Grey2White Initiative – the journey continues (parts I and II)

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(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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To Invest In The Rise Of The Emerging Market Consumer Start By Looking In Their Fridge

TASSOS STASSOPOULOS, THE ALLIANCE BERNSTEIN BLOG 

It’s not easy for investors to grasp the dynamics of consumer spending in diverse emerging markets. We think the best way is to look inside the refrigerators of people across the developing world.
Refrigerators are more than just iceboxes. Their contents speak volumes about their owners. And their proliferation signals a country’s economic progression. So the fridge and its contents can serve as a guide for investors seeking to tap emerging consumer spending, which is projected to grow eightfold to US$63 trillion by 2030, according to our forecasts, based on OECD data.

Devices Are Deceiving

Emerging consumers defy simple classifications. Some analysts look at income, assets or people per room as a framework. In our view, these indicators are flawed. For example, a Living Standard Measure counts the number of certain items in a home to determine a household’s socioeconomic status. So a person with a laptop, TV, mobile phone and stereo could be classified as rich. Yet in our field research, we’ve met people in countries like Ghana whose ramshackle homes are full of electronic devices but who are quite obviously poor.

Kitchens offer a more honest reflection. Behind the fridge door is an abundance of information that can help us understand who emerging consumers are and how they’re likely to spend money in the future. We’ve analyzed the contents of 70 refrigerators in rural and urban homes that we visited across 12 developing countries from Chile to China. While it may not be a statistical sample, the initial patterns we’ve seen suggest that the inside of a fridge mirrors the status of a home.

Food for Thought

In working-class homes, the fridge is used mainly for efficiency items (Display). It includes basic foods such as eggs, fruits and vegetables and some pre-cooked food. Middle-class fridges stock more indulgences, from alcoholic beverages to chocolate and cheese. And for affluent households, health is a primary concern. So expect to find foods like low-fat Yoghurt or 100% fruit juices.

Why is this important? Because once we understand how people’s tastes change as their income levels increase, we can also figure out how to invest in the consumer evolution as the refrigeration revolution sweeps through a market.

The display below shows penetration of refrigerators in different countries as income levels increase, from 1980 through 2013. In developed markets, more than 99% of households have a fridge. Brazil isn’t far behind. In China, about 86% of homes had a fridge. But in India, by contrast, only about 27% of households were able to chill their food. This is likely to increase rapidly as annual per capita incomes reach US$3,000, which seems to be the tipping point for rapid adoption of refrigeration.

refrigeration revolution The AllianceBernstein Blog

Indulgences in China

Our research suggests that China is in the indulgence phase. So companies that make products like beer, butter and chocolates should benefit from rising incomes. Indian families are still buying fridges, then filling them with efficiency items like milk, yogurt and ready-made sauces. Brazil has already shifted toward health mode, which should see higher-end food producers draw more spending.

Of course, specific investing conclusions differ in every country. Market environments and company fundamentals must also be studied to identify successful portfolio candidates. But by starting with refrigerator shelves, we think investors can gain vital intelligence to understand the people, lifestyles and spending scenarios that will unlock earnings growth in emerging consumer companies

This article originally appeared at The Alliance Bernstein Blog. Copyright 2014.

Read more: http://blog.alliancebernstein.com/index.php/2014/06/20/cold-facts-in-emerging-market-fridges/#ixzz35M4aCKN2

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In Manufacturing, the U.S. Is Surprisingly Competitive

By Peter Coy, BusinessWeek

Forget what you think you know about high-cost and low-cost countries for manufacturing because there’s been a dramatic shakeup over the past decade. According to a report by Boston Consulting Group, the U.S. has shot up the ranks of competitiveness, while Brazil has foundered badly.

The report ranks the world’s 25 biggest exporters of manufactured goods in terms of direct costs of production—factoring in wages, productivity, and electricity and natural gas. Indonesia and India are the cheapest and next-cheapest in terms of those direct costs. But they have other problems such as poor infrastructure, says Justin Rose, a co-author of the report and partner at BCG. Brazil’s costs have gotten as high as those of Western Europe. Mexico, on the other hand, has made big productivity gains.

The 10 biggest exporters account for about 70 percent of global manufactured exports–and are therefore destinations of choice for most companies locating new plants. China is still No. 1, though its lead has narrowed. The U.S. has moved into the No. 2 spot, followed by South Korea, the United Kingdom, Japan, the Netherlands, Germany, Italy, Belgium, and France.

It’s worth noting that the consultants’ ranking doesn’t line up too closely with countries’ trade performance. Despite its No. 2 ranking, the U.S. runs a huge trade deficit in manufactured goods. Germany, ranked No. 7, is a manufacturing powerhouse. Rose says Germany is hurt in the ranking by its high labor cost, but says that the country has managed to minimize that disadvantage by focusing on goods that have relatively low labor content and require high skill to make. Also, he said, the superior ranking of the U.S. could be a preview of things to come. “Part of the point of this work is this [relative competitiveness] is evolving quickly over time.”

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How to Sell Garbage Disposals in China

Emerson’s InSinkErator Rejiggered to Munch Kitchen Favorites Like Eel, Bullfrog Skin and Duck Heads


Emerson Electric hopes China’s housing market will open up for its kitchen disposals. Pictured, workers at its Racine, Wis., InSinkErator factory. Rob Hart for The Wall Street Journal

By JAMES R. HAGERTY, WSJ.com

RACINE, Wis.—About half of all U.S. homes have garbage disposals gurgling under kitchen sinks to grind up food waste. The rest of the world generally doesn’t share Americans’ enthusiasm for this gadget.

That’s a problem for Emerson Electric Co. EMR -0.15% ‘s InSinkErator unit, the world’s largest disposal maker, whose founder invented the device 87 years ago. The U.S. market for disposals, totaling about $1 billion at the retail level last year, is mature and slow-growing. Despite decades of overseas promotion by InSinkErator and others, the U.S. still accounts for more than three-quarters of global demand for disposals.

So InSinkErator has staked its growth hopes on China, where it sees big potential even though the product is almost unknown there.

“We are turning the dial up in China,” said Dave MacNair, vice president of global marketing at InSinkErator. The company in November 2012 opened a plant to make disposals in Nanjing, China, its only manufacturing site outside the U.S. It is pitching its product to the Chinese via online marketing and in-store displays, while working with home builders and local building-code and waste-handling officials to explain its benefits.

While browsing at Jiahe Jiamei Furniture City in Beijing recently, Wang Chao, an office worker, was skeptical about the disposals on display, costing 1,000 to 4,000 yuan, or $161 and $645. “I don’t know much about that,” she said, “and I’m not interested in buying one either.”

But James Liu, an antique dealer who studied in Britain, was interested in one to avoid blocked drain pipes and “disgusting” smells. “Not many of my friends have this at home,” he said.

So far, sales in China are tiny. InSinkErator won’t provide data but says sales are growing quickly—more than 30% a year—from a small base. The company is competing against several Chinese rivals, including Beijing Becbas Technology Co. and Ningbo Oulin Kitchen Utensils Co.

China is attractive partly because it has more housing construction than any other country. InSinkErator executives also believe the Chinese have a greater need for disposals because they eat less processed food than Americans and have more leftover vegetable peelings, fish bones and other items that can be ground up.

InSinkErator redesigned its disposals for the Chinese market, angling the grinding teeth differently so they could handle tough waste, including eel or bullfrog skin. The device also grinds more finely so leftover rice or noodles won’t clog pipes.

At InSinkErator’s labs in Racine, workers test disposals by feeding them with cow ribs and pinewood blocks. They also now test food more likely to be found in China, such as white radish (whose density presents challenges) and duck heads.

The technicians have found shark skin nearly impossible to grind up. Mango pits are equally tough. “They’re like nature’s Kevlar,” said Dane Hofmeister, a lab manager.

InSinkErator regularly seeks meetings with local Chinese officials to explain how disposals could reduce the amount of household waste that needs to be hauled away and buried in landfills. One victory came in early 2012 when the Shanghai Urban Construction and Communications Commission, under a pilot program, recommended use of disposals in certain types of housing.

The disposal was invented in 1927 by John Hammes, an architect in Racine, who got the idea while watching his wife clean up after dinner and built a primitive grinder from sheet metal and a small electric motor. He obtained a patent eight years later and formed the company in 1938. InSinkErator sales didn’t take off until after World War II, when housing construction boomed.

Sales depend heavily on new construction because it is expensive—often $400 to $800—to retrofit disposals into old homes. For that reason, they’re far more common in the Western U.S., with its newer housing stock, than in the Northeast’s older cities.

In the 1970s, InSinkErator used wild-haired comedian Phyllis Diller as a pitchwoman. Her lines included: “Every woman needs a leftover lover.” It diversified into trash compactors, which squash refuse into smaller bundles, but quit making them because they weren’t a big hit. It found more success with kitchen spigots that provide instant hot water at temperatures near boiling.

Still, disposals are the company’s mainstay. “We know kitchen waste solutions better than anyone,” says a banner hanging from the ceiling in the company’s bustling Racine factory, which has about 900 workers and 24 robots, including one nicknamed Wilma after the “Flintstones” cartoon character.

In the U.S., InSinkErator disposals retail from about $80 to $340. The company competes against General Electric Co. GE +0.50% and the Waste King brand of Anaheim Manufacturing Co., both of whom import disposals from Asia.

For now, InSinkErator is focusing efforts on China’s high end, but it may eventually have to offer lower-cost versions, Mr. MacNair said. “We think it will become a mass market [good],” he said. “The question is how long it is going to take.”

—Lilian Lin in Beijing contributed to this article.

Write to James R. Hagerty at bob.hagerty@wsj.com

U.S. Retailers Spent the Past Year Rushing Into Russia. Now What? (The Sanctions Blowback)

By Kyle Stock, BloombergBW


Illustration by Steph Davidson

Tiffany & Co. (TIF) invaded Moscow nearly 10 months ago. The luxury jeweler set up a beachhead of bling on June 4, 2013, promising millions of potential customers dreamy diamonds—or at least a nice window view for an Audrey Hepburn-style doughnut breakfast. Now the 4,500 square-foot store is caught in an economic war zone as sanctions squeeze Russian payment pipelines and a rapidly escalating standoff with Western powers cripples the ruble.

Tiffany is just one of many U.S. retailers that recently bet big on Russia—both on its consumers and the stability of its markets. Over the past year, companies that belong to the Standard & Poor’s 500-stock index crowed about Russia at least 350 times during conference calls to discuss financial results, according to a Bloomberg analysis of transcripts. Russians have been driving demand for Apple (AAPL) iPhones, McDonald’s (MCD) burgers, Estee Lauder (EL) makeup,Fossil (FOSL) watches, andBeam (BEAM) bourbon, among other hot products.

At BorderFree (BRDR), a company that handles international e-commerce for such U.S. companies as J. Crew, Macy’s (M), and Williams-Sonoma (WSM), Russia is a top-five market, behind Canada, Australia and the United Kingdom. Just a few months ago, VF Corp (VFC), an apparel conglomerate, opened its first Moscow store to sell Van’s sneakers to would-be Russian surf rats. Mattel (MAT) reported a tripling of its Russian sales last year, which suggests that further U.S. sanctions abroad would threaten the sales of its American Girl dolls, surely an instrument of soft power.

Nike (NKE) has gushed about Russia for months, noting that business there has been sprinting along at a double-digit clip. “We are still the sports brand of choice in Russia and in Eastern Europe,” Trevor Edwards, president of the Nike brand, said in December.

MotionPoint, a Miami-based company that translates and optimizes websites for e-commerce companies expanding abroad, says its Russian business has doubled in the past year. “It’s just a really, really big country, and because of that it’s been pretty underserved,” says Charles Whiteman, senior vice president of client services.

The recent proliferation of broadband, in particular, has spurred sales. Many MotionPoint clients started building Cyrillic sites only after they noticed how many Russians were navigating their English-language sites.

As of now, U.S. sanctions on Russia are mostly confined to members of President Vladimir Putin’s inner circle and don’t stand in the way of iPads, Air Jordan high-tops, or the delicious bourbon pouring out of Kentucky distilleries. But it’s getting much harder for Russians to pay for them. Visa (V) and MasterCard (MA) stopped processing some Russian transactions in order to comply with new U.S. sanctions. And the ruble is getting crushed as investors worry about where the diplomatic standoff over Ukraine may lead.

Since Putin offered Ukraine a $15 billion stimulus package on Dec. 17, the value of the ruble against the U.S. dollar has slid by 25 percent. If Putin wants a pair of authentic University of Connecticut basketball shorts (go Huskies!), he’ll have to fork over 2,848 rubles, rather than the 2,640 he’d have paid in December. (Unless, that is, U.S. Secretary of State John Kerry throws him a pair as a peace offering.)

U.S. retailers that have watched the yen plummet in Japan know all too well how much that kind of exchange-rate turmoil weighs on commerce. The marketing choice is to watch transactions slow markedly or cut local prices just to keep people in stores or visiting websites.

For now, the Russian trade—like the standoff in Crimea—appears to be teetering on a brink of sorts. Elena Bychkovskikh, MotionPoint’s Russian specialist and a native of the country, says shoppers are in wait-and-see mode. “They just continue to monitor the situation,” she says. “But if they really need something, they’ll buy it.”

Nike, meanwhile, hopes those needs still include sportswear. Here’s Chief Executive Officer Mark Parker discussing the situation with analysts last week: “Obviously we’re hoping that a resolution comes to that situation peacefully,” he said. “And right now we’re focused on the things we can control, which is making sure we connect with our consumers.”

 

 

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