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 Meanwhile, business, the main source of national wealth, is suffering great losses.
Analysis & Commentary: By Diana Smakhtina, Vice President, Corporate Governance, Restructuring, Kharkiv Office, SigmaBleyzer
Dzerkalo Tyzhnia,Mirror Weekly # 22 (750)
Kyiv, Ukraine, 20-26 June 2009
UKRAINE INVESTORS AWAIT SYSTEMATIC DECISIONS ON REFORM
Meanwhile, business, the main source of national wealth,is suffering great losses.
Analysis & Commentary: By Diana Smakhtina, Vice President,
Corporate Governance, Restructuring, Kharkiv Office, SigmaBleyzer
Dzerkalo Tyzhnia, Mirror Weekly # 22 (750), Kyiv, Ukraine, 20-26 June 2009
How much money does an investor want to put into a project or pay for corporate rights even if he has quite substantial resources? Naturally he won’t immediately pay as much as the seller asks. An investor wants to be sure that he’s not overpaying. But he also doesn’t want to underpay, because his goal is to “bring home the bacon” from the invested money. That’s why his investment needs to be efficient.
These are all truths you’ll find in any textbook or from experience working in the investment market, where investors aren’t afraid to go. But any knowledgeable and careful investor (and they’re usually always careful) is afraid of trusting Ukraine with his money.
And we’re not just talking about foreign investors. Ukrainians with free capital (or those who seek it for professional investments) are also not very confident in our investment market. Ukraine has definitely scared off foreign investors for what seems will be a long time.
The crisis isn’t the issue. Investors were weary about trusting their money before the crisis, are afraid to do so now during the crisis, and will be afraid to once it’s over.
According to the State Statistics Committee, in the first quarter of 2009, Ukraine received a mere 24.4% of direct investments as compared to the same period last year. Those who need it most – industrial enterprises, those who drive modernization – received only 9.5%, while earlier this figure exceeded 22%.
UKRAINE IS REAPING THE FRUIT OF ITS UNSYSTEMATIC WORK
A crisis is a crisis, but decisions could have been passed as usual, new concepts could have been written, and measures could have been taken to improve the investment climate. All according to Parkinson’s Laws: "Work expands to fill the time available for its completion." But there’s no money and there won’t be any. Ukraine is reaping the fruit of its unsystematic work.
Breaking the practice of unsystematic work in Ukraine’s political system is a difficult and increasingly inevitable problem. It’s already a political problem. As a systematic approach would recommend, this problem needs to be tackled piecemeal, while understanding the contours of the whole system.
True, there are also problems when it comes to understanding the entire system in Ukraine. The most difficult issue to resolve (if it even can be resolved in the near future) is that of the end body that should ensure implementation of systematic decisions regarding the political system. It’s “jammed” our legislative and executive branches.
Without it, it is impossible to pass systematic decisions regarding the political system. But despite the hopelessness of the problem, this doesn’t mean that we can’t systematically work out or at least prepare to work on the functioning of separate units.
We can and must look for an answer to the question “what should we do?” starting, let’s say, with the investment market. Without laying claim to the sole correct truth, let’s take a look at one of the approaches to the systematic analysis of its problems.
Legislatively, everything directly related to investment market regulation is outlined in the Laws of Ukraine “On Investment Activity” (1991) and “On Foreign Investments” (1992). As we see, there was a timely understanding of the need to document investment legislatively for the investor to feel that his investments are protected.
Back then even the media cast the idea that the Ukrainian law on foreign investment was one of the best and its advantages were actively discussed. But if we continue with this example, we’ll end up saying: “If everyone is walking out of step, there can’t be someone walking in step.” If all the parts of a high order system and its related systems aren’t systematically linked, then even one ideally tailored part won’t work.
UKRAINIAN STOCK MARKET
Let’s pause at one of the investment market’s systematic links – the stock market. The birth of the Ukrainian stock market was tied to the privatization process. Herein lies the reason for all the stock market’s problems: the grimaces of mass privatization in Ukraine disfigured its face too.
In the 1990s laws were appearing one after another, and while they were necessary, they were drafted according to the principle “faster, faster, we can’t do without this!” These include the Laws of Ukraine “On Business Entities” (1991), “On Securities and the Stock Market” (1991), “On the National Depositary System and Peculiarities of Electronic Circulation of Securities” (1998).
There’s no use now, given the experience gained in recent years, to reproach and blame those who were there at the beginning for all the stock market’s future problems. What was done had to be done. But our state wasn’t able to to take a comprehensive and systematic approach to the system’s development.
The financial market regulators that emerged, feverishly trying to correct the mistakes in regulation given the lack of necessary legislative decisions, programs and executive government decisions, issue numerous bylaws meant to put into operation mechanisms for implementing laws. But they don’t exist!
To illustrate the abovementioned regarding the price an investor agrees to pay for corporate rights, let’s take for example the problem of price manipulation on the stock market. An investor wants to know the so-called fair price.
But the Ukrainian stock market is organized in such a way that this is practically impossible. Open trades account for less than 10% of the market, and there too are questions on determining the fair price (only now are they using measures to switch from market quotation to market orders).
Over-the-counter trades account for more than 90% of the market. There is no organizer of over-the-counter trading because that’s how the Law of Ukraine “On Securities and the Stock Market” (2006) set things. Article 20 clearly states that the trade organizers on the stock market will be stock exchanges.
Only today was an attempt made in the amendments to the law on state regulation of the securities market to determine an organizer not tied solely to the stock exchange. For comparison, in the Russian securities law (ratified in 1996) the trade organizer isn’t fixed to the stock exchange, which allows for a stricter approach to price manipulation.
By the way, that very Russian law (Section 2, Article 51 of the 2006 version) legislatively introduced the concept of manipulation and unfair emissions and sanctions for violating these legal requirements (Section 3 of the 2002 version). In Ukraine, the regulatory authority – The Securities and Stock Market State Commission (SSMSC) – is only now patching up this hole with normative documents.
By the way, investors were hit hard by the crisis, not lastly due to price manipulation. An investor can find out about a relatively fair price from the stock exchange index (I remind you that this is less than 10% of the market). As for prices for more than 90% of the market, at best he will find out at the end of the quarter from the SSMSC integral index.
The over-the-counter market in Ukraine isn’t regulated. There is only the semblance of regulation through the regulator’s package of systematically unrelated normative documents. As an example, we’ll give you the information about the state of the market that was posted on the SSMSC website on June 1, 2009.
The analysis of the activities of the professional market participants was from 3Q 2008. The integral index – from 4Q 2007. But the integral index is the indicator that is calculated based on over-the-counter trades using traders’ reports. These are the 90% of over-the-counter deals that the investor is learning about only as of the fourth quarter of 2007.
UKRAINE'S INVESTMENT LEVEL BELOW THE BAR
We can provide many more examples of the lack of systematic decisions on the stock market, which certainly lowers Ukraine’s investment level below the bar. Moreover, feverish and unsystematic attempts to improve the investment climate are being made directly in legislation on the investment market.
Draft law No. 3065 on introducing changes regarding investment activity is currently being readied for its second reading in the Verkhovna Rada. As always everything was done in a rush manner.
As always, we got burnt – we rushed to write it and approve it…And the fire is the problem of reconsidering the level of state interference in the market, an issue which is heatedly being debated today throughout the world.
The draft includes a proposal to supplement Article 2 of the Law of Ukraine “On Investment Activities” with a concept of investment activity. Moreover, the authors are formulating it such that it will require documents related to all forms of private investment to be in agreement with “methodological recommendations approved by the central bodies of executive power on securing state economic policy”.
One wouldn’t want to say that the style of preparation and approval of law and bylaws in Ukraine is completely unprofessional. But if drafts aren’t systematically coordinated with the environment, and the cause and effect of the proposed norms aren’t tracked.
Let’s take for example the recent case with information about Ukraine’s place at the “bottom of the list” of international corporate management ratings. In a hurry, so as to make sure we make it by the end of the year, we start writing a law “on improving it.”
And this, while the law on joint stock companies is just about to come into effect, even with a two-year extension, and while the regulator and stock exchanges are unable to strictly control the disclosure of information to issuers. Nevertheless, investors are very interested in this rating.
This picture we painted turned out rather bleak. It is naive, at the very least, to take on the task of instantly breaking the entire bureaucratic mechanism of political system formulation. But at the same time, shaping elements of the political system based on a principle of expediency or “faster, faster, we needed it yesterday” has become engrained in our bureaucratic apparatus.
BUSINESS, MAIN SOURCE OF NATIONAL WEALTH IS SUFFERING GREAT LOSSES
Meanwhile, business, the main source of national wealth, which is suffering great losses, is not requiring that those it has trusted to manage the wealth work according to 21st century standards.
The created infrastructure, regulations, qualifications and mentality of market experts are all out-dated. We all lived in that time and created stereotypes of behavior based on the level of a bazaar – the investor isn’t first – his money is, and we want it now and more of it. And this is the answer to why the influx of investment into Ukraine is dropping.
We can’t patch up the holes in the stock market any more in our example. If Ukraine is to truly switch to western standards of working with investors, if we add new norms to old laws or normative documents, this will only deepen the problems related to the lack of a single state policy on stock market regulation.
In Directive 2004/39/EC of the European Parliament and Council, Article 19 of the section on provisions to ensure investor protection outlines required conduct of business obligations when providing investment services to clients. Meanwhile, Article 21 is about the “obligation to execute orders on terms most favorable to the client.”
GOAL SHOULD BE TO ATTRACT INVESTORS
Instead of patching up holes in legislation, there needs to be a strict goal-oriented approach. And the goal is to attract investors. Then, instead of endless disputes between competitors and them stepping on each other’s toes, a sound model with be developed for a Central Depositary.
A basic SWOT analysis of the strengths and weaknesses of different levels of state or private ownership will provide an answer to the question of how to reform the Ukrainian depositary system. Investors are very troubled by this issue given the scandals in Ukraine involving confiscation of property.
A systemically sound model for modern trading platforms, normative requirements for software and technical equipment, and obligations of traders and qualified investors will help resolve the issue of how many stock exchanges and traders there should be on the stock market.
The crisis should force the market to come out of it renewed. If there’s a goal-oriented approach and the proposed goal is let’s say to attract investors, then systematic procedures will be chosen. These procedures require a conceptual approach to legislative and normative provisions and to defining the level and quality of regulation. Afterwards, given the causes and effects, a package of draft documents is prepared.
This package should be proposed to the Cabinet of Ministers and coordinated with other parts of the system, and submitted to the Verkhovna Rada. And look, during the recession, we’ll have time to prepare for the economic recovery. By that time, perhaps Ukraine will already have competent legislative and executive bodies.
The new head of the SSMSC Serhiy Petrashko told the media that one of his priority tasks is to analyze the legislative and normative base. Now is the time to provide investors with the systematic decisions they’ve been waiting for.
FOOTNOTE: The above article was translated from Ukrainian into English by the U.S.-Ukraine Business Council (USUBC), Washington, D.C.. The SigmaBleyzer Emerging Markets Private Investment Management Group is a member of USUBC.
Link in English: http://www.mw.ua/2000/2020/66475/
Link in Ukrainian: http://www.dt.ua/2000/2020/66475/
Link in Russian: http://www.zn.ua/2000/2020/66475/ |
