Doing Business the Ukrainian Way

KIEV, Ukraine —  The steady hum of detergent bottles being swept along an assembly line represents the sweet sound of earnings for S.C. Johnson Wax.

After years of turmoil and uncertainty, the Wisconsin-based company has finally turned an early investment in Ukraine into a profitable business. Its Brillo detergent, for example, is now a household name here.

“We’ve been very successful,” says Boris Kuznetsov, manager of the Kiev plant of the 100% U.S-owned subsidiary.

On the other side of the Ukrainian capital, Joseph Lemire’s privately owned Gala Radio is back on the air broadcasting music, after being illegally silenced by the government last year. But lawyers’ fees are killing him, and the signal is mysteriously weak.

“If I had known what problems we’d have, I never would have come here,” Lemire says.

Both stories reflect the unpredictable--and often disappointing--business climate of this former Soviet republic, where foreign investment has fallen far short of expectations.

Ukraine, with its population of 52 million, the most fertile soil in the world and a richly endowed territory larger than France, was ranked by Germany’s Deutsche Bank in 1991 as the most likely of all Soviet republics to succeed economically.

Today, there are some success stories. In addition to that of Johnson Wax, an advertising and media industry is burgeoning, and Coca-Cola is building a second factory.

By the end of 1996, Ukraine’s fifth year of independence, direct foreign investment had tripled over the previous year.

But the $1.7-billion total still amounts to only $34 per person, compared with the $170 per capita that went into Russia and the $600 per capita that went into Poland last year. U.S. investment leads--but with a mere $250 million, that isn’t saying much.

Much bigger are the complaints from American companies stymied by regulations that are painful when they aren’t opaque; unfettered corruption; and, perhaps most galling, lack of support from a government that is the third-largest recipient of U.S. foreign aid, after Israel and Egypt.

The corruption issue was high on the agenda at Thursday’s meeting in Washington of the U.S.-Ukraine Binational Commission, where Vice President Al Gore called on Ukraine President Leonid D. Kuchma to press forward with reforms. Kuchma acknowledged that the “unsatisfactory” investment conditions in his country were due to “corruption in government.”

In a condemnation of “ever-changing terms and conditions,” Motorola announced in March that it was abandoning what could have been a $500-million investment in a joint venture to develop a cellular phone network.

And there was a time when Johnson Wax also thought about quitting.

“It was a pioneer,” Kuznetsov says of the company’s decision in 1990, when Ukraine was still part of the Soviet Union, to buy an 80% share in a joint venture with a state-owned household-chemicals company.

Initially, it spent money training personnel who, after a year, had higher salaries and nicer offices than workers at the state-owned chemical association who worked at the same 23-year-old factory. That’s when what Kuznetsov calls “the war” started.

“The association started complaining to the government that the joint venture was a mistake,” he recalls.

Kuznetsov is sure that without the support of Ukraine’s then-President Leonid Kravchuk, the company would have abandoned the venture.

While Johnson Wax was banging on officials’ doors instead of manufacturing the products to clean them, other Western businesses were beginning to take a look at the newly independent Ukraine.

Joseph Lemire did more than look. At the end of 1992, the Houston-based banker joined a Ukrainian company that brought Western Union to a country where the only way foreigners could bring in hard currency was by money belt.

Not that there were many foreigners left.

With efforts at reform no better than haphazard, Ukraine ended 1993 with hyper-inflation, energy shortages and confiscatory exchange controls. As the zeros grew on the currency, called the karbovanets, so did Crimean separatism and the number of coal mining strikes. The investment climate couldn’t have looked worse.

Johnson Wax watched production plunge along with the buying power of Ukraine’s increasingly impoverished consumers. Although the Kiev operation was losing money, the company stuck it out.

“Johnson is family-owned,” Kuznetsov points out. “It could make a long-term commitment without having to answer to shareholders.”

That commitment seemed justified when Kuchma was elected resident of the country in July 1994. A peaceful transfer of power signaled a new political stability. And when Kuchma’s reform program won International Monetary Fund backing in the fall of 1994--as well as critical financial aid from the West--economic prospects also seemed to brighten.

Although industrial production continued to decline, tight money and credit policies slowed the hyper-inflation and purchasing power increased. Though perhaps too poor to buy many new clothes, or dishes, enough Ukrainian consumers could afford a bottle of Brillo, Johnson’s all-purpose detergent, to clean their old ones.

When the subsidiary started earning a profit in 1994, it put it into refurbishing the aging physical plant. In 1995, it bought out the joint venture and brought new products on line.

“Things started moving in 1995” for much of Ukraine, recalls Lemire, who decided then to invest about $500,000 in transforming Gala Radio, a small Kiev station on the virtually unoccupied FM dial, into a Western-style commercial station. Within a year, Gala was the top-rated FM station.

But last June--after it reported a profit and paid taxes--things started to go wrong. And not only for Gala.

Just two weeks after a new constitution professing the sanctity of private property rights and promising relative financial stability made Ukraine’s investment climate more attractive, Pavlo Lazarenko, the current prime minister, came to power. And many businesses noticed a significant rise in corruption, cronyism and backtracking on what they had thought were done deals.

That didn’t affect manufacturers such as Johnson Wax, which already had the licenses it needed and was flourishing in the improved economic environment. Plant manager Kuznetsov won’t divulge dollar amounts--the company is family-held--but says that sales keep rising.

Coca-Cola also saw its own sales grow--fourfold in 1996 over the previous year, and this year it broke ground on a new factory outside Kiev.

“With the current soft-drink market development, we can envisage substantially increasing investment in Ukraine in the years ahead,” says Valentin Stalovir, Coke’s manager for Ukraine and Belarus.

Small companies such as Perehid Media Enterprises, an advertising and media company, are making money too. But they have to be fast on their feet.

“You have to be flexible. This is not a place to be a passive investor,” says company President Andrew Bain, noting that Ukraine’s advertising industry is 400 times the size it was in 1993.

Earlier this month, Lazarenko acknowledged that there is a corruption problem in Ukraine and said a government restructuring will help matters by reducing the number of bureaucrats. He also said that the government is working to resolve foreign investors’ problems, including those of Gala Radio’s.

In April, Kuchma told a cabinet meeting that he feels “ashamed” when he reads press accounts of corruption and foreign investors’ troubles.

The businesses most likely to run into difficulties are those that require licenses--whether for broadcasting, oil and gas drilling or setting up a cellular phone network.

“Bureaucratic intrusion has gotten worse,” says Bain, whose company--which brought “Beverly Hills 90210” to Ukraine--was kicked off the second national television channel in a much-publicized case early this year, despite having a 10-year contract.

Joseph Lemire is blunter: “The problem is corruption,” he declares.

Last July, his Gala Radio was yanked off the air and the company’s equipment stolen. Suddenly, another station also calling itself Gala was broadcasting on the same frequency--with a license issued by the National Council on Radio and Television Broadcasting, a government regulatory body.

Lemire believes that members of the broadcasting council have a financial interest in the second Gala. A court declared the new Gala’s license illegal, yet the council let it stay on the air for three months after the ruling--giving an appearance of inappropriate favoritism at the very least.

What finally worked for Lemire was to put political pressure on the Ukrainian government’s pocketbook. He and other unhappy investors began lobbying the U.S. Congress to link Kiev’s receipt of U.S. foreign aid--proposed at $225 million for 1998--to cleaning its greasy palms.

After House members took up the Gala Radio issue in March, the station got back on the air.

But Lemire, who has run up $100,000 in legal fees, isn’t satisfied. Gala’s signal is weak, he still hasn’t received other licenses he paid for, and the second Gala is back on the air--on a different station, but using Lemire’s jingles.