Nataliia Osadcha, the co-founder of S&P Investment Risk Management Agency, shared with LDaily the most common mistakes companies make while working on the Ukrainian market and advised on how to minimize these mistakes.
LDaily: 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?
N. Osadcha: 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. The payback period of projects in Ukraine is 3-7 years.
When determining the investment attractiveness of our country, we can’t ignore the huge area of Ukraine: according to various data, it now has a population of 37 million people. This population is well-educated, and the cost of labor is minimal compared to the 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.
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.
LDaily: How to minimize the above-mentioned risks?
N. Osadcha: In fact, the above-mentioned risks in an economically attractive environment are not something unique for Ukraine. Any developing country is a market with potentially high risks and at the same time high profit rates. To be successful in any developing country, you need to learn how to correctly calculate these risks, that is, consciously accept the fact of their existence and learn how to manage them.
To protect your business from loss of assets and other risks, the first rule is to clearly understand the existence of risks, identify the threats they carry and determine how to manage them.
As a risk minimization specialist and a business consultant with more than 20 years of experience in asset protection and risk minimization in Ukraine, I can say that you can not only calculate a lot of risks, but also successfully minimize them. And if, after analysis, it turns out that the risks are very high and their minimization or prevention are impossible, you can save time, money and health simply by stopping such an unjustifiably risky business project.
Implementing risk management process during the formation of a business plan gives a high chance of success. At the stage of the business functioning, risk management should already be implemented directly in all business processes of a company and, especially, in management decision-making processes.
For example, the decision to start building a large business object should not only include risk auditing, but also be the subject of discussion at the highest level of company’s CEO and business owners, the conscious acceptance of the identified risks and taking steps to minimize them.
Companies which are not only engaged in long-term planning but also have a precise coordinate system which helps to get into the planned future, have been and will remain successful. However, without a conscious risks calculation, this does not seem possible.
LDaily: What are the major mistakes made by foreign businesses at the entry stage?
N. Osadcha: 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.
The second major mistake of foreign investors is not having risks analyzed or a map of risks 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 that it is not easy to foresee and model the risks of possible losses. That is why there are so many high-profile cases when foreign companies suffer from various losses during an investment process.
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, modify the risk of possible losses and answer the question: “Is this asset mandatory for my business?”
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.
LDaily: What do you suppose should a business do to successfully operate in the Ukrainian market?
Recommendation №1. Risk management will be an important competitive advantage.
We have stated and will continue to state that a business will be successful if it uses risk management regardless of the positioning of political forces in the state. A risk management system integrated into the decision-making process is a real competitive advantage. Companies around the world take risks but use new business opportunities and models, which makes it possible to avoid unnecessary risks, especially when it comes to new countries and markets. Current realities are a market for strong players, and risk is part of this game. Companies which take risks as part of their business process will always be ahead. These companies will have fewer problems than those which work in the old-fashioned way.
Here is an example: a manager has to make a decision and approve a strategy to protect assets or reputation. In most companies, the decision is made on the basis of recommendations of the relevant department – legal, security or PR – which has this field of activity within its competence. The solutions offered by individual departments are intrinsically correct but are often limited by narrow-profile areas. At the same time, any important business decision will affect more than one of the company’s business areas. For example, a bank decision to dispute a client may be correct from a legal and financial perspective. Still, it can be absolutely wrong from the point of view of reputation and protection of business from the license loss. Moreover, both company executives and heads of departments often don’t even see the causal link between their decision-making and the consequences. Especially in those cases when the consequences come not in the area which was the subject of the decision.
Recommendation №2: Think about narrowing the planning horizon.
Elections, the possible change of political players, heads of the state and law enforcement agencies, lifting the moratorium on inspections are going to violate long-term strategic planning of companies.
Recommendation №3: Timely and prompt response to incidents/conflicts will be a priority for business.
Attacks on business were not uncommon in 2019. There were also suspends of economic activity via seizures of accounts and assets and the removal of primary documents and data during searches and other investigative actions. Unfortunately, these actions not only have influenced the reputation and financial performance of companies but have also generally affected the business climate in Ukraine. All the loud cases and conflicts which have arisen in Ukraine in recent years have pushed business to the understanding that each company must have strong risk management and a crisis management plan. The prompt and timely response of the company to incidents/conflicts regardless of their sources should be among the main business functions.
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