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Ukraine: Tough Road To Running Your Own Business

RFE/RL economics correspondent Robert Lyle has just returned from a tour of privatization projects in Russia, Ukraine and Belarus. Organized by the World Bank's International Finance Corporation (IFC), the tour took a small group of international journalists to dozens of sites in major cities, small towns and on farms.

Kyiv, 31 March 1998 (RFE/RL) -- The old physiology institute auditorium in Kyiv was hushed one morning recently as auctioneer Yuri Ganulyak told 35 potential bidders that nine properties -- ranging from a fruit and vegetable shop to an unfinished pre-cast concrete factory -- are for sale.

"We'll start the bidding for the unfinished construction site in the Industrial Center in Brovary at the starting price of 92,115 hryvnas," he says in the auctioneer's sing-song style. As bidders silently raise a card with their assigned number, Ganulyak calls the bid up 10,000 hryvnas at a time.

Single bidders, some with friends and colleagues, quickly confer as the price rises past 200,000 hryvnas. Soon, only two bidders are in the running and Ganulyak points his huge gavel first at one and then the other as he recites the size of the property, its attributes and the current offer.

Then suddenly, it's all over and Ganulyak calls out "sold for 300,000 hryvna" and bangs his gavel to the applause of the audience.

The scene is a fairly common one in Ukraine this days, despite the country's poorly functioning economy and elections which have left the future in some doubt.

With the help and guidance of the International Finance Corporation (IFC), the World Bank arm that deals with the private sector, and huge infusions of financial aid from the British Know-How Fund and the U.S. Agency for International Development, Ukraine has seen more than 44,800 enterprises or sites -- all called objects -- privatized by the end of January, practically completing privatization in this business sector.

This is the small- and medium-size enterprise privatization program, which is separate and distinct from the large scale mass privatization program and from the privatization of land and reorganization of farms.

On this small and medium scale, the goal has been to get as much of the state-owned businesses, shops and service providers into the private sector as quickly as possible.

At the auction in Kyiv, Viktor Aralov was the successful bidder, a large bearded man who grinned widely as he signed the papers for the property he had purchased.

Aralov is the manager of a medium-size joint stock company called Kram which he and some friends started 10 years ago to repair electric motors. They've outgrown their current premises and want the unfinished plant with nearly 11,000 square meters to greatly expand their business.

Aralov says his company has the money to buy the site, but will need some additional capital to finish the building the way they want it. But he's confident that some companies in Italy and Germany which make equipment they need will advance the capital.

The auction in Kyiv that day brought in 1.7 million hryvna for the nine properties, 5.5 times higher than the starting prices. The money goes to the State Property Fund which turns the proceeds over to local and national governments.

So far, say IFC officials, these small and medium scale auctions have brought in more than 90 million hryvna, with expectations of another 40 million hryvna yet to come.

There were 63,000 unfinished construction sites all over Ukraine that were abandoned when the Soviet Union broke up. Many are large apartment and office complexes which require major investments to renovate.

Large unfinished buildings selling for 300,000 hryvna at an auction can require 1.5 million hryvna to 100 million hryvna to complete construction, making these major projects.

But even buying a neighborhood shop to turn it into a private business is no easy task. Anriy Kravchenko was only 25 years old when he left the air force, talking with friends about what they would do next. They decided to pool their money and bought the old soviet hairdressers shop in an apartment building on the Rusianivska Embankment.

As part of the purchase of the shop, they had to pay the equivalent of 300 dollars for the old equipment as well. Only a single chair was worth saving, but Kravchenko says they didn't really intend to keep it as a beauty shop.

It was only after they began the ardous task of totally revamping and modernizing the shop did they discover they were required to maintain the same kind of business for two years and to retain all the old employees during that period.

Kravchenko told a group of visiting foreign journalists recently that in all, he and his partners put about $150,000 into the shop, but it was a "very difficult" road they had to follow.

"The biggest problem proved to be the renovation of the premises," he said, "because of the number of authorities who supervise repair and renovation works." What was most frustrating, he said, is that they kept telling all the authorities they were trying "to do something good, trying to improve the situation," yet no one really cared.

Still, by persevering, often waiting two weeks to a month for each of dozens of required permits, the Schwarzkopf Salon was opened in late 1994. It's dazzling black and white exterior, full windows and bright lights and modern interior was quite a change for the neighborhood.

To match the new surroundings, all of the salon's 35 employees are required to take regular training in the latest hairstyles and in using the famous German cosmetic line from which the shop was named.

As with all shops located within another building, Kravchenko ad his partners are only leasing the ground under it. However, they expect to negotiate an outright purchase of the property before their current ten year lease expires.

Kravchenko says despite the problems for small business people, he intends to stick around -- if not in the beauty salon business, then in something else.

Small and medium business people across Ukraine complain that extraordinarily high taxes, coupled with frequently changing requirements for reporting on taxes, and the unstable legislative climate for business, make it extremely difficult for them to survive.

A just-completed IFC survey of small business owners in Ukraine found that they spend 30 percent of their time resolving issues with government authorities, from handling inspections to responding to official inquiries. That's nearly double the time needed by a small business person in Uganda or El Salvador.

Dealing with state authorities is no picnic either, say business people. A group of small business owners gathered recently in the Business Center in Zhytomyr oblast west of Kyiv and said corruption by officials -- mostly clerks demanding bribes to complete paperwork -- was endemic in the system. "I don't want to sound unpatriotic," said one middle aged man, but "everyone knows that getting a simple license will demand a lot of effort and money to pay for it."

The government already gets so much in taxes, chimed in several others, that it's nearly impossible to make a profit. Another major problem is the number of official inspections required, running to as many as eight per year by each of 18 different government bodies.

Said one of the business men in Zhytomyr: "There is a general common misunderstanding, from common people to officials, of such a simple idea that the state should exist and function for the benefit of people, not the other way around -- it's a cornerstone idea and unless people get this principle, we won't solve the economic crisis in Ukraine."

Despite the complaints, however, the IFC says that through eight business centers it has established around Ukraine, more than 2,000 people have been trained in modern management and business techniques and the demand is growing almost daily.

Oleg Bogatko is a young man, a composer and singer at heart, who started his own office equipment firm three years ago. He's got nine employees and the business is turning over around 40,000 dollars a month. He complains like everyone else about the bureaucracy, the taxes and the un-businesslike environment in Ukraine, but in the end, he says. it's the only way to go.