Galina Akimova
February 4, 2014 11:25 am   Sled.net.ua

Translated by Olia Knight
Edited by Isis Wisdom
Source: http://www.sled.net.ua/pravo/na/biznes/ukrainskiy/apokalipsis/blog/2014/04/02

The Constitution of Ukraine was written in 1996, when the Communist Party represented the majority in Parliament, and the country had just begun privatization. Therefore, the Basic Law does not have the word “business” in it. But there is a right to entrepreneurial activity and the guarantee of the inviolability of private property. These rights have always been violated. But in past years, the government has practically annulled them. It’s become absolutely impossible to have a middle business (they will take it away) and unprofitable to have a small business (it will not pay). If you’re not afraid of emphatic expressions, we could talk about the genocide of Ukrainian business that turned into the revolution on Maidan, regional revolts, and a new wave of mass migrations out of the country.

Instead of a foreword:

Article 41 of the Constitution of Ukraine (abstracts). Every person has the right to own, use and manage one’s property, as well as the results of one’s intellectual and creative activity. Nobody can be unlawfully deprived of one’s property right. The right to private property is inviolable.

Expropriation of such objects with subsequent full reimbursement of their value is permitted only under martial law [conditions of war] or state of emergency.

Confiscation of property can only be exercised under court order in a case, the amount and manner established by law.

Article 42 of the Constitution of Ukraine (abstracts).

Every person has the right to entrepreneurial activity that is not prohibited by the law. The State ensures the protection of competition in commercial activity [business]. Thus, abuse of monopoly position in the market, unlawful restriction of competition, as well as unfair competition are not allowed. The law determines the types and limits of monopoly.

Tyranny of a “single window”

In Ukraine, the fact that massive numbers of businesses are taken away and consolidated into the hands of obscure managers from the ruling elite is talked and written about a lot. There were even official announcements on the highest international level. In November of 2011, the World Bank director in Ukraine, Belarus and Moldova, Martin Riser, recognized in an interview with RBC that in any other other country this would have caused shock: any business can be taken away in Ukraine. “Coming to Ukraine, investors should talk with embassies and other investors to find out more about the specifics of how things work in Ukraine. They can take away one’s business here quickly. It is quite dangerous here, and everybody acknowledges that,” he said. What changed after these words?  Nothing really. The situation has only worsened.

The point is that the entrepreneurial conditions (not taking into account the enormous vertically-integrated holdings) resemble relationships in nature. Just like pilot fish eat by “sticking” to sharks, and it is called commensalism, likewise in business one middle firm uses the services of a number of smaller companies. Someone brings water to the office, someone cleans the carpets, fixes cars and computers, organizes corporate parties and banquets. Even the restaurants, beauty salons and shops not connected to a certain business are indirectly linked to the welfare of a business situated nearby through the volume of lunches eaten, goods sold and manicures performed.

From the start of Ukrainian independence, industrial production has been systematically dying away, especially with the production of military equipment. Instead, and insensibly, the service industry developed, represented heavily by the very small businesses our officials are so fond of talking about. Until a few years ago, providing services to affluent Ukrainians in all segments (from building country houses to plastic surgery) gave hopes of survival to the poorest, and future growth possibilities to the most talented. In general, this led to a thin but fast growing middle class.

However, the massive expropriation of profitable businesses that arose with this new business ethics hit the “service” industry irreparably hard. “Old clients no longer need anything – they have their own problems, new clients refuse to pay the bill, they even try to rob us by complaining about “inadequately completed orders,” says Sophia, whose small bakery specializes in exclusive sugar treats, chocolate paintings and wedding cakes (which are–just between us–very tasty). According to Sophia, they recently brought a custom ordered cake to the banquet of one of the MPs, and his security guards grabbed the box out of the deliveryman’s hands, refusing to pay.

This is not the only example of such behavior. On forums of small business owners there are stories about famous politicians arrogantly leaving restaurants without paying their bills, or their wives taking expensive household appliances (e.g.: a refrigerator) saying “I am so-and-so, I do not have the money with me, my husband will pay for it.” Afterwards, it is impossible to reach the debtors by phone, in person, or through the security guards at their residential complexes. This is currently the trend.

Why would those who bake cakes or deliver household appliances concede? Do they have a paralyzing fear of influential people, or is it hopelessness? It’s a moot question. And probably closer to the second reason: to survive, they have to agree to the rules of the game dictated to all of the “service sector” in Ukraine: to close the firm as a legal entity, and register it again as an independent contractor [Translator’s note: sole proprietor will not be used in invoices billed to clients], take cash and not complain about non-payment. Because there is nobody to complain to. The country has no competing interest groups. There are no patrons and protectors on different levels.

Everything is monopolized and nobody wants your problems anymore, even if they will get paid to solve them. The class of “fixers”, quite numerous and well paid before, has disappeared. Their services are no longer needed, since whether you come to complain or ask for something, you will get to the “same service window”.

Life in a forest of brigands

To better understand how it feels to be a regular Kyiv businessman, making a living with your creative abilities, let’s crawl into their skin (with the permission of the hostess – a mink coat) and entrench ourselves in her, now already, virtual firm: an artistic design bureau.

Anna is 36 years old. For 15 years, she’s been the owner of a small company. It all started in her third year of a construction institute (Facultyof Architecture), when she and her future husband created a design project of their parents’ shop. Then they were invited to design a fish restaurant for the parents of their classmate. And off they went…

It so happened that Anna proved to be a very popularly acclaimed designer, and her clients passed on her services to their acquaintances. In the circles of the so-called Ukrainian elite it is not customary to let strangers into your house without a recommendation. After our protagonist designed a guest room – a mantelpiece room for one of the MPs, she received a number of orders from rather respectable people. Meanwhile, her husband opened his project bureau and designed club and country houses.

Business was good. She hired a full staff and paid employees quite generously by Ukrainian standards, a “white” salary. Her employees wanted to be paid this way because most of all of them took out car loans or mortgages and took vacations overseas (it is well known that the salary level affects ones chances of  getting a foreign visa). Overall, they lived the life of the average middle class.

They had problems, of course. “During Kuchma’s presidency, our biggest problem was to compensate the value-added tax. At that time, we started textile production for hotels and began selling textiles to our partners in Croatia who built hotel complexes there. It was a large order. But we could not write off our value-added tax. And that is why our profit was too low.”

Anna also added, that she ALWAYS had to “toss” some money at tax inspectors, who had a “checklist for fines” and give them the opportunity to “identify” minor infractions. She recognizes that before the Orange Revolution her business grew slowly, the profits were small, and red tape took a lot of time. However, she did not have problems with payments from her partners – everybody paid in full, and the amount of kickbacks for state contracts was no more than 5-10%  “premiums” to intermediaries. And that is how they won a tender for the reconstruction of a sports complex and the full renovation of a ministry.

Since the beginning of 2005, with the coming to power of Victor Yushchenko as President of Ukraine, and before the crisis of 2008, Ann’s company prospered. The firm could not fulfill orders on time. Office complexes were built, foreign banks increased their presence in Ukraine, and shopping centers appeared everywhere. “We had to hire additional staff, stop designing apartments – since it took time but did not bring as much revenue as work for corporate clients; we opened several new departments like phytodesign and aqua design because they were very popular with our clients.” During this time, Anna and her husband bought a house outside the city and replaced their car, and their employees took out loans.

At the same time, a number of unpleasant events characteristic for that period, started happening.

“Starting from the middle of 2005, we constantly heard about raiders and forceful takeovers of companies, but we were not concerned. However, in 2007, unknown people tried to rewrite the registry (for some reason the registrar did not prevent them from doing so) and put the names of absolutely “unrelated” owners on the list. Lawsuits started. Absolutely absurd, they also took place in a variety of provincial courts. Krasnoperekopsk, for example. It was a regular scheme of that time. We hired a law firm that sucked out all the money we earned during that favorable period. We were able to keep the firm, but we entered the crisis of 2008 completely exhausted financially,” recalls Anna.

In 2009 they found out what unemployment was all about. The building contracts stopped, then the design contracts as well. They had to restart the design of small projects – apartments, seasonal cottage homes, and landscaping. Building contractors kept the company afloat for some time. “Painting contractors gave us client referrals, and not vice-versa like before,” Anna sadly smiles, remembering that difficult time.

By 2010 everything seemed to have come back to normal. A small but obvious recovery from crisis began. She built hopes for a new round of prosperity. Until she was faced with a harsh reality.

Her husband got a phone call from a man who introduced himself in a strange way (word-for-word “I oversee your territory on behalf of the Presidential Administration”), and offered a ridiculous sum of money to reassign our business. My husband refused, reasoning that an architectural bureau was not a gas station, and that we did not have any “extras,” so there was nothing they could hold against us.

If he had only known how wrong he was …

Soon, the bureau received a lawsuit for an astronomical amount of money under a contract for which it was paid “pennies” (in comparison to the lawsuit amount): something in the whereabouts of $2,000 Euro. The lawsuit amount was equivalent to almost $200,000 Euro. The client accused him that the project architect made a mistake that made it impossible to continue construction already under way, and therefore he demanded damages.

“The most amazing fact in this story is that the lawsuit was brought by our old acquaintance, with whom we have done business a number of times,” Anna says. He would not pick up his phone so as to avoid any explanations, but I managed to meet with him anyway. During the meeting, he said: I am sorry, I would not have done this, but they took my construction project that had already started, and I lost invested money, credit line, and such.” What is even more interesting is that despite the “mistake” by the architect, all necessary permits were issued. And the construction is in full swing. Expert decision about the mistake was issued by a body that is not competent in this particular area. But the court apparently decided to satisfy the claim.”

In the process, we discovered during the lawsuit that suing for alleged mistakes and shortcomings in one’s work is now the most common way to avoid paying builders, renovators, and even seamstresses. Those who cannot pay the amount specified in a lawsuit, and whose business does not interest the claimants, are offered to “work the money off” free of charge. For example, it is offered to them to renovate ten apartments. Or to sew a free collection for the wife of an important “ghoul,” who “dabbles” in fashion design. A new type of slavery developed during this post-industrial period.

Anna’s husband was also offered to work free of charge on one of the state-owned projects, the one no one wants to work on because of its enormous, up to 50% kickbacks. On top of that, this is beside the fact that he must also register his architectural bureau under the name of other people.

“But why should new owners have a creative business without a project author?” I ask perplexed. “My husband also asked them the same question, and they said – your firm has the reputation, people know about it, we are only interested in the firm’s name, we will bring our own staff, we have many graduates from building institutes.”

Anna’s situation is even more confused. It has been a year since her firm ceased to exist officially. Instead, she has a number of independent contractors. “My old clients no longer build offices and houses here – they buy and sell them in Poland, Czech Republic, Hungary. Along with the residence permit. New owners of businesses and expensive apartments ask to conduct all the business in cash. However, I could not run my firm as an LLC in cash. That is why we had to liquidate. I have to work under oral contract, with a high probability of nonpayment. It is impossible to work with state clients: if earlier we had a ministry as a direct client, now we have a number of intermediaries. And you will never know at what stage your money will be stolen. We do not do phytodesign anymore. Our last client was an MP from Donetsk who refused to pay for the greening of his estate in Koncha Zaspa (resort city near Kyiv), saying that he could get those tulips in Shevchenko Park, and that his drivers could plan them, and therefore our work was worth nothing. And that we are all fat cats in Kyiv. As for the building and renovation contracts, we try to at least get a partial payment. And also in cash. Because our partners who work as painters have paid the price obeying the law: they signed the contract, performed the work, gave them the invoice, the deed, and they refused to close the deed and did not pay them. Saying “your work is bad, and we have no money in the budget.” By the way, this was the renovation of a governmental building.”

Government Hunger Games. Why?

It is always difficult to explain the obvious. Why did the government destroy the power of medium-sized businesses – the part of society that was its safety “airbag,” the source of “food” for the budget, the foundation for the basic balance in the economy and competition between the clans? That’s why it’s just like an old anecdote: “bought the driver’s license, but could not buy the ability to drive.” It’s a grandiose mistake of governance on a national scale.

Yes, the government made a simple mistake by starting to monopolize the profitable businesses that made easy targets – not oligarchs who could fight this (they were left for “dessert”), but defenseless small businesses and the middle class.

According to journalists Sergey Shcherbyna and Sergey Lyamets in an article about the current president’s third year in office (Economic Pravda, July 18, 2013), the major problem was that the steering wheel of almost unlimited state power was in the hands of a group that had that power but lacked their own funds [had no assets of their own]. So, to stand on a par with other oligarchs, they began feverishly collecting businesses. And since rather specific people were involved in this, instead of an auction of unprecedented generosity the country ended up with the attraction of undue greed. The businesses were not bought, but practically taken away. According to our colleagues, “the wave of expropriation affected mostly medium-sized businesses. Nobody thought about going after the large oligarchs.”

The tendency was finally formed by the end of 2011. In 2012 the Director of BFM Group Ukraine, Andrey Stadnyk, wrote in his blog on the LIGA portal that the usually enumerated risks by the government – from high prices on gas to unfavorable global environment do not scare potential investors. “The real problem lies in state racketeering and 100 per cent possibility of subsequent raids on business. That is what all investors are afraid of.”

Currently, there is a systemic takeover program of large and medium-sized businesses in Ukraine. This program is in no way related to the re-privatization of assets earlier stolen by the government or private raiders. There are no stupid raids and extortion in the tradition of the 1990s. Nobody acts through “recto thermal cryptoanalyser,” and no one is taken out into the forest. In Ukrainian business they dismantle everything acquired through the blood, sweat and tears of the past 20 years in a simply lawless fashion.”

In 2013, the final result of such an approach manifested itself: instead of businesses that pay the entire amount of taxes and full salaries to their employees, there appears a forced form of legalization – individual contractors.

I remember well, how in April of last year the Head of the State Registration Service, Dmytro Vorona, wrote on his Facebook page, perplexed that “… in only the fist quarter – 8,700 legal entities ceased to exist, meanwhile over 57,000 new sole proprietors were registered.” By June, this number grew to almost 80,000. Business moved into the shadows.

Evacuation became the main tendency in the fall of 2013. At the same time, the acting businesses started selling at the price of equipment. This did not happen even during the crisis of 2008-2009. Hundreds of similar announcements appeared daily on Slando [classifieds board], and the majority of sellers were willing to bargain, they listed “moving” as the reason for selling. Ukrainian business fled the country in masses.

So, how the country started off the 2014 year is pretty obvious – with barricades on Maidan. The question is whether the government understands why it is not loved so strongly? And whether it intends to stop running the same flywheel eating away at business and to return to its citizens the constitutional right to the inviolability of private property and free enterprise?