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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Financing Feasibility Fund I (FI3F) – a $30 mil. Global Project Development Fund announced by the Broad Street Capital Group

(New York City, NY, February 20, 2018)   For Immediate Release

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Fresh from its recent success, as the Financial Developer of the $250 million OPIC insured capital markets financing for NAEK Energoatom of Ukraine, Broad Street Capital Group has fi3f_badgeannounced today that it will establish a $30 mil. Financing Feasibility Fund I (Fi3F™) – a global project development fund to provide feasibility grants and pre-financing development funding for qualified emerging markets’ OPIC-insured infrastructure projects to be financed in the US capital markets.

The Fund will provide qualified Governments and State-owned borrowers feasibility seed funding in the amounts between $350,000 and $1 million dollars and pre-financing bridge loans in the amount of $1.25 to $2.5 million per project.

The Fi3F™ Fund will develop and seed international projects whose financing requirements fall between $150 mil. and $1 billion, and which will span the industry segments ranging from energy, airspace, transportation to agriculture, infrastructure and healthcare. The projects should be located in credit-challenged emerging market countries, which represent priority markets under OPIC’ development finance and insurance mandate. Financing terms for the projects will be between 10 and 20 years. A strong US supply nexus and willingness of the host governments  to provide sovereign guarantees for the financing, will be key considerations during the project selection stage.

Participation in the Fi3F™ will be open to qualified private and institutional  investors, with at least 51% of all the shareholders being US nationals. The management of the fund will utilize proven project development techniques and will be administered by an experienced team consisting of leading legal, insurance and financial experts, a placement agent and the financial developer. The Fund will obtain Political Risk Insurance from OPIC to protect its funds and will retain a top tier investment bank to act the the Paying Agent to administer all the payments and disbursements. Fi3F’ returns are targeted to fall in the 12-17% range annually.

Call for the first round of Financing Feasibility Proposals will commence April 25, 2018.

About the Broad Street Capital Group

Based in the heart of New York City’s Financial District, Broad Street Capital Group (www.broadstreetcap.com) is an international private merchant bank, which since 1988 has served several foreign governments, multiple state-owned companies, as well as SMEs in emerging markets. Through its member companies, the Group focuses on developing project financing in the $100 million to $1 billion range, providing political risk mitigation, export management services and cross-border market development advisory. The Firm has done business in over 35 countries, spanning the emerging markets landscape from Bangladesh to Ukraine.

The Firm works closely with all trade and development agencies of the U.S. Government and Export Credit Agencies of several European and North American countries. Since its inception, Broad Street Capital Group has been involved in multiple high-profile cross-border transactions in IT/telecom, aerospace, healthcare, energy generation, food security, nuclear safety, hospitality and franchising sectors. The firm’s current advisory and export management portfolio exceeds $417 million and expected to exceed $1.5 billion by November 15th, 2018.

This announcement is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the Company or any related or associated company. Any such offer or solicitation will be made only by means of the Company’s confidential Offering Memorandum and in accordance with the terms of all applicable securities and other laws. None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended.

For more information contact Alexander Gordin, Managing Director +1 212 705 8765 ext. 701 or via email agordin@broadstreetcap.com

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Broad Street Capital Group – part of the Project Financing team, which successfully concluded a cutting-edge, OPIC insured, $250 million capital markets transaction, to finance spent nuclear fuel facility construction in Ukraine

Washington, DC, February 15, 2018.

cropped-ukrainefi180profile_page_1.jpgYesterday, at a historic ceremony near the White House, a Ukrainian State-owned enterprise, NAEK Energoatom, and a special purpose statutory Trust, have concluded a $250 million loan transaction to finance the bulk of a new Ukrainian Centralized Spent Nuclear Fuel Storage Facility being built in the Chernobyl exclusionary zone.

The low-interest, 20-year loan, is notable for a number of important reasons:

  • It is the first time i political risk insurance provided by the Overseas Private Investment Corporation (OPIC) – a US Government agency- has been used to issue bonds in the US capital markets, in order to finance a state-owned enterprise.
  • Based on the insurance, and its merits, the project received Aa2 credit rating from Moody’s, which in turn allowed the project to benefit from significantly lower financing costs for the financing of the project.
  • The project marks unique collaboration between the US and Ukrainian governments, major US public and private companies and a state-owned enterprise.

Broad Street Capital Group proudly acted as the Financial Developer on this transaction and would like to congratulate all participants and thank the entire project team for its professionalism, dedication and perseverance.

As the Financial Developer, Broad Street Capital has provided project facilitation, assembled the financing team , developed the insurance application, and secured financial support for the project.

About the Broad Street Capital Group

Based in the heart of New York City’s financial district, Broad Street Capital Group (www.broadstreetcap.com) is an international private merchant bank, which since 1988 has served several foreign governments, multiple state-owned companies, as well as SMEs in emerging markets. Through its member companies, the Group focuses on arranging project financing in the $50-500 million range, providing political risk mitigation, export management services and cross-border market development advisory. The Group has done business in over 35 countries, spanning the emerging markets landscape from Bangladesh to Ukraine.

The Firm works closely with all trade and development agencies of the U.S. Government and Export Credit Agencies of several European and North American countries. Since its inception, Broad Street Capital Group has been involved in multiple high-profile cross-border transactions in IT/telecom, aerospace, healthcare, energy generation, food security, nuclear safety, hospitality and franchising sectors. The firm’s current advisory and export management portfolio exceeds $630 million.  For more information, please contact Tamara Zykova at tz@broadstreetcap.com,

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Moody’s assigns Aa2 rating to Energoatom transaction supported by OPIC political risk insurance

cropped-ukrainefi180profile_page_1.jpgWe at Broad Street Capital Group are excited and proud to be part of this historic financing. Moody’s unprecedented credit rating underscores the hugely positive effect of US Government’s credit enhancement to offer long-term, low-rate financing in emerging markets, such as Ukraine, for large infrastructure projects containing US exports.

 

Moody’s assigns Aa2 rating to Energoatom transaction supported by OPIC political risk insurance

Global Credit Research – 18 Jan 2018

London, 18 January 2018 — Moody’s Investors Service, (Moody’s) has today assigned a definitive Aa2 rating on the approximately U.S. $250,000,000 of senior secured Notes (the Notes) to be issued by Central Storage Safety Project Trust (the Issuer). The outlook on the rating is stable.

The Issuer will use the proceeds of the Notes for the purpose of funding a senior term loan facility of up to $250,000,000 (the Loan) to State Enterprise National Nuclear Energy Generating Company “Energoatom” (Energoatom or the Borrower), pursuant to a credit agreement between the Issuer and the Borrower (the Credit Agreement), and to fund related reserves. Energoatom will use the proceeds of the Loan to finance a portion of the costs of constructing the first stage of a long-term central spent nuclear fuel storage facility on dedicated land in the Chornobyl exclusionary zone, which will be completed, in part, pursuant to a supply contract with Holtec International. Under the Credit Agreement, the Borrower has an unconditional obligation to pay debt service. The Government of Ukraine (the Guarantor) has issued an irrevocable and unconditional guarantee (the Guarantee) of the Borrower’s payment obligations under the Credit Agreement.

Moody’s rating of the Notes is based solely upon its view of the credit benefit of a political risk insurance policy provided for the benefit of the Issuer by the Overseas Private Investment Corporation (OPIC), an agency of the government of the United States (Government of United States of America, Aaa stable). The insurance policy covers expropriation (limited to nonpayment of an arbitral award and denial of justice) (the OPIC Policy) in relation to the Credit Agreement and the Guarantee. The OPIC Policy insures the Issuer against nonpayment of an arbitral award by the Borrower and the Guarantor or denial of justice on the part of the Guarantor.

Commenting on the rating action, Christopher Bredholt, a Moody’s Vice President and Senior Analyst, said “The Energoatom transaction is one of a number we have seen incorporating credit enhancement from development finance institutions and multilateral development banks, as they seek to crowd-in risk averse private sector capital to support infrastructure investments in more challenging sovereign environments in emerging markets”. Mr. Bredholt continued “The underlying transaction structure, with New York law obligations and submission to arbitration, in the context of the Issuer’s available reserves, supports our view of the credit benefit of the OPIC policy”.

Energoatom is a state enterprise organized under the laws of Ukraine (Government of Ukraine, Caa2 positive), and is the largest electricity producer in the country, with nearly 15 gigawatts of nuclear capacity, contributing approximately 50% of Ukraine’s electricity.

Central Storage Safety Project Trust is a State of Delaware statutory trust formed under the Delaware Statutory Trust Act, and operates pursuant to a Trust Agreement. So long as any of the Notes remain outstanding, the Issuer will have no power to engage in any business activity, or to create, assume or incur indebtedness or other liabilities, other than in the performance of its duties and obligations as contemplated in the Trust Agreement. The Issuer is a bankruptcy-remote, limited-purpose financing trust and its activities will generally be limited to making the Loan, acquiring and owning the OPIC Policy, issuing the Notes and making payments thereon, and related activities.

RATINGS RATIONALE

The Aa2 rating on the Notes reflects as strengths: (1) the political risk insurance policy provided by OPIC; (2) the Issuer has access to liquidity adequate to cover approximately 2 years of debt service in the event of instigating a consolidated arbitration process following payment default by Energoatom and the Government of Ukraine, as well as reserves to cover legal and administrative expenses, which Moody’s considers appropriate given the deal structure and insurance claims process; (3) the project is a stated policy priority for the U.S. and Ukrainian governments, as the facility will be developed to store spent fuel from three of Ukraine’s four nuclear power plants, offering an efficient and secure process that will reduce Ukraine’s dependence on Russia; (4) the key transaction documentation is governed by New York law, the obligations of Energoatom are unconditional, corporate obligations (Issuer is not directly exposed to project-related risks), and the Government of Ukraine waives sovereign immunity in respect of the Guarantee; (5) the OPIC Policy requires a valid arbitral award against the Guarantor, but does not require the enforcement of the arbitral award in either a US or a Ukrainian court, and in Moody’s view this limits potential sources of delay to a timely recovery under the OPIC Policy; and (6) the transaction parties have contractually agreed to a resolution of disputes by a single, consolidated arbitration process to be conducted under expedited arbitration procedures of Article 30 of the International Chamber of Commerce Rules, located in New York.

The rating does, however, reflect the following challenges: (1) the OPIC policy does not provide a guarantee of payment under the Notes, and is not intended to directly or indirectly transmit an unconditional OPIC guarantee of Energoatom’s payment obligations under the Credit Agreement; (2) if the Issuer is unable to obtain a final arbitral award prior to the full depletion of its available liquidity, the Noteholders would not receive scheduled debt service; (3) there is only a limited, relatively untested track record of the International Chamber of Commerce (ICC) expedited arbitration procedures which have only applied to arbitration agreements executed since March 2017; (4) it may be difficult to prove that any efforts by Ukraine to frustrate obtainment of an arbitral award will satisfy the conditions for a valid Denial of Justice claim under the OPIC Policy.

RATING OUTLOOK

The outlook on the rating is stable.

WHAT COULD CHANGE THE RATING — UP/DOWN

Moody’s does not currently consider there is scope for an upgrade.

Moody’s could downgrade the rating on the Notes if: (1) the United States government bond rating were downgraded; (2) in Moody’s view, there is a material, detrimental change in the standing of OPIC as a U.S. government agency, or to the full faith and credit of the United States which has been pledged to secure the full payment by OPIC of its obligations under the insurance policy; or (3) Moody’s considers there is a non-negligible risk of the arbitration process either (1) taking longer than anticipated and materially eroding the Issuer’s available liquidity or (2) returning an unfavourable outcome.

The principal methodology used in this rating was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017. Please see the Rating Methodologies page on http://www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on http://www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see http://www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on http://www.moodys.com for additional regulatory disclosures for each credit rating.

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OPIC STATEMENT AT UKRAINE SIGNING CEREMONY FOR ENERGOATOM SPENT NUCLEAR FUEL PROJECT

Happy Holidays and all the Best in the New Year!

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We at Broad Street Capital Group are proud to have been an integral part of this amazing cutting-edge project financing. As a Financial Developer, Broad Street Capital has provided project facilitation, selection of the Placement Agent, as well as insurance application development and financial support for the project. This unique transaction provides for a 20-year! low-interest loan to Energotom to help construct a centralized spent nuclear fuel storage facility in the exclusionary zone in Chernobyl Ukraine.  The loan is funded by a US capital markets bond offering, which is insured by OPIC, rated by a major agency and guaranteed by the Government of Ukraine. Press release below describes the transaction in greater detail. For more information on this project, please write

December 21, 2017

Photo, 2 men signing documents while others look on, OPIC, Energoatom, Kyiv, Ukraine, Overseas Private Investment Corporation, Holtec, Camden, New Jersey, spent fuel storage casts, Depty Prime Minister Volodymyr Kistion, Minister of Finance Oleksandr Danyliuk, Deputy Chief of Mission George Kent, OPIC President and CEO Ray Washburne, Bank of America, Merrill Lynch, Broad Street Capital Group, credit agreement, political risk insurance

UKRAINE – Today, the government of Ukraine hosted a signing ceremony in Kyiv for the Energoatom Central Spent Nuclear Fuel Storage Facility Project, which helps move Ukraine closer to energy independence by giving Ukraine the capability to domestically store spent nuclear fuel. OPIC is providing $250 million in political risk insurance and Holtec International, based in Camden, New Jersey, is providing the spent fuel storage casts and other equipment.

The documents included the credit agreement, the sovereign guarantee, the arbitration agreement, and the foreign enterprise support agreement. Representatives from Energoatom, Bank of America/Merrill Lynch, Broad Street Capital Group, and an OPIC trustee were in attendance.

Deputy Prime Minister Volodymyr Kistion and Minister of Finance Oleksandr Danyliuk delivered remarks. The U.S. Embassy’s Deputy Chief of Mission George Kent read the following statement from OPIC President and CEO Ray W. Washburne, who was unable to attend:

Thank you all for the invitation to attend today’s signing ceremony in support of the Energoatom Central Spent Nuclear Storage Faculty. I regret that I was unable to attend this important milestone. Many of you have worked very hard to get us here today and I thank you for your commitment.

I am very proud that OPIC has been able to support such an important project here in Ukraine. When I became the head of OPIC just a few months ago, the first international trip I took was to Ukraine. I was very impressed with what I saw here. Despite some challenges facing Ukraine, we see the potential for high-impact development projects here – particularly in the energy sector.

It is a pleasure for the United States to help move Ukraine towards energy independence by providing the capability to store spent nuclear fuel in-country, thus eliminating the need to ship the spent fuel to Russia for storage.

With total project costs of $410 million, Energoatom cannot self-finance the entire project. Therefore, OPIC has committed up to $250 million in political risk insurance to support the development, construction, and commissioning of the Energoatom Central Spent Nuclear Fuel Storage Facility in Ukraine.

This storage facility will be developed to store spent fuel from three of Ukraine’s four nuclear power plants, offering an efficient and secure process. The United States-based company, Holtec International – located in Camden, New Jersey – will supply dry storage casks, transportation casks, ancillary equipment, and engineering and training to the facility over an expected five-year period.

I’d like to thank our partners at Bank of America/Merrill Lynch without whom this deal would not be possible. They will arrange for the sale of OPIC’s $250 million commitment in the U.S. capital markets in the form of fixed-rate bond securities. The proceeds will fund the 20-year loan to Energoatom. We are very pleased that Ukraine will support the OPIC-insured loan financing by issuing a sovereign guarantee for repayment of the loan.

This is the first OPIC deal structured in this fashion and we are pleased to partner on an innovatively financed project. By working together, we will help Ukraine meet its energy needs, while supporting the U.S. economy with the creation of manufacturing jobs.

Thank you.

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The Overseas Private Investment Corporation (OPIC) is a self-sustaining U.S. Government agency that helps American businesses invest in emerging markets. Established in 1971, OPIC provides businesses with the tools to manage the risks associated with foreign direct investment, fosters economic development in emerging market countries, and advances U.S. foreign policy and national security priorities. OPIC helps American businesses gain footholds in new markets, catalyzes new revenues and contributes to jobs and growth opportunities both at home and abroad. OPIC fulfills its mission by providing businesses with financing, political risk insurance, advocacy and by partnering with private equity fund managers.

OPIC services are available to new and expanding businesses planning to invest in more than 160 countries worldwide. Because OPIC charges market-based fees for its products, it operates on a self-sustaining basis at no net cost to taxpayers. All OPIC projects must adhere to best international practices and cannot cause job loss in the United States.

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Nuclear waste with an OPIC wrap

  TXF PREMIUM

An Opic-wrapped Energoatom nuclear waste storage facility project bond is nearing launch. The enhanced bond will be structured around Ukrainian risk, nuclear risk, and the vagaries of the arbitration process.

A $250 million enhanced bond financing for Ukrainian nuclear operator Energoatom is likely to come to market in November this year. The bonds, for which Bank of America is placement agent, would carry breach of contract insurance from the United States’ Overseas Private Investment Corporation (Opic), and fund construction of the Energoatom Central Spent Nuclear Fuel Storage Facility near Chernobyl.

Opic is wrapping the debt in large part because a US manufacturer, Holtec International, is supplying the facility with 94 double-walled stainless steel casks and related equipment. Broad Street Capital, a New York-based advisory firm, is financial adviser and what it describes as “financial developer” for the project.

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Should Corruption in Ukraine be Legalized?

Corruption

Should corruption in Ukraine be legalized? As I ask this question, I can almost see many people who follow Ukrainian politics raise their eyebrows. I can also see many, especially members of the outspoken Ukrainian Diaspora, beginning to seethe. Yet, after two and a half decades of watching Ukraine fight, and mostly lose, battles against epidemic corruption, and realistically not seeing no other credible options to turn the tide, I turn to the only principal, which works well when trying to combat a very strong and seemingly unbeatable opponent. It is a millennium-old Judo principle, which states “use your opponent’s strength to your advantage”, or as I like to say, “when pushed, instead of pushing back, pull.”  In this case, corruption is the proverbial opponent we are looking to defeat.

Government corruption in Ukraine is deep, well entrenched and akin to a massive granite mountain. Not to be too simplistic, but it can generally be divided into two basic categories. The first is corruption perpetrated by the influence of the powerful interests who direct budget flows, or rig supply and privatization tenders. The second type is corruption perpetrated by the underpaid bureaucrats (ministry clerks, prosecutors, and customs and tax agents). They extort money from businesspeople and from the public by either helping them expedite, or by running interference, as these folks try to navigate through the arcane systems of byzantine rules and regulations, which permeate Ukrainian life.

Although corruption in Ukraine has always been an issue, recently, certain young reform factions, with support from Western (primarily US) donors, have attempted to combat government corruption head on. Attempts to install Western and progressive Ukrainian Ministers to head the corrupt Ministries have failed. Not a single one of those ministers remains in power after one year.  Unfortunately, but predictably, they were all consumed and spat out by the system they tried to reform. These people were set up to fail, as it is impossible for a handful of even the brightest people to defeat a monolith without having a strong backing of the population, support of organized political parties, sufficient finances and true support from the country’s business and political elites. As the saying goes, “we can only help those who want to help themselves.” It seems Ukrainian bureaucracy is not yet ready to help itself. The general population is also not at the level where it keeps up constant pressure for change. The people of Ukraine have bravely risen up during Maidan revolutions, but the after effects of their protests did not produce desired meaningful changes (e.g. post Orange Revolution government rift, Yanukovich presidency).

The idealistic thinking and mentality of some Western ministers who thought they could and singlehandedly tried to alleviate corruption and change the Ukrainian bureaucracy, is nothing but naive. I was privileged to know some of these intrepid warriors and their advisory teams. They certainly possessed the skills and the desire to change the system. Yet, they were very ill-equipped and did not have a realistic grasp on how badly the corruption cancer metastasized.  In some cases, the reformers’ desires to radically break the system led to opposite effects. I have seen Ministers require tenders, where none were needed (or legally required) just to display a corruption fighting banner. The irony of the whole thing was that Ukrainians have learned to rig and beat many “fair and open” tenders, so these Ministers’ misconstrued demands were a double whammy.  I have also seen a large state company paralyzed with fear of action on a terrific project, because the management was afraid that a minister would interpret a legal sole-source procurement, as corrupt.

These ministers, advisors, governors, investigative journalists and many other extremely well-meaning and reform minded folks also have failed, or modestly succeeded in their attempts to introduce e-government procurement, create a new police force, reform Prosecutor’s General office and the GPU and reform the Customs Service. It certainly was not for lack of trying, patriotism, or incorruptibility. All this got me thinking as to:

  • why there is such rampant corruption in Ukraine?
  • whether efforts to eradicate it are doomed?
  • if there is a better way to solve the problem?

 To answer the first question, we need to look at couple of factors, which amplify graft in Ukraine. Although corruption exists pretty much everywhere in the world, in Ukraine, a confluence of factors makes it particularly pervasive and damaging to the economy. A very low pay scale for public servants, very large gap between the salaries of civil servants and budget funds, which are expended in public procurement, external financings, aid and donor contributions. Thus people of means, seeking to corrupt the system, get greater leverage in influencing low-paid bureaucrats. These bureaucrats (especially the ones steeped by the Soviet system of graft) operate with impunity because the enforcement branches are corrupt and so on. The whole system is infested and needs complete structural overhaul.

Is Ukraine doomed? That depends on whether radical attempts of wishful thinking, unsustainable reforms, populist solutions and political farce continue. As people who have been on crash diets, tried to kick a habit cold turkey, or tried to undertake a massive change mostly with lip service PR, but without real resources and commitment know, these solutions almost never work.cropped-ukrainefi180profile_page_1.jpg

So what needs to be done? The biggest asset, which Ukraine has today, are its people born in the 80’s, or after the fall of the Soviet Union. These folks grew up in a freedom-loving Ukraine and connected to the rest of the world. They are mostly free of the Soviet corruption malaise (although strong evidence exists that current Ukrainian corruption has permeated Ukraine’s higher education system in the last twenty years and many students are very comfortable with bribing teachers for good grades). Yet, despite these obstacles, and with the understanding that human nature will never change and some corruption will always be there, we can reasonably expect corruption in Ukraine to subside with every subsequent generation.

Meanwhile, in the medium term, it is reasonable to start chipping away at the corruption from many sides. Gradually introduce reforms, decrease rules and regulations, reform the tax code and completely overhaul Ukraine’s prosecutorial branch GPU, substantially increase public service salaries, and introduce international audits of select tenders. Eliminate tariffs and, most importantly, continue to raise the stakes for the powerful business and political elites by expanding their access to western markets and financial systems, thus raising the stakes for them in terms of reputational and real risks in case they are implicated in corruption.

In the short-term, it is worth looking at the lobbying and advisory/support institutions of the US as an example. Their structure should provide a very clear framework as to how our country has legalized activities normally considered corrupt. Setting up regulated lobbying firms, expediting firms, and shifting mindsets of the bureaucrats on being able to make money at such lobbying firms after leaving the public service, are just some of the tools, which may be employed to legalize corruption. This is the carrot. 

The stick should be greatly increased punishment for those who break the rules, with prosecution being handled by outside independent arbitrators, the accused having the burden of proof and expense of their own legal defense in an international neutral venue. 

Many countries and states have legalized vice and illegal activities in order manage them. Holland and Australia legalized prostitution, the state of Colorado marijuana, Nevada gambling. All such efforts have been largely successful, generated billions in taxes and dealt with massive public problems according the judo principle mentioned above.

So if the future powers to be in Ukraine and in the West start looking at the eradication of the corruption problem through a 30-50 year prism and start managing the transition gradually while legalizing some of the corruption, Ukraine stands a chance to finally realize its true potential.

 

 

 

 

 

Face The Dark Side

Can you handle the flip side of the coin when doing business abroad?

dibujo 02My last LinkedIn® post addressd issues of overt corruption. Here, I address issues of conduct and human behavior that can engulf you like quicksand and hamper your ability to do business in a foreign country. I am talking about malaise, self-interest, fear, greed and jealousy, to name just a few of the obstacles. Unless you thoroughly understand the issues and characters behind particular transactions, markets and business dealings, you will have an extremely tough time doing business abroad. Things that make perfect business and social sense on the surface will not get done. Your offers of lowering prices, increasing efficiency, bringing prosperity to the population in your chosen market will be enthusiastically received at the top, even announced to the world, and then fizzle in the execution and die a slow death.

Several years ago, a major international financial institution approved a sizeable ‎loan to partially ‎rehabilitate a badly deteriorated municipal water system in the Ukrainian city of Dnipropetrovsk. ‎Given the tremendous difficulties municipalities in emerging countries face in obtaining financing, an ‎announcement like this should have brought joy to the people everywhere in the city and in the water ‎utility authority itself. Instead it brought fear, intrigue, resistance and sabotage.‎

The Bank put out a tender for a project management company to implement the financing, for which ‎our firm co-bid with one of the world’s leading Dutch engineering consortiums. We were unsuccessful, ‎but in the process we uncovered a fascinating textbook case on how a dark flip side can seriously ‎interfere with what on its face appears to be a win-win situation.‎

As we started to interact with the officials from the water utility authority and the municipality, it ‎became clear that most of the senior officials and most of the 3,200 employees were opposed to the project. On the surface it made absolutely no ‎sense, as the project promised to improve the quality of the city’s drinking water, improve sewer ‎cleaning facilities, improve the water pressure of the residents, conserve water, and reduce water ‎main ruptures. Ostensibly, the reason for the resistance was a fear that the municipality would not be ‎able to repay its debt obligations without impacting its financial condition. Although a fairly valid ‎reason, it did not seem sufficiently compelling to justify all the intrigue and stall tactics that plagued the ‎project.

What was going on? Well, as part of the conditions for extending an economically viable loan, ‎the bank required that the debts be cleared from the balance sheet, the tariffs subsidies removed, ‎that international financial accounting standards be applied, and that periodic audits would take place. ‎This threatened to uncover a number of financial irregularities. Further, the accounting department would have to be reduced from 50 employees to ‎four and the entire staff would have to be pared down to 800 from 3,200 as part of transforming the utility from a bloated and inefficient Soviet-style organization ‎to a modern well functioning profitable enterprise.

‎But the project was still good and well-intentioned, right? Wrong! The municipal politicians did ‎not want to raise the water and sewer tariffs, because it would hurt them in the upcoming election. ‎Many workers were afraid of losing their jobs and illegal side businesses, and of having to work harder ‎in a leaner, high-pressure environment. And they were doing everything in their power to stall or ‎kill the deal. Their pay was low and the working conditions poor, but the workers in this case preferred the status quo. This is a very important lesson when working on the side of radical organizational change.‎

The Deputy Director who had championed the deal and was primarily ‎responsible for arranging the loan was now faced with significant and unexpected ‎resistance from a number of directions. As the financing process began, he eventually ‎lost his job and implementation of the loan sputtered.‎

Although our firm ended up not participating, we identified some critical concerns: (i) the need to communicate and win support of the key project ‎participants and constituents prior to commencing a project, (ii) the need to examine in advance the ‎organizational dynamics of the enterprise set to undergo significant changes, and (iii) the need to ‎extensively shape and counsel the organization to maximize the project’s chances for success.

LEARN WHAT TRULY STANDS BEHIND EVERY DEAL – from motivations of the parties, to ultimate beneficiaries, to whose interests will the deal cross to why are you being selected, or you will fail.

Here’s an example. A U.S. company proposed that a large bakery in Russia buy its baking mix for its products to simplify the production process and make it more cost effective. The U.S. executives were baffled when their offer was rejected. It turned out that the plant manager was systematically stealing eggs that were earmarked for baking from scratch. For her to switch to a ready-made mix would have meant the loss of side income (and it is hard to sell eggs as part of the bake mix on the black market).

Working on a large feasibility project, the project team initially encountered very strong resistance from local employees charged with providing assistance and information. We learned later that several other studies sponsored by various international financial institutions were performed earlier and none yielded in any measurable results, thus local employees had lost faith. But instead of open hostility the employees had adopted a passive-aggressive approach to solving what they saw as a major problem. Although on the surface they acted compliantly enough to appease their superiors, in reality they were not performing and were placing the entire project in jeopardy.

In some countries, politicians will often reject opportunities that would mean long-term prosperity for their constituents, such as infrastructure improvement or increased energy efficiency because the political system does not reward long-term decision making as much as it does short-term action that avoids unpopular measures against the electorate. Thus, short-term result harvesting behavior is rewarded instead of investment that can produce long-term benefits.

In every foreign country, every opportunity has a flip side. Of course, many situations back home are also complex and nuanced and have underlying currents and flip side issues. But in foreign countries, the political uncertainties, organizational dynamics, local culture, and socioeconomic standing of the country magnify the subtleties and intensify the consequences.

Effectively combating or sidestepping flip side issues requires a thorough understanding of the situation. You need to earn the respect of the folks whose help you will want to enlist in resolving the underlying issues. Credibility, clearly defined issues, and open and ongoing communication are essential. Both positive and negative information needs to be communicated promptly, overtly, and without any bias. And try to break down the problem into small incremental challenges so that you can work diligently to achieve defined milestones.

People in countries where difficult and tumultuous conditions are a way of life tend to be jaded when it comes to promises of a better life and are generally much more cynical than people in developed countries.

People in developed countries also have a completely different frame of reference and values set. For instance, no one in the U.S. would think of bringing burned-out light bulbs from home and replacing them for good light bulbs from the office. But this kind of thing used to happen all the time in the former Soviet Union. Not many people in the U.S. would think of stealing flowers placed on a grave and reselling them, but it happens to this day in countries like Moldova where, to prevent flower theft, people break stems in half before placing them on graves.

When a country is converting from a state run economy to a free market, there are always members of the working population that are pathologically afraid of losing their jobs. Very often, fundamental organizational dynamics and culture are overlooked and overshadowed by the commercial issues such as sales and financing. So it is critically important to address the organizational culture if you are trying to acquire, privatize, or rehabilitate an existing business that has its roots in state or municipal ownership.

When trying to sign contracts that were endorsed or approved by top government officials, don’t be surprised if you and your company find yourselves hitting the proverbial glass ceiling when you try to move the project towards its conclusion. Once again, it is important to really understand why.

An obvious answer is that bureaucrats may be looking for payoffs or favors, both serious no-nos, but more often than not these contracts are directly opposed to someone else’s interest and unless you figure out how to align the various interests, the project will not go anywhere because these forces and motivations are more potent than a simple corrupt payoff.

Other, sometimes less obvious, factors involve political, nationalistic and anti-U.S. sentiment. Here, you need to pay attention to external considerations, which may affect your business dealings and which, if not handled properly, may result in frustrating delays, wasted money, and lost opportunities.

Many emerging markets have created alliances with countries whose influence disproportionately affects the balance of economic power. For instance, China has successfully taken several African and Asian countries into its fold. Russia, in an attempt to regain some of the economic influence it lost in post-Soviet days, created a Customs Union with Belarus and Kazakhstan and renewed its Sevastopol naval base lease in Ukraine. These are alliances that provide natural advantages for their participants to the detriment of just about everyone else.

Nationalistic considerations are often of a protectionist nature and are designed to help emerging markets develop their internal manufacturing bases by favoring bids for products and services produced locally. Oftentimes, however, powerful local politicians or businessmen are behind the implementation of these tactics simply to keep out competition, gauge prices in the market, and enrich themselves through unfair procurement practices while wrapped in a national flag. China and India are both shining examples of strong nationalistic tendencies in some of the hottest manufacturing sectors. You can applaud their desire to advance their economies by creating their own technology and manufacturing bases, but to ignore the interests of the “darker” local forces behind such initiatives would be simply naïve.

Anti-U.S. sentiment also must be considered when doing business in a foreign country. Although it is not nearly as pervasive as the political or nationalistic sentiment, anti-U.S. sentiment is a dirty little secret in some very surprising places. Some multilateral financial organizations in which the U.S. is a prominent member have demonstrated clear anti-U.S. bias over the years by not awarding contracts and senior positions to Americans. I came face to face with it over years of representing Motorola in the former Soviet Union. And while this now global company has been identified as “born in the USA,” I have personally observed numerous cases of Russian decision makers and procurement officials handicapping the company’s offerings simply because of its American origins.

As you may infer, having reliable information gathering mechanisms in place is critical to understanding the flip side issues and the players involved. Make lots of friends and acquaintances in the rank and file, such as the clerical and administrative staff of the ministries and municipalities, hotel concierges, drivers, and middle managers of organizations with which your company intends to do business.

As discussed in Chapter 24 of my book “Fluent In Foreign Business”, treating people well, being polite, attentive and honest goes a long way everywhere. Write a thank you card to a secretary in a ministry, call a local department supervisor on his or her birthday, and remember the name of the janitor or security guard. You will be surprised at how much information will eventually start flowing your way. Always consider the source, but as you piece information together from various sources, an accurate picture will usually start to emerge and the dark flip side will slowly, but clearly, reveal itself.

Reprinted from Fluent In Foreign Business. Edited by the author. All rights reserved 

Trade Gap Narrows Sharply as Imports Tumble

Economists Bump Up Second-Quarter GDP Forecasts

WASHINGTON—The U.S. trade deficit narrowed more than expected in June amid a sharp decline in imports, a development that is likely to boost economic-growth readings but raises a concern about domestic demand.

The U.S. trade deficit shrank 7% to a seasonally adjusted $41.54 billion in June from May, the Commerce Department said Wednesday. That was the fastest contraction in the gap since November. Imports fell 1.2% in June, the steepest decline in a year, while exports increased 0.1% to reach a record high.

The smaller gap than projected has many economists expecting the government to upgrade its measure of second-quarter gross domestic product later this month. The trade deficit has shrunk about 6% since March; a narrower trade deficit generally supports economic growth.

Forecasting firm Macroeconomic Advisers now projects GDP, the broadest measure of goods and services produced across the economy, expanded at 4.2% rate in the quarter. Other economists project as high as a 4.5% gain. Last week, the Commerce Department said second-quarter GDP expanded at 4.0% annual pace.

The latest data also may support third-quarter growth. Imports, especially outside of oil, surged in April and May but fell back in June. “A further correction is likely over the next two months,” said IHS Global Insight economist Patrick Newport. “As a result, imports will be a much smaller drag on growth than they were in the second quarter.”

But the trend isn’t entirely positive. It suggests importers may not be confident that U.S. consumers will ramp up spending in the second half. That runs counter to the Commerce Department’s measure of consumer spending, which increased steadily during the second quarter.

The June decline in imports was led by decreased U.S. demand for consumer goods, cars and car parts, and foreign oil.

“The broad-based declines in import activity seem at odds with the narrative of improving domestic demand,” said TD Securities economist Millan Mulraine.

Growth in consumer spending eased in the first quarter and exports fell, contributing to the economy contracting at a 2.1% rate. Those factors reversed in the second quarter, supporting the rebound in growth.

Exports rose sharply in May and held those gains in June. The small June improvement was led by increased foreign demand for U.S. cars, consumer goods and services, which include travel and intellectual-property use.

The numbers coincide with improved growth in China this spring and a stabilizing European economy. However, unrest in the Mideast, Africa and Ukraine could pose headwinds to global trade.

The U.S. trade ledger with Russia fell in June amid an escalating sanctions battle over the conflict in Ukraine. Exports plummeted 34% on the month to the lowest level since January last year. Imports from Russia fell nearly 10%. Russia, however, accounts for a relatively small share of total U.S. trade.

Trade with China, the No. 2 U.S. partner, has expanded modestly this year. The U.S. trade gap for goods with China widened 4.9% through June, compared with the same period a year earlier. That is only slightly larger than the 4% overall growth in the goods-trade deficit.

The goods deficit with European Union expanded 15.2% in the first half. The gap with Canada, the largest U.S. trading partner, widened this year. But the gap with Mexico, Japan and Brazil narrowed during the first six months of 2014.

—Ian Talley contributed to this article.

Write to Eric Morath at eric.morath@wsj.com and Jonathan House atjonathan.house@wsj.com

In these trying times a “Do It Yourself” approach to export financing is fraught with peril

1308 pose 9Financing large complex export projects and transactions through Export Credit Agencies, such as the US Ex-Im Bank, is difficult at best and impossible at worst.  Hundreds of moving parts, byzantine structures, political considerations, legal quagmire, shipping and logistics challenges, along with financial considerations, extensive due diligence, host country laws, licensing and public relations are just a few of the factors involved in this year-plus long process. Add to that geopolitical risks a la Ukraine, Russia, or Iraq and the process can befuddle even the most sophisticated practitioners. Thus it is vital to have a highly experienced team of financiers, lawyers, shippers, technical specialists and ECA compliance folks to work with committed exporters and buyers in order to develop and nurture such transactions to success.

Yet oftentimes in their desire to either save money, or driven by false sense of familiarity with the process, the exporter clients prefer to undertake what I call a “home depot” do-it-yourself approach to ECA financing.  During times of relative geopolitical normalcy this approach primarily works for those companies that have extensive experience dealing with ECAs in structuring complex export transactions. During times of political instability such approach is certainly doomed for all novices .

Although there are multiple players in the export finance industry and they range from the largest global banks, law firms and shipping companies, to small brokerage firms and advisors of different stripes; the world of export finance is fairly small with all players of substance knowing each other well and for many years.  For a newcomer exporter venturing into this world, the complexity of the process and the capabilities of the players are not well-known and oftentimes they are misled and misguided.  Thus after taking a hard look in the mirror and forgoing a do-it-yourself approach to complex export financing, the next step any company should take is to really understand the workings of the export finance industry, capabilities of the players, and the importance of an integrated approach of putting together a complete finance, legal, compliance and logistics team early on.

Selection of the financial advisor should not be based on the name alone, but on that advisor’s experience in the target market to be served by the exporter, his or her experience in handling complex transactions and the ability to add value to the process. Good advisors will oftentimes save the exporter such large sums during the structuring and implementation of the process, that their fees pale in comparison.  Once the advisor is selected, the exporter should let him or her invite the other team players into the process. There is a big difference between the exporter being totally committed to the process and working very hard to assist the advisors by supplying the needed information in the timely manner, helping to obtain necessary licenses, interfacing with the buyer etc and having the exporter venture into the process on his/her own. The first approach will lead to the successful financing and the latter will certainly lead to a painful and expensive failure.Fi3E Badge

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