Background Information
Evaluation Part 3 (Return to Part 2)
Terminology
Several terms were used and discussed by most participants.
- Technology: This seems to apply to all levels of information, equipment, recipes,
formulas, etc. It never applied to computers or communications.
- Joint Venture: This appeared to apply to all forms of cooperation with foreigners
including: direct investment, production agreements, sales arrangements, outsourcing, etc.
- Administration: This is the government of the Oblast, located in the City of Kharkiv.
The Kharkiv City Council reports to the Oblast Administration. The Administration appears
to have a direct impact on most business activities and is interested in controlling the
companies. For example, the Oblast approves products a company can produce and market.
Sometimes this interest is as a result of owning shares in the company. Some companies
said they could not develop their plans for 1999 since the Oblast had not yet published
their plans.
All firms appear to pursue plans for vertical integration. Businessmen are convinced
this is necessary for survival. The problem seems to be as much with taxes as anything
else. As a result, the businessmen do not specialize to drive down their costs. For
example, small sunflower processing and grain milling operations are common. Since taxes
are about 130% of profits there is little incentive for increased profits so long as the
firm can survive.
Regional Business Assistance Center (RBAC)
RBAC reported that relations between the USA and Ukraine are not good as a result of
the lost jobs due to the cancellation of the Ukrainian control systems for the nuclear
power stations going to Iran. Therefore, USAID decided to undertake the Kharkiv
Initiative. The Ukrainian government delegated the overview of the program activities to
the Kharkiv Oblast Administration. The Oblast appointed consultant Edward Simpson as
advisor who works with Andy Bihun in the US Embassy.
Mr. Kolot remains in charge of the Oblast Department of Economic Development and is
doing a good job. In the City of Kharkiv, Yevgen Nazarov, Deputy Mayor is now very
important and Mr. Anatoliy Dulenko, CEI's former contact person on the City Council,
handles investment projects. Mr. Dulenko was formerly CEI's contact person.
In August 1998 there was an economic crisis in Russia and Ukraine. In Ukraine, 52% of
the companies are closing and the average wage has dropped from $120/month to $40/month.
Inflation is about 5% per month and interest rates about 80% per year. Presidential
elections are coming up this fall and the government has started printing money. Inflation
and interest rates can only rise! People are now slightly less optimistic about the future
than before the current economic crisis.
Offices similar to RBAC are now open in the following Ukrainian cities: Lviv, Rivne,
Odessa, Mykolaiv, Kerson, Zaporizhia, Donetsk, Kharkiv, Kiev and in Chi sinau, Moldova.
Technical Manuals
The two Technical Manuals had been completed by RBAC. CEI decided to print 10 sets of
color manuals and 190 sets of black and white. RBAC eventually decided to print the
manuals in-house. Color copies were given to the Oblast (2 sets), Tim Dubel (USAID),
Leland Cole, James Silberman. A distribution list for manuals was left with RBAC and they
will send out letters and copies.
Energy
Energy is a major concern to all Ukrainian companies since its cost is so high. Many
companies have invested in more energy efficient equipment or had taken other steps to
reduce energy costs. One of the energy savings measures was to avoid heating office areas.
As a result, many meetings and meals were held in rather cold surroundings.
Raw Materials
Throughout the following discussion there is much reference to the availability of raw
materials.
- Sugar: For all sugar companies, 1998 was a very bad year due mainly to the dry weather.
The harvest was very low and Ukraine did not even produce enough sugar beet to meet its
internal needs. Thus the plants could sell all the sugar they could produce. Most sugar
companies do not pay the farmers directly for the sugar beet. Rather, they process the
beet and retain a percent, usually 40%, for their service. As a result, the sugar plant
ends up competing with its suppliers. Moreover, sugar prices from the farmers are not
regulated, but prices from the plant are. This enables the farmers to undersell the plant
and makes it important for the plant to differentiate its products.
- Milk: Most dairies are having difficulty getting enough raw milk. Part of the problem is
that they are often short of cash to purchase milk. Moreover, when they do pay the farmer,
the cash goes into the farmer's bank account. Since most farmers are in debt to the bank
or government, the money is withdrawn from the account to pay those debts and the farmer
does not see the cash. A third reason for the low milk supply is that cows on collective
farms produce only 10% of the milk privately owned cows produce. This is mainly due to the
lack of incentive for the farmer to produce more milk.
The Kharkiv Oblast currently gets 800 tons of raw milk per day. More than 4,000 tons of
raw milk are needed daily to meet the capacity of the oblast dairy plants. It is possible
that some rationalization is called for. If cash were paid for the raw materials, supply
would probably increase by 40% or roughly another 320 tons per day.
- Meat: Some companies report a shortage of meat while others do not. Part of the problem
is due to a shortage of animals since the herds have been depleted to raise cash. The
major problem appears to be lack of cash to purchase the meat. There are more than 140
illegal meat processing plants in Kharkiv alone which reportedly pay cash. The legal
companies cannot afford to pay cash and thus the illegal ones buy up the meat supply. The
local authorities are well aware of these illegal firms but are reluctant to close them
down. There also may be some problem concerning the cost of meat due to VAT. CEI was not
able to confirm or understand this.
- Fruits, Vegetables, Other: Farmers are short of cash with which to purchase fertilizers.
Therefore, their yields suffer.
- Edible Oils - Sunflower seed oil: Ukraine currently produces, according to the Edible
Oil Institute, 1.5 million tons of sunflower seeds. In 1998 they exported one million tons
and are processing the remaining amount in Ukrainian plants. Weather permitting, Ukraine
could produce nearly 2.5 million tons of sunflower seeds in 1999. Production requirements
at oil producing plants in Ukraine could use all of that amount.
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