April 3, 2018
by Alexander Gordin
™
(Part I of the article reprinted from the June 2017 issue)
Hypothesis:
Given Ukraine’s current economic and geopolitical situation, one of the most beneficial steps the US government, business and NGO community can take, is to encourage significant external and internal direct investment into the country’s economy.
Although the US Government has had some success in attracting and supporting American direct investment into Ukraine, those investment amounts are far from sufficient. US investors new to the Ukrainian market are wary of the country’s reputation for corruption, difficulty in doing business, threats from Russia and lack of financing options.
A second and much more viable economic development option, would be to support and enable direct investment by the successful Ukrainian business people who have amassed sufficient capital and are much more comfortable and adept in investing in their home market.
One problem with pursuing that option are high Western standards, which often preclude US government development agencies and public US investors from working with this potential class of investors. This is due to the fact that for the last twenty-five years, practically all business people in Ukraine had to operate under a certain set of conditions widely considered “grey” and in many cases “black” in the West.
Some of these “grey” conditions are lack of financial transparency, inadequate corporate governance, use of yellow press, use of cash, as well as offshore accounts to conduct operations, bribery and use of adverse political influence.
In their attempts to succeed, some folks in Ukraine went beyond previously acceptable business norms and crossed the proverbial line even further by engaging in criminal “black” behavior – graft, extortion, corruption, tender rigging and illicit drug trade.
To date, these grey conditions have presented significant challenges for the IFIs, development agencies and regulated financial US investors. Yet, it is vital to recognize the necessity to find an acceptable solution that allows Ukraine’s economy to reap significant benefits from the anticipated increase in direct investment and low-cost, long-term financing.
It is also very important to understand that the proposed Grey2White (G2W)™ initiative aims to broaden and scale up very important development and capacity building work already undertaken over the last quarter century by IFIs, such as IFC and EBRD, USAID; development agencies such as OPIC and USTDA and financial investment communities. Those initial efforts, although quite effective, focused on a relatively small sample of Ukrainian companies and were undertaken during a different stage of the country’s development.
Initiative
The G2W™ initiative will only work with those companies and individuals, who will be able to create meaningful economic impact in Ukraine, after undergoing the conversion process. G2W™ will not in any way target those convicted of the “black” behavior, as their reputation gap is un-bridgeable within the scope of the project.
Thus the question becomes, is it possible for US stakeholders to create an environment and a broad platform from which so-called “grey” Ukrainian businessmen seeking to utilize US financing, equipment, services and franchises, as part of their major investment programs, become “bankable” under Western standards? If the answer is “Yes.”This type of conversion will provide hundreds of millions, if not billions of dollars in direct economic benefit and enhanced geopolitical security to Ukraine and to the US.
If the answer is “No,” these businessmen will either be forced to forgo the planned capital investments, or seek alliances with other grey, or black global actors in countries like Russia, China, Brazil, Iran, etc.
It is the fundamental belief by the creators of the proposed initiative that given a concerted effort by the US and Ukrainian stakeholders to develop and implement realistic procedures to increase corporate transparency, introduce financial standards, address any existing reputation issues head-on and provide reputable outside management and board oversight, it is possible within short to medium time-frames to bring these so called “grey” businessmen and their respective projects up to elevated western standards, mitigate investment and reputation risks and affect substantial economic growth in Ukraine.
Thus we hereby propose the following:
Select three-four financially viable projects sponsored the “grey” Ukrainian actors and use them as a pilot to develop, refine and implement an effective conversion strategy to bring that project up to acceptable Western standards.
From the government side, we propose to involve the US Commercial Service, USTR, US Embassy, Ukrainian Embassy, Cabinet of Ministers of UA, members of the US Congress focused on UA issues, OPIC, regional Governors and local administrations in Ukraine, IFC, USTDA and the US EXIM Bank (when that Agency resumes its activities in Ukraine).
Among the NGO stakeholders we would like to see US-Ukraine Business Council (USBC), AMCHAM, Transparency International, Freedom House, Atlantic Council and US Ukraine Foundation. Additionally, reputable international law firms, audit firms, press, appropriate private individuals, corporate off-takers, financial market regulators, as well as relevant providers of US goods and services should be involved.
The framework of the proposed initiative shall be as follows:
- Initial Sponsor/Project assessment and preliminary due diligence
- Project selection and stakeholder awareness and involvement
- Project G2W™ Team building (attys., directors, advisers, auditors, suppliers, investors etc.)
- Full due diligence and implementation plan for the Western financial, FCPA and governance standards
- Investor cultivation and underwriting of the financing package
- Project development and implementation
- Monitoring and compliance
To kick off the proposed initiative, we propose an intensive education and awareness-building campaign designed to simultaneously involve all the stakeholders.
After the initial buy-in into the initiative is secured, work will begin on developing the pilot projects.
During the pilot project phase, the G2W pilot project team will be seeking to achieve specific and tangible goals:
- Fully assess the existing reputation risks, possible political influence issues, suitability for OPIC/IFC financing and Political Risk Insurance for the US project participants
- Prepare a legal due diligence report by a world-class law firm
- Recruit highly reputable and competent outside board members to the Project’s Board
- Design a comprehensive PR/IR strategy to inform stakeholders of the project and its ongoing developments
- Design and implement transparent financial audit, reporting and management accountability standards
- Develop ways to tangibly measure economic effect of the pilot project
- Continue to promote the initiative and seek to move it from the pilot project phase to full-blown implementation.
(to be continued)
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Part II (April 2, 2018)
In the nine months since the above article was first published, a number of events took place, which not only validated the concept behind the Grey2White™ initiation, but also expanded its scope and attracted top notch global professionals to the program.
Although initial premise of the program to convert grey actors in Ukraine to white bankable actors, whose economic contribution will greatly outweigh any possible transgressions they may have committed up to this point remains intact, the program has been expanded to include other emerging market countries of Eastern Europe and Central Asia. The program also grew to allow so-called grey companies to unlock their value through financial and legal transformation in order and become more bankable in the Western capital and financial markets. Part of this transformation involves tools, which on one hand provide increased political protection to the current management and to foreign investors, and on the other hand allow western companies to lock up predictable valuations and to observe the transformation process first hand.
A first rate international “scrub team” has been assembled as a multidisciplinary team consisting of former US Government prosecutors, forensic accountants, legal and financial experts and last but not least, former high-level grey operator with deep expertise in shadowy government and business dealings in Ukraine and several other post-Soviet countries.
A pilot company and its owner have been selected, as the first of four pilots companies to undergo Grey2White™ transformation in order to make them bankable by US Development Agencies for a $150 million project slated to create over 200 new jobs and to generate significant economic impact in Southern Ukraine.
In the next 60 days. key members of the G2W™ Team are expected to travel to Latvia, Kazakhstan, Azerbaijan, Uzbekistan and Ukraine to conduct additional screening and selection of the pilot companies and individuals.
In the subsequent parts of this article, we will examine the different case studies and watch the pilot candidates undergo the first steps of the Grey2White™ transformation.
(to be continued…)
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Alexander Gordin
Valerie Antoinette
Fluent In Foreign Business 