DNIPRO INVESTMENT OPPORTUNITIES

TOP FIVE TIPS FOR DNIPRO INVESTORS: Ukraine’s industrial capital is attractive but local knowledge remains essential

Dynasty Law Firm’s Denys Myrgorodskiy draws on considerable personal experience to offer insights for international investors considering Dnipro market entry

TOP FIVE TIPS FOR DNIPRO INVESTORS: Ukraine’s industrial capital is attractive but local knowledge remains essential
Dnipro is one of the engines of the Ukrainian economy and a major producer of national GDP making it one of the most attractive cities in the country for international investors
Denys Myrgorodskiy
Friday, 14 April 2017 19:54

Dnipro is not the capital city of Ukraine, but it is the capital of the Ukrainian mining, machine-building, metallurgical and chemical industries. It is also located at the geographical heart of the country in a position that provides access to vast business and consumer markets. In fact, if you take a set of compasses and draw a circle on a map of Ukraine with a diameter of 300 kilometers and a center in the city of Dnipro, you will find that more than 17 million people live inside this circle. Over 40,000 companies have their base of operations in this catchment area, and it accounts for more than 30% of Ukrainian GDP.

The huge regional market located around Dnipro is larger in terms of potential consumers than the national markets in 20 of the 27 member countries of the EU (not including the UK). The Dnipro region’s B2B market is also highly attractive, especially when you take into consideration the fact that many local factories are oriented towards foreign markets and have stable revenues. These factors have helped a significant number of American, European and Turkish investors to develop their own success stories in Dnipro.

For example, American agribusiness giant Bunge has an oil-processing plant and grain elevators in Dnipro. This approach is in contrast to America’s ADM and European company Louis Dreifus Company, who choose to manage their agricultural commodities trading mainly via the facilities of local companies. Austrian Primetals Technologies (a subsidiary of Siemens and Mitsubishi Industries) and Italy’s Danieli Heavy Machinery Engineering have both established a strong local presence with offices in Dnipro. German HeidelbergCement is developing a chain of quarries and cement-producing factories in the region. Turkey’s Miroplast and Axor factories cover local demand for PVC profile and accessories for windows and doors, while also producing for international export markets. There are many more examples of international investment in a wide range of industries.

In addition to Dnipro’s numerous competitive advantages, recent improvements in the Ukrainian business environment are also making the investment climate more attractive while having a positive impact on the local business community. Numerous previously time-consuming and cumbersome procedures have been streamlined and modernized. Things like registering a new company, cooperating with the tax service, registering vehicles and real estate, and beginning construction works have all undergone fundamental simplification. In many cases, the entire process has moved online as Ukraine increasingly embraces e-government.

A range of basic commercial information that is important in order to secure property rights is now available to the public via online registers. This includes data on legal entities, real estate titles, and court decisions. As a result, property rights are now much easier for owners and their lawyers to enforce.

Since 2016, Ukraine has cancelled hundreds of restrictive regulations and document requirements, including the registration of foreign investments. Across the legal and business communities, we are now feeling a major shift in the fight against corruption. Many corrupt state officials at the local and national levels have faced accusations of abuses, with some already sentenced by the courts.

All these trends help to make Dnipro an increasingly attractive option for potential international investors. Nevertheless, new market entrants must do their homework and assess the specific commercial challenges and local nuances of the Ukrainian market as a whole, and the Dnipro business environment in particular. The following Top Five Tips will provide some local insight into the Dnipro investment environment from a legal perspective. These five points should help investors to minimize risk exposure while maximizing the benefits of a presence in Ukraine’s industrial capital.

 

Tip 1: Study the Local Culture

Ukraine is a particularly large and complex country with a range of different social and cultural nuances in different regions. Even specifics like legal practices can differ from region to region. Investors should consider paying attention to these regional variations while also acquainting themselves with the broader distinctions between Ukrainian and international business practices. These national distinctions can often be far more striking than regional specifics. For example, standard terms of payment among major European companies for such everyday issues as construction works and business services generally envisage a six-month window. However, for many Ukrainian companies this is not a viable option due to concerns over the instability of the national currency, the hryvnia. Repeated experience of currency devaluations has taught Ukrainians to be careful with payment scheduling, making longer windows impractical.   

Another area where common international business practices often collide with Ukrainian practicalities is in the promotion of complex and open-ended long-term contracts. Ukrainian businesses are not inclined to commit to purchasing any product, service, or other item if they are unable to clarify the full cost of the entire contract at the outset. This explains why international consulting companies with their hourly fees are not particularly popular on the Ukrainian market. It also means that in practical terms, highly detailed contracts drawn up in other legal jurisdictions will often not work in Ukraine and may require modification.

Attention to local social specifics can also have a big impact on the success of any international investment. One of the specific features of the Dnipro region is the prominence of the local Jewish business community and the role this community plays in local and international business. An awareness of local Jewish traditions, religious holidays, and business culture will help to provide insight and improve understanding. A “local” partner from the relatively faraway Ukrainian capital might well miss this kind of nuance or fail to accord it sufficient importance. This is why there is no substitute for genuine local knowledge and local partners.

 

Tip 2: Research Your Local Partners

Like any business environment, the Ukrainian business community features a wide variety of people who often have markedly different approaches to issues of ethnics and acceptable behavior. It is perfectly possible to find ideal partners in Ukraine, but it also certainly pays to spend a little time researching the past business histories of your potential partners before committing to cooperation.

The past few years of crisis conditions in Ukraine provide the ideal context to clarify exactly who is who on any given sector of the economy. Many businesses scrupulously paid their debts and met all their obligations despite what were often extremely challenging market conditions. However, others were guilty of exploiting the situation in order to cheat partners and leave their commitments unfulfilled.

Luckily, much of this information is now publicly available. Ukraine’s post-Euromaidan reforms have seen large volumes of business-related information brought together in online databases that are open to the public. This includes useful information on prospective contractors and local shareholders. Are there any distressed assets or unpaid bank loans in this person’s business history? Have they ever used bankruptcy in order to avoid meeting their obligations? Are there any outstanding disputes with shareholders or unpaid debts to contractors? In many cases, the answers to these questions are available via reference to Ukraine’s publicly available databases.

Research should also include factors that are less easy to quantify. What kind of reputation does your potential partner enjoy among their professional peers? Researching these factors in advance will help to protect potential international investors from exposure to significant risks and future losses.

 

Tip 3: Avoid Comparisons with Central Europe or Russia

When new investors first come to Ukraine, they often have difficulties analyzing local markets and accurately assessing their prospects. As a rule, there is a temptation to refer to economic indicators and market analysis conducted in neighboring countries like Russia, Belarus, Poland, Georgia, or Romania. This approach will lead investors astray and create an unrealistic impression of the unique Ukrainian marketplace they are entering. For example, the prime base rent rates in Dnipro shopping centers may appear at first glance to be close to Amsterdam, while those in Kyiv are closer to rates in Milan. However, this does not take into account the specific local specifics you will sometimes encounter, such as the practice of fixing special exchange rates in rental agreements at below the existing market rate.

Likewise, in terms of consumer behavior, local quirks require detailed study. Investors cannot simply borrow from geographically close case studies. When it comes to something as banal as coffee consumption, for example, the figures for Dnipro would probably be close to existing indicators from the Russian and Georgian markets. However, there is likely to be significant divergence when it comes to beer consumption. 

Even general market indicators for areas such as retail turnover can be unreliable if they fail to take into consideration the many peculiarities of each national, regional, or municipal market. In the case of retail turnover figures, specifics could include less regulated segments of the market such as street vendors and small businesses. 

The best way to get around these problems is by identifying a credible local specialist with a proven record in a compatible industry. Detailed statistical information and reliable market analysis may not always be available in today’s Ukraine, but there is no substitute for personal experience.

 

Tip 4: Educate Your Employees

Ukraine commonly ranks among the most educated nations in the world, and Dnipro is one of best-educated Ukrainian cities. Nevertheless, the professional training of many Ukrainians often relies on outdated technologies and old equipment, while also failing to incorporate modern business practices and approaches. Ukrainian employers often find they lack appropriately qualified candidates for senior positions requiring specific professional skills and knowledge of contemporary management systems.

Training will help to remedy to this problem. Ukrainian staff generally have a high aptitude for new skills, but they require the necessary instruction. International investors need to factor this into their business plans. Investors planning to hire large teams in Dnipro might wish to follow the example of many local companies who have opened their own in-house corporate academies, schools, and training courses.  This would mean additional costs, but it would likely result in long-term savings and a far more efficient operation capable of seamless integration into ex-isting international corporate structures.

 

Tip 5: Engage a Good Local lawyer

This might seem like an obvious and somewhat biased piece of advice, but I have repeatedly seen how international investors have lost money due to a lack of knowledge on issues that are widely understood by the local business community. For example, Ukraine has special requirements governing the employment of disabled people in any company employing more than eight people. There are special regulations regarding responsibility for labor law and fire safety. Individually tailored employment contracts are the exception rather than the rule. According to Ukrainian employment law, breaches of compliance policy are not sufficient reason to dismiss somebody from their job. There are hundreds of similar legal details. Investors and new market entrants need to bear this in mind when looking to build a business in Dnipro. The good news is that Ukraine has a large market of experienced and qualified lawyers ready to provide international investors with the services they require.

About the author: Denys Myrgorodskiy is the Managing Partner of Dynasty Law Firm with offices in Dnipro and Kyiv

 

 

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