UKRAINE'S OUTSTANDINGOPIC DEBT (TEN YEARS) CONTINUES
TO BE A MAJOR BARRIER TO PRIVATE U.S.BUSINESS INVESTMENT
U.S. Government's Overseas Private Investment Corporation (OPIC)
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Mar 12, 2009
WASHINGTON, D.C. - One of the top issues for the U.S.-Ukraine BusinessCouncil (USUBC) for the past several years has been the fact that all the outstanding economic and business development programs of the U.S. government's Overseas Private Investment Corporation (OPIC) have been closed for Ukraine (http://www.opic.gov).
OPIC is closed because the government of Ukraine has never developed, approved and implemented a program, during the past ten years, to settle an OPIC political risk insurance claim against Ukraine which began in 1999. The claim came as the result of OPIC paying a political risk insurance claim to a U.S. business that invested in Ukraine in the early 1990's.
Such settlements of claims between government are rather normal in the international community of nations when government backed political risk insurance programs pay out claims. Governments usually settled such claims rather quickly, but this has not happened in the case of Ukraine.
OPIC being closed for Ukraine has stopped and is stopping many U.S. businesses from investing in Ukraine or from expanding their investments in Ukraine. OPIC being closed has thus cost Ukraine hundreds of millions of dollars of badly needed private business investments and thousands upon thousands of jobs.
An article about this important outstanding issue, written by Jim Davis in Kyiv (see article number one below), appeared in the Business Ukraine magazine on February 11, 2008. Such an article, for the most part, could have been written most anytime during the past few years and could be written again today as the issue is still unresolved.
RECENT MEMORANDUM OF UNDERSTANDING DID NOT RESOLVE THE ISSUE
The U.S. government and the government of Ukraine signed a Memorandum of Understanding about this issue in Kyiv on November 10, 2008 (see news releases number two and three below from the Embassy of the U.S. in Kyiv and from the Ministry of Economy of Ukraine). The Memorandum of Understanding (MOU) was a step forward but it just laid a foundation for a future agreement that would actually lay out the details of exactly how, when and for how much the outstanding OPIC claim would be resolved between the two governments. The steps specified in the memorandum have never been fulfilled.
As the news release from the Ministry of Economy of Ukraine said, "The signing of the MOU between the two governments is considered to be the first step in establishing practical mechanisms of dispute settlement with the Overseas Private Investment Corporation." (Item number four below shows a copy of the draft of the MOU).
Many observers thought the MOU signed in November between the two governments actually resolved the issue and that OPIC was then going to open for business in Ukraine very soon. Unfortunately this was not the case. There have been several reports recently at various meetings that OPIC is actually open for business in Ukraine now. Again this is not the case. Work to develop the final agreement has continued but the government of Ukraine has not yet finalized or offered an acceptable agreement. Reports indicate OPIC is willing to settle the claim on rather liberal terms.
USUBC has been speaking out about this critical issue at meetings, in Washington and Kyiv, with every top Ukrainian and U.S. government official who has some responsibility regarding this major problem. USUBC will continue speak out loudly and often regarding this issue until it is resolved and OPIC is open for business in Ukraine. This is a win-win for the U.S. and Ukraine. USUBC urges both governments to move this issue to the top burner. Both countries, now more than ever with the world financial crisis, need to be able to say that OPIC is OPEN FOR BUSINESS IN UKRAINE.
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1. UKRAINE'S OUTSTANDING OPIC DEBT: A BARRIER TO FOREIGN INVESTMENT
U.S. Overseas Private Investment Corporation (OPIC)
By Jim Davis, Business Ukraine magazine, Kyiv, Ukraine, Monday, February 11, 2008
Amid all the fanfare that has accompanied the signing of a protocol which will bring 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 mobilise 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, would 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.
LINK: http://www.businessukraine.com.ua/ukraine-s-outstanding-opic-debt
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2. UKRAINE AND U.S. GOVERNMENT SIGN MEMORANDUM OF UNDERSTANDING
FOR RETURN OF U.S. OVERSEAS PRIVATE INVESTMENT CORPORATION TO UKRAINE
Public Affairs Section, United States Embassy Kyiv, November 12, 2008
KYIV, Ukraine - The U.S. Government and the Government of Ukraine signed a Memorandum of Understanding (MOU) on November 10, 2008. The signing of this MOU lays the foundation for the return of the U.S. Overseas Private Investment Corporation (OPIC) to Ukraine. William Taylor, U.S. Ambassador to Ukraine and Ukraine's Minister of Economy Bohdan Danylyshyn acted as the signing parties of this agreement.
Ambassador Taylor believes the signing of the MOU is an important step toward securing OPIC’s return to Ukraine and an important sign of the faith the United States has in Ukraine and the Ukrainian economy. Once the steps specified in the memorandum are fulfilled, over $500 million of new investments that will be made in Ukraine in the next 12-18 months with OPIC’s help, he says.
Ambassador Taylor underscores that OPIC's return, like the IMF support package and other positive economic news such as the widely unheralded recent passage of a Joint Stock Company Law, is evidence Ukraine can take steps to improve the economic and investment climate if the leadership of the major political forces work together for the good of the country.
OPIC was established as an agency of the U.S. government in 1971. It helps U.S. businesses invest overseas, fosters economic development in new and emerging markets; complements the private sector in managing risks associated with foreign direct investment; and supports U.S. foreign policy. OPIC has been absent from Ukraine for several years over the failure to resolve an insurance claim dating from the 1990s. This MOU paves the way for a resolution of that issue.
The American Chamber of Commerce (AmCham) in Ukraine and the U.S.-Ukraine Business Council (USUBC) welcomed the news. AmCham President Jorge Zukoski said he is pleased that concrete steps are being undertaken to re-establish the operations of OPIC. Mr. Zukoski noted that the MOU signing sends a positive signal to the business community that Ukraine is open for business, and that it will assist in attracting additional strategic investment into the marketplace.
"One of the top priorities of the U.S.-Ukraine Business Council (USUBC) the past few years has been to support the return of OPIC's outstanding business and economic development programs to Ukraine." said Morgan Williams, SigmaBleyzer, who serves as President of USUBC. "USUBC members certainly welcome the signing of the MOU and hope all issues will be resolved quickly so OPIC can once again support U.S. businesses doing business with Ukraine.
LINK: http://kyiv.usembassy.gov/infocentral_eng.html
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Public Affairs Section, United States Embassy Kyiv
4 Hlybochytska St., Kyiv 04050 Ukraine
(380 44) 490-4026, 490-4090; Fax (380 44) 490-4050
http://kyiv.usembassy.gov/; info@usembassy.kiev.ua
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3. U.S. GOVERNMENT & UKRAINE GOVERNMENT SIGN OPIC
MEMORANDUM OF UNDERSTANDING, THE FIRST STEP
Signing of the Memorandum of Understanding (MOU) between the Government of Ukraine and the
Government of the United States of America on Overseas Private Investment Corporation activities in Ukraine
Ministry of Economy of Ukraine, Kyiv, Ukraine, Monday, November 10, 2008
KYIV - A Memorandum of Understanding [MOU] between the Government of Ukraine and the Government of the United States of America, which makes an important foundation for Overseas Private Investment Corporation (OPIC) to resume its work in Ukraine, has been signed on November 10, 2008.
On behalf of the Government of Ukraine the Memorandum has been signed by Bohdan Danylyshyn, the Minister of Economy of Ukraine, and on behalf of U.S. Government the MOU has been signed by the Ambassador of the United States of America to Ukraine William Taylor.
CONSIDERED TO BE THE FIRST STEP
The signing of the MOU between the two governments is considered to be the first step in establishing practical mechanisms of dispute settlement with the Overseas Private Investment Corporation.
Ukraine has a very strong interest in the further attraction of private American investors that can insure their risks with OPIC, stated the Minister of Economy of Ukraine.
At the same time, Ambassador William Taylor underlined that sighing of the MOU is a very important step for the return of OPIC to Ukraine and an important sign that the United States of America believes in Ukraine and its economy.
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4. LATEST AVAILABLE DRAFT OF THE MOU ON NOV 10, 2008
May not be the final copy that was signed.
MEMORANDUM OF UNDERSTANDING
between the Government of Ukraine and the Government of the United States of America
The Government of Ukraine and the Government of the United States of America (hereinafter “the Parties”),
Confirming their intention to cooperate with the aim of developing relations between the two countries in the area of investment;
Desiring to ensure favorable conditions for investment including the principles of equality and mutual benefits and the provisions of the Treaty Between the United States of America and Ukraine Concerning the Encouragement and Reciprocal Protection of Investment, with Annex, and Related Exchange of Letters, signed at Washington March 4, 1994; and
With regard to the situation which has developed in connection with the investment of Alliant Techsystems Inc. to ensure operation of closed- end Joint Stock Company Alliant Kyiv;
Achieved the following understanding:
Section 1
The Parties welcome and admit the importance of the agreements that are envisioned to be concluded between the U.S. Overseas Private Investment Corporation (hereinafter: OPIC) and an economic entity (hereinafter– the Enterprise), selected by the Government of Ukraine with OPIC’s approval, as described in Section 2 of this Memorandum of Understanding, and, in accordance with their respective national laws, intend to facilitate the implementation of these agreements.
Section 2
The Parties take into account the agreements (hereinafter – Agreements) regarding resolution of the situation involving the investments of Alliant Techsystems Inc. into Alliant Kyiv. These Agreements envisage that:
(i) OPIC would transfer to the Enterprise the rights assigned by Alliant Techsystems Inc. to OPIC in connection with the payment made by the latter (hereinafter – the Rights). The transfer of rights would be made in accordance with the legislation of Ukraine.
(ii) The Enterprise, in its turn, would transfer money in favor of OPIC in the amounts and during the time period specified by the Agreements.
The Parties support OPIC’s willingness to consider the full and proper performance by the Enterprise of the payment and due implementation of other obligations under the provisions of the Agreements, as mentioned in the paragraphs (i) and (ii) of this Section as final resolution of the situation that emerged in connection with the investments of Alliant Techsystems Inc. in Alliant Kyiv.
Section 3
The U.S. Government confirms that OPIC will resume support of investment projects implemented in Ukraine by U.S. private investors, upon satisfaction of the conditions outlined in the Agreements for the resumption of such support.
Section 4
The Parties acknowledge that the provisions of this Memorandum of Understanding do not constitute and should not be considered as constituting any admission on behalf of the Ukrainian Side of any commitment, debt, complaint or other claim of any company, including those involved in the resolution of the situation with regard to the investments of the Alliant Techsystems Inc.
Section 5
Each Side will endeavor to resolve any differences regarding the interpretation and/or application of provisions of this Memorandum of Understanding by holding consultations between the Parties.
Section 6
The Memorandum of Understanding enters into force upon signature by authorized representatives of the Parties.
Modifications and additions that are integral part of this Memorandum of Understanding can be incorporated into it upon mutual written consent of the Parties.
Signed in duplicate at Kyiv on November 10, 2008, in the Ukrainian and English languages. Both copies have equal value.
For the Government of Ukraine: For the Government of the United States of America:
Minister of Economy of Ukraine U.S. Ambassador to Ukraine
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LINKS: http://www.mfa.gov.ua/usa/en
http://www.me.gov.ua/control/uk/publish/article?art_id=123973&cat_id=38461
http://www.kmu.gov.ua/control/uk/publish/article;jsessionid=21D3C39E34
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U.S.-UKRAINE BUSINESS COUNCIL (USUBC)
1701 K Street, NW, Suite 903, Washington, D.C. 20006
E-mail: usubc@usubc.org; LINK: www.usubc.org