Interview Lessons for business

Loud claims of the state to ArcelorMittal Kryviy Rih, DTEK, SAP, and other powerful enterprises – what does that mean? Are the rules of the game changing for large investors?

High-Profile Cases

Our country has recently experienced difficult presidential and parliamentary races. The entire business community was waiting for the first actions of the new government. There were special hopes for simplifying the procedure of doing business and increasing the attractiveness of Ukraine to foreign investors. The beginning of a new political era began as expected – a complete replacement of all leaders in the key government positions. Additionally, the actual government has received a majority in parliament and has already begun active amending existing legislation. The new authorities have already announced their further steps: complete privatization of state-owned enterprises, lifting of the moratorium on land sales, adoption of the law on concessions, amendments to the Constitution of Ukraine, and so on. Some promises, such as the removal of parliamentary immunity and the passing of the law on impeachment, have already been fulfilled by the president.

With the change of the political force in Ukraine, many complaints and accusations concerning pressure from law enforcement agencies, numerous investigative actions, including long searches and seizures of property were received from large foreign and domestic business representatives.

After careful analysis, we can state that some criminal cases were initiated previously, but the proceedings have been intensified right now, for example, such as those involving DTEK or the German SAP. Several high-profile criminal cases have already been initiated under the new power. For example, cases involving the largest enterprises such as ArcelorMittal Kryviy Rih, PJSC DTEK Pavlogradugol, JSC Dniproazot, PJSC Dneprovsk Metallurgical Plant, PJSC Dneprovsky Plant of Mineral Fertilizers. Criminal cases were opened on abuse of power, violation of environmental standards and environmental safety rules.

Besides that, a criminal case against ArcelorMittal Kryviy Rih was opened on the grounds of an ecocide criminal offense (environmental poisoning) several months ago. There were searches, commentary from the media and press conferences with law enforcement agencies and the company. The investigation is still ongoing.

In the summer, after the presidential race, the media reported that the State Bureau of Investigation was conducting searches at the Fiscal Service in order to remove documents related to the settlement agreement between Philip Morris and Ukraine. Let us remind you that on December 2018, the Ukrainian government signed a settlement agreement with the manufacturer of cigarettes — Philip Morris — and waived tax claims in the amount of 635 million UAH. On December 5, 2018, the Cabinet of Ministers of Ukraine adopted the relevant order, obliging the acting SFS chairman Alexander Vlasov to sign that settlement agreement.

The German company SAP has also recently suffered from searches. According to the article in “Our Money”, on September 3, NABU conducted searches at the offices of two companies, including SAP Ukraine, to investigate possible misappropriation of funds by SE “NNEGC “Energoatom” while purchasing licensed software. The criminal case was opened based on attempted encroachment, misappropriation or seizure of property by abuse of authority. According to the publication: “NABU is conducting a case on the tender of “Energoatom” for SAP ERP’s software support services, which costs 27.06 million UAH.”

The criminal proceedings show that the case is not new, but the investigation has been intensified right now.

The right question arises: “What is that?” What are the reasons for such claims of the state to the largest foreign and domestic investors?

The answer is very simple. This process is not new. Moreover, it is natural for Ukraine; and for us — business risk experts — it is quite predictable and expected. Over the 27 years of Ukraine’s independence, we have seen a steady sharpening in relations and an increase in state’s claims to business, especially after the presidential election and the change of political power in the country. This happens quite often — every five years (or even more often). That is why Ukraine is considered to be a country with high political risks. Well, political risks result in business risks, and due to this, there are not many foreign investors who want to “quickly invest” in our economy, even after the change of the country’s government.

Serious Violations or Political Will?

One can unambiguously answer this question only after a thorough analysis of the cases. However, it can already be argued that every powerful law enforcement player who is currently under pressure had to calculate the business risks caused by the changing of political forces in advance.

It is obvious that any significant agreements (including settlement agreements) signed with the state during the leadership of one political force can not only be the subject of close attention of the new government but also might be canceled by these successors. What’s more, receiving significant state budget subsidies or any other preferences, including monopoly in certain areas of business, may become the focus of law enforcement and the antitrust committee. Additionally, the purchase of goods/services at the expense of the state budget, especially when it comes to millions, tens and hundreds of millions, will definitely be the subject of constant and thorough scrutiny by law enforcement agencies. Therefore, these processes should be perfect.

As for violations, which are not only reported to law enforcement bodies but also publicly announced through the media, businesses need to work hard to prove that there are no such violations. However, this is especially difficult when people trust the government much, as it is happening today. Therefore, any statement made by the guarantor of the Constitution regarding a possible violation by a certain company causes serious damage to its business reputation. It should be understood that all the difficult conflicts that have recently arisen or intensified between business and the new government are not new. All this has already happened in Ukraine more than once, during the rule of almost all presidents. So, you should not expect anything fundamentally new.

Compromise or Conflict

Based on our experience of dealing with complex and high-profile conflicts between the state and business, I can definitely state that compromises have never worked for the business and its benefit. It’s an illusion, a five-minute break. Once a compromise is reached, the conflict doesn’t disappear. On the contrary, it becomes more complicated. After a compromise, it becomes even more difficult to return to the dominant position and prove that you are right. These are sometimes not even compromises but micro-compromises. Business uses them daily. And it does not matter how: whether it is issuing documents or information, disclosing bank secrecy or paying extra fees that the company does not have to pay. By compromising, the company creates an image of a player who’s ready to fulfill any demand, even illegal one. For instance, when we come to law enforcement agencies regarding our clients’ affairs, we see that businesses issue confidential documents on their own free will, while law enforcement agencies should at least go to court to obtain them. But why should government perform according to the procedures if the business agrees to break them? For many companies, the fear of criminal prosecution is the worst fear. This is a starting point of compromises. Next, these compromises result in the fact that for some reason, a solid foreign company has a number of checks, recharges, criminal cases…

If a company is in a conflict, this is a time when you need to assert your rights. It’s crucial to defend the rights within the legal field: if we are talking about the rule of law, the business must start from itself. Reforms are great, but what will change if the business is not ready to apply the existing rules, is not ready to return the state to the prescribed limits? What difference does it make for a law enforcement officer or an SFS employee to have a misdemeanor charge or file a criminal case, if they bear no responsibility for making illegal decisions? And the question is: “How can a business change the rules of the game on a transparent basis if it is not ready to systematically assert its rights day by day?”
If a foreign business chooses a strategy, it does not want to lose money but is ready to hold the perpetrators responsible for every fact of violation of their rights! And not only would they create this strategy, but also implement it every day — in this case, the state would understand that the business would not forgive and would remember for every illegal step. This would be a game-changing point.

This may sound strange but the state respects the very business that does not compromise, which puts the rule of law at the forefront and defends its rights step by step.

So, what is stopping the business from making one simple move every day – to bring an official or a supervisor back to the frame which he crossed?

Major Business Mistakes during a Conflict with the State

The first mistake is the lack of understanding that a business has a serious conflict with the state. Company executives are often very reluctant to look at the real picture. They consider this kind of situation a “temporary misunderstanding”, “a minor problem of business activity” – and anything else but a conflict! The lack of a real picture and its analysis does not give a complete vision, does not allow to develop an optimal strategy for getting a company out of the crisis and correctly identify the risks.

The second mistake is the lack of a coherent strategy and a step-by-step plan for resolving a conflict or crisis. This mistake is closely linked to the lack of professionals — both internally and externally — who would be able to get the business out of a crisis. The lack of a vision of where to go and what to do causes many small mistakes that interfere with proving the correctness of the position and legality of doing business. Very often, companies in conflicts give full decision-making to full-time or external lawyers. This is also a serious miscalculation, as legal instruments alone cannot resolve a complex conflict. This is just one of many tools that every business should possess.

The third mistake is the lack of a reputation protection strategy in the information field (crisis communications). Companies commonly rely on PR and require crisis and conflict management from their full-time PR professionals. Therefore, quite often we observe a complete disregard by the business of loud statements in the media by high-ranking officials, published comments on investigative actions, searches, and criminal cases. Also, there are utterly false statements of the companies (in terms of crisis communications), which not only do not deny violations, but on the contrary, continue destroying the business reputation. It is a mistake, as PR and crisis communications are different areas. So, effective crisis communication practitioners in the information field are necessary for effective reputation protection during a conflict.

The fourth mistake is the wrong choice of tools that businesses use for resolving conflicts. Some companies rely solely on legal instruments, others rely only on PR, while others believe that only GR will help them get out of a difficult situation. We are convinced that the choice of instruments, their frequency (the stage of usage) and their main messages should be closely integrated and built into a single strategy. The initial set of tools must be constantly changing during the escalation of a problematic situation. Choosing and using only one tool or deliberately building a strategy around it is reminiscent of a picture when a military general wants to win a war with just a spear, although the enemy’s arsenal includes infantry, tanks, aircraft, and even a fleet.

Let’s draw a bottom line. Unfortunately, there is no magic wand which can instantly and painlessly solve any problem, crisis or conflict. The crisis is neither good nor bad in its essence. In the Japanese language, ‘crisis’ means not only a problem but also a possibility. Business crises are no different than other crises. Still, will one be a winner or a loser in a crisis — depends on the specific actions of the person who has faced this crisis.

Please read: Doing business in Ukraine during the period of political instability: what to focus on

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