks of our clients, we always share recommendations and a step-by-step action plan on how to prevent them. If this is not possible, we honestly recommend such clients to not invest in this particular project on such conditions.

This kind of calculation and minimization of risks at the investment stage significantly reduces the likelihood of problems that arise after entering the Ukrainian market, when a business is created, operates and brings a steady income. The symptomatology of problems can be completely diverse: from conflicts with partners (if any) to large conflicts with government agencies.

Foreign companies doing business here often have symptoms of serious problems — criminal cases opened against a company and/or its officers. Examples from our experience: criminal cases of damage to the state (if a business somehow entered into economic relations with state entities); criminal cases of abuse of power by government officials (if a business acquired assets from state ownership); criminal cases of tax evasion, unauthorized seizure of land, violation of environmental standards and similar “violations”. The solution to such conflicts must be comprehensive, including the development and implementation of a crisis strategy. Legal tools won’t be enough. The problem of many companies is that they simply haven’t face such crises, so they do not have narrow-profile anti-crisis specialists and cannot independently analyze and develop anti-crisis measures.

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