Ukraine`s outstanding OPIC debt: a barrier to international investment

Amid all the fanfare that accompanied the signing of a protocol which brought Ukraine WTO membership, it is worth noting that a disagreement over a relatively small amount of money has made it impossible for Ukraine to enjoy the benefits of an obscure but extremely important agency of the United States government, the Overseas Private Investment Corporation (OPIC).

Estimates made by well-informed persons involved in the process relating to OPIC would suggest that had the problem could have been resolved when it first arose in 1999, Ukraine could have gained an absolute minimum of an additional USD 5 - 10 billion in foreign direct investment - and probably a lot more than that.

The issue could have been solved years ago, but it was as is so often the case it is a problem for which no one had primary responsibility on the Ukrainian side.

All those, i.e. the various ministers, who had parts of the responsibility within their jurisdictions failed to understand the overall importance of the issue and therefore guarded their own turf rather than that of the state as a whole.

The end result has been to deny the Ukrainian economy one of the tools that could have been attracting investment into the country ever since, with a potential opportunity cost running into the billions of dollars.

A SIMPLE PROBLEM MADE COMPLEX

The matter involves the non-payment of a state debt incurred by the Ministry of Defence about ten years ago at a time when the needs of various ministries were seriously under-funded and ministers were prone to making deals first and worrying about payment later.

The debt in question was covered by OPIC political risk insurance. OPIC paid the claim to the insured U.S. supplier and looked to Ukraine to ultimately make good on the original agreement, as was called for in the Ukraine-OPIC agreement.

The amount of the claim, approximately USD 17 million, is quite small when viewed in the light of the overall budget of Ukraine.

For the uninitiated, USD 17 million might appear to be a sum that could be dealt with in a simple meeting among ministers of any government.

However, there is no single ministry nor any single minister who has ever been tasked with dealing with the problem in a priority manner, so time and time again the issue has been discussed at seemingly high-level meetings between U.S. ambassadors and embassy staff on one side and various ministers and prime ministers on the other.

The matter is further complicated by the nature of Ukraine`s budget process. No government has wanted to debate the debt in parliament so it has never been made a part of any annual state budget.

With no line item listing of the debt, some other mechanism would need to be found in order to keep a payment from being illegal under the existing legislation of the state budget act. So far, no creative payment mechanism has been found that would meet the needs of both sides of the disagreement.

The most recent top-level discussions came during a visit to the United States by then-Prime Minister Viktor Yanukovych in late 2006.

At the time Yanukovych promised U.S. officials during discussions that the matter would have his personal attention and would be settled in a very short time. However, the Yanukovych government neither paid the amount owed nor requested or agreed to negotiations to adjust the amount owed.

ABOUT OPIC

OPIC is an independent U.S. government agency whose mission is to mobilize and facilitate the participation of U. S. private capital and skills in the economic and social development of less developed countries and areas, and countries in transition from non-market to market economies.

OPIC assists U.S. companies by providing financing (from large structured finance to small business loans), political risk insurance, and investment funds. OPIC complements the private sector in managing risks associated with foreign direct investment and supports U.S. foreign policy.

Since its establishment in 1971, OPIC programmes have grown and expanded to encompass the support of development in over 150 countries. In 2007, OPIC assisted 70 projects in 38 countries and regions involving a wide range of industries. Of all the projects underway around the world in 2006, 87% or 61 projects involved U.S. small businesses in 35 U.S. states.

Many OPIC projects involve U.S. procurements, but it is also small and medium-sized enterprise (SME) projects in recipient cooperating countries that receive the greatest benefits. For example, in Kazakhstan, OPIC provided debt financing for a USD 1.89 million investment in the Asian Credit Fund (ACF), a non-banking microfinance institution established by the Mercy Corps.

In Azerbaijan, OPIC provided financing to SOAKredit LLC (SOA), an independent limited liability non-credit organisation. SOA`s purpose is to implement an innovative finance programme primarily designed to stimulate local business growth and facilitate Azerbaijan`s transition from a demand to a market economy.

In Russia, OPIC is providing financing to ZAO Europlan (Europlan), the leading leaser of equipment and vehicles to SMEs throughout the Russian Federation, to support a planned USD 450 million expansion.

CREATING CONFIDENCE, OFFERING SECURITY

Nadir Shaikh, Chairman of the Board of Citibank Ukraine, explained that SME firms and medium-sized projects are the ones that would benefit most if Ukraine settles its dispute with OPIC.

Shaikh has been one of the persons most active in promoting a settlement with OPIC and as recently as two weeks ago participated in a meeting with senior government officials where this matter was discussed.

"We know from experience that the largest foreign firms come here fully prepared to finance their own way into the Ukrainian market. Their investments are based on advice from the most sophisticated sources in their own companies or from professional advisors such as investment banks. It is the smaller foreign investors who need the type of help and risk coverage that OPIC is able to give.

"Making OPIC political risk insurance available would, for example, give many smaller foreign investors the kind of backing that would first help convince their own boards of the viability of investments in Ukraine, and would also assist them in finding financing for projects here or in their home country.

"In addition, it would help Ukrainian companies to get access to financing that could be provided by such banks as Citibank, based on OPIC risk coverage programmes.

"Settling the current dispute requires a firm decision and political will on the part of government to find a financing mechanism to pay the current claim. I am optimistic that the efforts of the current government are more likely to find a solution to this problem," Shaikh concluded.

A RELATIVELY TRIFLING DEBT

One of the most interesting elements in the OPIC-Ukraine issue is the flexibility exhibited by OPIC in attempting to settle the claim. On several occasions various Ukrainian governments have been told that while USD 17 million is the amount actually owed, OPIC is willing to engage in negotiations that could lead to a solution that would mean a substantially reduced settlement.

Even with the clearest signals possible from OPIC, no Ukrainian government over the last ten years has been willing or able to find the will to effect a settlement.

The issue has not been filed away in a long forgotten filing cabinet, either. Morgan Williams, president of the U.S.-Ukraine Business Council (USUBC) said that the OPIC issue has been a matter of discussion between the two governments in every meeting that he has attended in Washington or Kyiv in recent years.

"On January 31, while addressing a meeting of the USUBC that included representatives of the American Chamber of Commerce and U.S. embassy officials, Vice-Prime Minister Nemyrya made a point of telling the audience that he was fully aware of the problem and that he expects a solution to be found soon. We sincerely hope that is correct.

"OPIC programmes are being used all over the world to spur development and USUBC thinks that the inability of Ukraine to solve its OPIC problem has cost the country at least one billion and perhaps several billions of dollars in lost investment opportunities. In effect, a failure to solve the OPIC issue has a negative effect on Ukraine`s ability to create jobs and wealth for all of Ukraine`s citizens.

"For example, in the autumn of 2005 OPIC conceived and was ready to implement a USD 100 million private equity fund programme for Ukraine.

"I have been told on the back channel by top U.S. government officials in Washington that the total value of OPIC programmes that could be implemented here within a relatively short time might have a total value of as much as USD 500 million.

"However, it is the government of Ukraine that must turn the key to open what is literally a treasure trove of new investment and risk guarantee opportunities. I hope it will make the effort necessary to find the solution needed," Williams concluded.

By Jim Davis, Business Ukraine magazine