Expert opinion – Kreston

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Even though Kreston GCG is part of the international audit and consulting network Kreston International, we are independent to develop and implement sales strategies within Ukraine.

Kreston GCG has a sales model that is different from conventional models used in the consulting market. Our organizational structure comprises an independent Development Department that employs over 10% of the entire company staff and has 8-grade levels for those employees engaged in direct sales. This ensures us a steady accretion in both revenue and new clients. In 2018, the share of new clients in sales of Kreston GCG hit over 45%. We will elaborate on this more in one of our next articles.

We outline 13 sales channels and divide them on both outgoing and incoming. However, each of them is subject to a detailed refinement and creation of marketing influence factors by reference to specific services (products).

Different channels show different feedback, and different MROI may eventually vary in efficiency. Let us take a look at the most expensive and inefficient, yet quite popular among other consulting companies, sales channel – business events.

There are 4 approaches to business events:

  1. Event arrangement.
  2. Event sponsorship.
  3. Participation as a speaker.
  4. Participation as a delegate.

The key problem is that most of our colleagues consider all 4 approaches to business events as a PR promotion and networking and make no plans or projections as to the ultimate goal – execute a sale to certain companies through specific people.

How do we approach business events? How do we make the most of them?

First of all, it is essential to take your own service portfolio into account, assess its value for a client and understand the target audience. Let me remind you that sales channels are just a way to convey your message to decision-makers. If the market has low demand for such a service, and you cannot create a new demand, no article can help you with sales.

1. Just as any sales channel, a business event should have a sales funnel

  1. Target audience identification. 2. Search and formation of contacts. 3. Initial communication. 4. Meeting arrangement. 5. Company presentation. 6. Demand diagnostics. 7. Preparation of commercial proposal. 8. Conclusion of agreement. 9. Advance receipt.
  1. Each stage of the funnel needs to be measured in plan and in fact

Let us break down approach 4 – participation as a delegate.

Conference websites are often to post lists of participants. Or suppose you have already met the hosts and have an invitation list: you evaluate if you can come over to talk, spark the interest and make appointments with 15 decision-makers at the event.

In reality, some of them will not come or you will not get the chance to talk to those who came. Most likely, you will communicate with 10 representatives of potential clients – prospects. Depending on the level of a salesman, there may be different indicators at stage 4 “Event Arrangement”. Think, for instance, of 50%. You have managed to agree on 5 meetings and hold 5 presentations.

In a properly managed meeting, one can have 5 diagnostics of the prospect’s demands, translate them into leads and prepare 5 commercial proposals. Naturally, results are below expectations. In our company, 5 meetings with prospects translate into 2-3 commercial proposals.

This year, Kreston GCG translated 33% of commercial proposals into contracts. That is, with 15 decision-makers identified from our target audience, we converted one conference into one sale with one salesman.

3. It is essential to identify financial KPIs for events

The costs for each stage in the sales funnel should be calculated and compared with the costs of other channels and actual income.

If you calculate the previous case with a conference participation, you will get the following results:

  1. Cost of conference participation: UAH 10,000.
  2. A portion of an S1 salesman has (preparation before conference, participation and holding of meetings): UAH 2,500.
  3. The cost of 1 communication with a decision-maker: UAH 1,250 (12,500/10).
  4. The cost to arrange one meeting and presentation: UAH 2,500 (12,500/5).
  5. Direct distribution expenses at a contractual cost of, say, UAH 300,000: 4.2%.

How much more or less?

If we compare with standard indicators from the channel “Outgoing calls/messages”, then with 30 performing calls to decision-makers plus the corresponding portion of salesman’s salaries in the amount of UAH 10,000, the cost per communication with a decision-maker will account for UAH 333 instead of UAH 1,250. For the next 14 meetings arranged, one meeting costs UAH 714 instead of UAH 2,500. As a result, we have 7 commercial proposals and 2 agreements of UAH 300,000 each. In total, direct distribution expenses will account for 1.7%.

We included the cost to participate in a conference and a portion of the salesman’s salary (net of a motivational variable) into direct distribution expenses to compare sales channels. The difference is 2.5 times.

For comparison, we took standard indicators from the sales system used in Kreston GCG, which (between you and us) are performed by and large.

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4. Each event has a separate sales map and KPIs for the sales

It is essential to have an officer responsible for events and sales channels. A sales channel should have internal instructions containing rules and business processes, an annual program with projected revenue and expenses, etc. It is important to arrange the work with salesmen in a form of applications, formation of sales maps, plan verification and assessment, KPI control for each event.

It is quite an expensive channel that works well long-term. However, it requires to shift emphasis from marketing and PR to direct sales. In this case, your sales will be more predictable, and the growth of your business will meet your expectations.

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Despite the high level of corruption and poor economic growth, the insurgency on the Ukrainian M&A market is growing due to the low cost of assets and the presence of internal investors with enough money to enhance existing companies and diversify investments in different industries.

According to KPMG Ukraine, the size of Ukrainian M&A in 2017 increased by 37% to $1 billion, while their number — by 22% to 67 transactions. To that note, the market of M&A is far from being as active as in 2013. CIS companies were the most active foreign participants on the market with their key focus being centered around Ukrainian assets in Crimea, North America, and Europe. However, there are other estimates as to the size of the Ukrainian M&A. According to the financial intelligence and news service Mergermarket and legal firm Aequo, 2017 marked a 57% increase in M&A — up to €554 million. The number of transactions hit its four-year maximum with 44 transactions as compared to 30 and 41 of 2015 and 2016, respectively.

Some studies have other figures. According to Zephyr Global M&A Review 2017, the number of M&A transactions in Ukraine declined by 35% to $5.14 billion in 2017 ($7.95 billion — 2016). Ukraine ranked third by the size of M&A among the states of the Central and Western Europe being ahead of such countries as Romania, Czech Republic, and Hungary. The number of M&A increased by 33% to 60 transactions. Such a huge difference stems out of the research methodology.

The largest transactions in 2017 were (according to KPMG): an acquisition of 100% shares in Ukrainian Agrarian Investments from Onexim Group for $155 million by Kernel; an acquisition of 13% shares in Ferrerxpo Plc from CERCL Holdings Limited for $126 million by BlackRock Inc.; a sale of 100% shares in PJSC “Evraz Sukhaia Balka” to DCH Group for $110 million by Evraz Group; a sale of agricultural assets in Crimea to an anonymous buyer for $78 million by an agricultural holding MKhP; and a purchase of 75% shares in 10 agricultural companies from Glencore for US$55 million by Epicenter K.

All studies show that domestic investors set the tone. According to Zephyr Global M&A Review 2017, residents accounted for 41 transactions, whereas Russian companies — 4, and Cyprus — 3. According to Mergermarket, 75% of transactions involved Ukrainian companies and only 25% of transactions involved non-residents. That said, most transactions were structured through foreign jurisdictions.

“So far, internal investors lead the investment ratings both by size and number. Local companies have a better grip on the situation since they have already been here and factored in all the risks. For foreigners, the decision about the first investment is much more difficult to take. However, there is a positive trend. Since 2017, Ukrainian companies with local owners are have been facing competition from Ukrainian companies with foreign owners. Foreign companies that had invested in Ukraine before the crisis now compete with local companies for juicy assets, which has not been the case since 2014” — says Vladyslav Ostapenko, Head of Corporate Finance and M&A at EY in Ukraine.

Local investors have a good position too. With a plethora of investment opportunities, they use the momentum to reinforce their market position by acquiring affordable competitors or diversifying investments in various industries. Many transactions seek to enlarge the existing business, especially in agriculture and energy sectors. As far as domestic investors are concerned, the investment company Dragon Capital, business groups TAC, DCH, Burisma Holdings, and agricultural company Kernel are most active on the M&A market.

At the same time, experts note that foreign investors are becoming more active. “Based on our project portfolio, foreign companies, which had never been in Ukraine and who we proposed acquiring a profile asset here in Ukraine two years ago, always had the same response — a polite refusal due to the lack of interest in a region. Today, however, foreign investors are actively engaged in the process: they study materials, come to inspect assets, and meet with owners. This means there is interest and that we can expect foreign investors to return to the Ukrainian capital market. Non-residents are looking for assets to buy, but they are not the changing power on the market for now,” — says Vladyslav Ostapenko.

According to Ihor Dykyi, Director of Corporate Department at IBI-Rating, non-residents accounted for one-third of transactions. Most of them are strategic investors, who gradually build up their presence in Ukraine. However, little by little, there is interest from investors that do not hold any assets but are exploring the market actively.

“For now, a foreign investor is an oddity for the Ukrainian M&A. Foreigners see Ukraine as a toxic state. The country is too risky because of the military actions in Donbas, economic instability, and poor legislative base on investment security”, — says Oleg Kuznietsov, Partner at Kreston GCG. For the M&A market to grow further, certain risks should be addressed: slow pace of reforms, endemic corruption, presidential and parliamentary elections of 2019, and unfavorable macroeconomic situation.

However, Ukraine’s investment climate is far from perfect. According to the European Business Association, Ukraine’s investment attractiveness in July to December 2017 declined by 3.03 points of potential 5, which is 0.12 points less compared to the first six months. According to respondents, the Ukrainian business climate has had no significant changes. 25% of respondents saw no positive changes for their business, and almost one-half of the respondents pointed at a lack of any changes. Respondents also spoke on the issues that prevent their business from growing: the lack of results on the prevention of endemic corruption and creation of an anti-corruption court, a slow pace of reforms, political and economic instability, etc.

According to the American Chamber of Commerce, the Ukrainian business is facing corruption more often. In 2017, 91% of respondent businesses became victims of corruption, while in 2016 this figure was 81%. That said, 36% of respondents think that the level of corruption in 2017 decreased (47% in 2016). Corruption may take different forms, but the main ones were bribes and ‘contributions’ to stop pressure on the company. As a result, 40% of respondents speak about additional legal expenses due to corruption, 17% say international companies are unwilling to work with Ukrainian companies on that very reason, and 22% point at the unwillingness to develop their business.

At the same time, the surgent M&A market means the investment climate has improved in Ukraine. “According to domestic investors, there is some equilibrium in the political and economic environment, i.e. no significant shocks are anticipated and, therefore, investment projects can be implemented, including M&A. Our practice shows the increasing number of pre-investment analyses (due diligence) — a common prerequisite for M&A. However, their existence does not guarantee a successful M&A. It only means that an investor wants to prone the situation and considers entering the market. Therefore, the investment appeal of Ukraine has slightly grown in the eyes of investors” — says Oleg Kuznietsov.

Venture investments is another indicator of a vigorous investment market. According to the Ukrainian Venture and Private Equity Association (UVCA) in partnership with Deloitte Ukraine, it was following the fall in 2016 when the total size of venture investments in Ukrainian IT companies took a tumble and reached US$259 million, thus, being three times higher than the previous year. The last year also became successful for direct investments. In 2017, there were 14 private equity transactions accounting for $126.7 million in total.

Unfortunately, many IT startups are Ukrainian only by the citizenship of their founders and by office location for some employees. As far as legal matters are concerned, these companies are registered in the US and pay corporate taxes there.
Taking into account the macroeconomic trends, it is reasonable to assume that the number of M&A deals next year will top the figures of 2017. The prerequisites for this are a relative macroeconomic and monetary stability, attempts to kindle the privatization and continue improving the business climate. However, it is unlikely we will see the exploding growth.

According to KPMG Ukraine, the increased number and size of transactions will be facilitated through the growth of the Ukrainian economy and structural reforms supported by international financial institutions.

Influencers

The M&A market is a reflection of the economy and performance of certain companies. It also stems from the geopolitical situation in Ukraine and war in the Donbas. Investors become more interested in Ukrainian property mainly because of the improved macroeconomic stability, cessation of hostilities in Donbas, and a relatively low cost of assets.

“The market worth of assets may differ depending on certain factors. These may be buyer’s preferences, revenue risks, time-to-revenue, liquidity, degree of control powers. The supply and demand are also an important factor” — says Larysa Poberezhniuk, managing partner at Poberezhniuk and Partners Law Group.

According to Oleg Kuznietsov, the economic situation made the cost of Ukrainian assets hit rock bottom and remain there still. Unfortunately, nothing promises drastic changes in this area. To that note, almost all the most promising assets have been already bought, and the remaining ones are of no serious interest for investors. Therefore, their value does not grow.

“Meanwhile, there is another peculiar trend on the market caused by the upcoming presidential elections. Some experts fear a military regime can be declared in Ukraine as a result. Such a forecast divided investors into two groups. Anticipating the worst, those rooting for the bad scenario hop on all assets they find interesting. Others take no serious actions preferring to wait until the situation unfolds itself. This fact should be also factored in when we look at the increasing number of M&A deals in Ukraine” — says Oleg Kuznietsov.

For his part, Vladyslav Ostapenko notes a gradual improvement for the sellers: “the market is slowly reviving, valuation multiples are growing steadily”.

Another trend was an en masse withdrawal of Russian owners from the Ukrainian market as a result of restrictions imposed on the Russian banks in Ukraine. Since 23 March 2017, five Russian banks working in Ukraine have been under sanctions. They are forbidden to conduct financial transactions for the benefit of affiliates, including parent entities. Even though there are potential bidders, no deal was struck for various reasons. It is most likely that Russian financial institutions will soon fold operations.

Industrial priorities

According to Zephyr Global M&A Review 2017, most deals fall for agriculture (12), banking (9), oil & gas (4), finance (4), and metallurgy (3).

At the same time, according to Mergermarket, the banking sector leads with 33% of the total number of transactions and 33% of the total size of transactions in 2016–2017. The buyers showed interest in other assets from the power generation and extractive industries (14%), FMCG (13%), telecommunications (11%), and agriculture (8%).

According to Vladyslav Ostapenko, the most popular industries for M&A are: agriculture (mainly crop farming, grain elevators), IT, commercial real estate in large cities. Other industries are characterized by a situational demand. Only leading companies are showing interest or have new technology/equipment.
“We are currently having a good situation on the commodity market, which only adds to the appeal of export-oriented industries. We expect no serious changes on the M&A market in the nearest future” — says Ihor Dykyi.

It bears mentioning that agriculture will remain one of the most attractive industries for M&A. According to KPMG, the appeal of agriculture owes to the steady growth of direct foreign investments in the industry and increased number of deals in the agriculture against the backdrop of higher yields and high export potential of the industry. Agriculture will have even more investment prospects once the land moratorium is lifted and the market becomes free as required by international donors, and that is what people and certain politics do not really want. That is a political question, and no politician would want to risk ratings in the run-up to elections.

The commercial property remains to be the most promising on the market. One of the most active internal investors in the market is Dragon Capital, which has recently added some good investments to their portfolio: Shopping Centers Pyramid in Kyiv and Victoria Gardens in Lviv, business centers Prime and Eurasia, some logistic assets and a TV and radio broadcaster Radio Era.

Foreign investors have a high interest in IT for its export-oriented nature and low susceptibility to the local economic environment. Investments were made both in startups and through large companies acquiring small companies. This trend is expected to continue in Ukraine for the next few years.

According to Larysa Poberezhniuk, the political situation we have now causes a gradual reduction of direct Russian investments, especially in the banking sector. Russian owners simply have no other way but to sell their assets to cease business activities.

With regulations imposed by the National Bank of Ukraine, Ukraine’s banking sector is likely to consolidate.

Mention should also be made of the alternative energy sources. “Ukraine has a unique situation where the green energy tariff is still high, thus, encouraging local investors to build wind and solar stations. All efforts center around the plant to commission it before 2018 and hold that beneficial tariff so then a foreign investor can be found and the implementation ends with premiums. In this regard, we can expect increasing M&As in alternative energy in 2-3 years”says Oleg Kuznetsov. As far as the global situation is concerned, experts point that M&A will increase in such industries as oil & gas, telecommunications, transportation, FMCG and retail, including extractive industries and metallurgy (according to EY).

M&A globally

According to EY, the number of M&A deals entered in 2017 topped the peak of 2007. Over 52% of respondents — more than 2,500 executives from 43 countries — say that they plan M&A in 2018. Top managers are also full of optimism. The number of executives planning to conduct more deals in 2018 has increased by more than two times (67% in April 2018, 33% in April 2017). 80% of respondents expect a tougher competition for assets subject to M&A.

Positive macroeconomic and capital market situations are what raises interest in corporations to conclude M&A deals. Most top managers (73%) think that the global economy is on the mend. Three-fourths of respondents (77%) expect corporate revenue to increase.

However, owners acknowledge that the geopolitical uncertainty creates difficulties, and almost half of them (43%) consider it to be the main risk. More than one-third of respondents (36%) see changes in regulations and protectionism policies as risks that will only hamper the development.

More than three quarters of respondents (81%) plan transnational mergers and acquisitions within the next year because access to new markets in various regions is on top of their agenda.

Privatization

The increasing number of M&A also owes to the government’s actions taken to invigorate privatization of state-owned companies. “Another important thing to upsurge M&A can be the start of a privatization of state-owned companies. If successful, many other investors will follow the example of pioneers” — says Ihor Dykyi.
January marked an adoption of a new privatization act designed to simplify the process greatly. The act stipulates regulations on privatization to be united under one law instead of seven and divide privatization lots into two groups (instead of five): small-scale privatization and large-scale privatization. The first pertains to state-owned companies worth more than ₴250. A privatization can be contested in international arbitrary courts within three years following the privatization. Buyers are eligible to demand a conclusion of any legal agreements under the law of England and Wales before January 1, 2021. Moreover, privatization lots will have a bankruptcy moratorium imposed. It is suggested to have two privatization procedures instead of five: bidding and purchase. If the first auction has not taken place yet, the second one will have the prices reduced. According to the Cabinet of Ministers of Ukraine, small lots will be sold in June 2018 at Prozorro.Sales.

At the beginning of May, the government adopted a list of 26 lots to be sold in 2018 as part of a large-scale privatization. Shortly after, 3 lots were removed from the list. It included 9 power facilities: Azovmash (almost inactive now), Turboatom (government has majority ownership), Centrenergo and other lots. The final flourish is Odesa Port Plant (OPZ — Ukrainian abbr.). Nothing changed since the previous year. The privatization competition for this lot has already been snapped twice and the initial price accounts for $54 million, which is 10 times less than three years ago. It is expected that Odesa Port Plant and other large lots will be privatized by November 2018.

Privatization is an excellent way to breath life into the Ukrainian M&A. That said, there is no issue with overpriced lots anymore. Investors are not willing to pay excess for an asset (especially when the government decreases the price). Alas, Ukraine is still risky to invest.

No doubt, some assets are interesting for investors, especially for the local ones. However, large investments are unlikely to enter the country. A classic example is Odesa Port Plant and the muddy waters surrounding its privatization. This case shows us only one thing — somebody particular really wants to put hands on the plant and with demand comes the supply. Authorities promised investors transparency in privatization and international creditors demanded it. Such a transparency does surround sales of various illiquid assets as part of a small-scale privatization. However, transparency in the large-scale privatization leaves much to be desired.

 

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Last year Ukraine has lost the status of net exporter of pork. Even back then, the imports exceeded exports – 5.6 thousand tonnes compared to 4.9 (according to the State Fiscal Service of Ukraine).

There was, however, one fact that smoothed the waters: the cost of total exports accounted for US$10.5 million, and imports – 9.96%. On paper, we could say that the country sold more pork than bought. 2018, however, set the record straight.

Imports for the first six months exceeded exports almost ninefold. According to the State Fiscal Service, Ukraine had overall 8.4 thousand tonnes of pork imported for US$15.4 million in January-June. 924 tonnes were imported in the same period of the previous year.

Imports have good chances of growing further.

How come?

The war in Donbas could be considered as a point of no return that caused the Ukrainian economy to decline and quality of life to drop.

The consumer’s demand for meat in 2014-2015 fell by 22%, which is crucial for pig farmers since most of their products were targeted at internal markets.

Back then, the situation was saved through exports to Russia. According to the Ukrainian Association of Pig Breeders, 2015 allowed Ukrainian farmers to sold record-high 50 thousand tonnes of pork and its derivatives.

In 2016, though, the situation took a U-turn as business relations between Ukraine and Russia ceased terminally.

Entering European markets was a tough challenge too. Not only due to stricter requirements but a high competition as well. As a result, farmers had to decimate their stock en masse.

In 2017, the number of pigs decreased by 10%. The pig stock is declining even now, and outbreaks of African swine fever only add to the issue. In total, Ukraine has about 6 million of pigs, which is an abysmal record.

The last time the state had such figures was 13 years ago. To compare, the number of pigs in Germany is about 26.9 million.

The reduced production will inevitably increase the price of finished products.

What aggravates the situation is the poor equipment at pig farms, old feeding and breeding techniques, higher costs of feedstuff, electricity, veterinary checks. The consumer demand so far has not increased. As a result, pig farming has high cost and low return.

This segment needs support from the state. The law stipulates a compensation of expenses and provides for no lump sums or loans.

That is the costs to build new livestock breeding complexes and a partial reimbursement of the costs to buy animals for further breeding.

Problem is that most farmers do not buy new animals and cut them out because they lack financial resource to provide for them.

Accordingly, they lack funds to upgrade their production facilities. For them, it boils down to a vicious circle.

To survive such conditions, pig farmers have to raise prices for their products. This is despite the global inverse trend that global prices are decreasing.

It turns out that purchasing imported products is now much beneficial than Ukrainian ones.

Moreover, Ukrainian pork compares poorly to the European one, which is cheaper and, thus, has a negative effect on sales and exports.

African swine fever problem

The African swine fever in Ukraine has been rampant for several years now. It is also indicative of how outdated Ukrainian animal husbandry is.

To neutralize the virus (and other diseases), there should be studies made to understand the contamination behavior and prevention measures.

For this purpose, the State Veterinary and Phytosanitary Service of Ukraine should conduct monitoring and selective control on a regular basis.

To the best of our knowledge, Ukraine conducts no such activities. Therefore, no research is being conducted in this area. This means the virus will continue to kill animals.

To protect against animal disease in the future, one would have to adopt a complex of measures, which requires investments. In sporadic cases, some breeders invest their own money.

Ideally, there should be close cooperation between public officials, scientists, and breeders. Which is not what the current situation looks like.

Can the situation be reversed?

Of course, we would like to be optimistic, but here it is almost impossible. There is no reason to think that Ukraine can reach the pre-crisis levels of pig production and pork sales.

Imports increased for a number of reasons. Even assuming the best-case scenario, it will take time to address them all. In our case, the state has no intention to solve the long-standing problems of animal husbandry, particularly, pig farming.

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You can hardly find a person in Ukraine that would seriously believe in a Hyperloop in Ukraine. A supersonic train running through a vacuum tube needs billions of US dollars to build and all of a sudden our state has the resource to build one? The kind of resource that would be much more practical if allocated for conventional railroads! Ridiculous.

Ukraine’s opportunities

If you carefully analyze the situation, it will not seem so comical. Ukraine does have a trump in a sleeve.

First of all, let us take a look at the list of the parties expected to be engaged in a Hyperloop project: In addition to the anticipated Academy of Sciences and ‘Ukroboronprom’, it includes Octagonal Corporation (provides strategic investment advisory services, the Mexican Hyperloop developer Fernando Romero is among its clients), Yuzhmash (manufactures US rockets Antares, expendable launch systems Tsyklon, rockets Zenith), Kakhovka Plant of Welding Equipment (recognized as one of the best in development and production of welding equipment, particularly rail welding), Unit.City (area incorporating dozens of innovative companies), Interpipe (specializes in the production of pipes and wheels for railroad transport; potentially, it can construct a highway for Hyperloop in Ukraine).

This list is non-exhaustive but it translates the project scale rather well. It becomes obvious that we have many reputable and experienced companies to create Hyperloop and most of them have a strong track record and recognition.

More importantly, they can perform most of the production works, thus, reducing the need for international fundraising greatly.

Secondly, Ukraine has experience with high-speed electric trains.

As you recall, the Kriukiv Railway Car Manufacturing Plant released Tarpan model — a train that is nearly on par with Hyundai models and much more cost-efficient.

Surely, Elon Musk’s vacuum trains are way more technological but it is an argument in favor of Ukraine. Apparently, we can achieve things when we really want them.

It is also worth mentioning the signing of the memorandum with Hyperloop Transportation Technologies (HTT), one of the three companies involved in the Hyperloop project. This matter, however, is rather ambiguous.

On one hand, the document is declarative in nature. It does not impose any obligations on the parties. And that means, there is no need to meet obligations and further cooperation can remain on paper only.

On the other hand, signing the memorandum is another step towards a stronger relationship. It is also a chance to come into the spotlight and get investor’s attention. Ideally, this agreement can open global best practices for Ukrainian experts.

So, will there be a vacuum train in Ukraine?

Yes and no. Ukraine has the potential to implement even such a large-scale project as Hyperloop. However, the implementation process will be surrounded with difficulties.

What kind of difficulties?

Firstly, its high cost. According to Volodymyr Omelian’s plan (Minister of Infrastructure of Ukraine), the construction will include several stages.

The first is a scientific substantiation of the project, measurement of risks and prospects. This one will be financed by the state, and all subsequent stages are expected to involve foreign investors. The question still stands, however, if Ukraine is going to have enough money? It is unlikely since we are talking large amounts.

For example, Virgin Hyperloop One (another company that wants to build a vacuum train) has spent US$245 million on research and development alone. But even if we assume that Ukraine is going to raise the amount necessary, how logical would it be to invest in Hyperloop when a plethora of unresolved problems stand are still on the agenda? This is quite a bold decision to make.

What remains to be seen is the investor’s desire to finance such projects in such a weak economy as Ukraine, when there are alternatives in other, more prosperous countries.

Secondly, Hyperloop enthusiasts in Ukraine, that is the Ministry of Infrastructure of Ukraine headed by Omelian, have no clear strategy to implement transport innovations in Ukraine.

It seems that they swing from one extreme to the other trying to hype up and draw attention to Ukraine.

Think of the New Sil Road attempt and the contract entered to build a billion-dollar terminal in Ukraine that would process liquefied gas. Hype surrounded both the road and terminal with nothing but promises of mountains and marvels. And in the end… It went down the tubes. The terminal idea turned out to be a fiction.

There is another issue about the price of travel. Construction costs and infrastructure maintenance will cost a pretty penny, and that is why low-cost tickets are hard to believe (Elon Musk says it will cost $1).

Hyperloop Transportation Technologies spoke of $20, but this is very likely to be a conservative estimate. The thing is that the technology is not ready yet, and its final cost may increase further.

To top it off, implementation is a long and complicated process. Take the land issue for example.

Many experts believe that a Hyperloop ticket can be over $100. But even if it stays at $20 – it is still much more expensive than taking a couchette car. At least at the current dollar rate.

Speaking of Hyperloop. It is still unclear who will pay for its maintenance. The state has no money even to put Ukrzaliznytsia back in order, let alone the vacuum trains.

Conclusion

With a great number of promising companies that can contribute to Hyperloop, Omelian’s idea to develop such a technology is understandable.

Alas, economic realities are not conductive. Of course, the Minister does not promise vacuum trains to appear in a day. His latest statement said that the launch is expected in five years.

Yet even this estimate is very doubtful. Unless Ukraine makes a real economic breakthrough by that time.

For all intents and purposes, it is extremely good that we have such global ideas and immense personalities. Such ideas should not be given up, they just have to be timed right.

Author: Alla Popova

Source: finance.ua

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Chatbots for companies: many pros and a bit of risks

Chatbots provide many advantages, which makes them a full-fledged intangible asset. That said, it is a pricewise purchase that can generate significant benefits in the near future. It is a win-win solution, which is a rare thing when it comes to investment. So, what kind of benefits do we speak of?

Higher earnings. Gartner’s study found that brands are exposed to an up to 15% loss in clients (and, therefore, their revenue) if they do not respond to the client’s inquiry in social media and messengers. Chatbots allow optimizing and maximizing your services.

They, on one hand, relieve companies of the need to finance their own call centers and, on the other hand, significantly extend your audience reach by 24/7 availability. An algorithm can help customers with answers to any questions at any time of day and night immediately and, thus, reduce chances of losing such a customer to competitors. It is no doubt will result in higher earnings.

Lower operating costs. Last year, PrivatBank mentioned at the ChatBot Conference that operating costs for chatbots are 90% lower when compared to a full-fledged call-center. To that note, the difference in customer satisfaction from interacting with a human operator and chatbot is small and accounts for mere 10%.

Optimization of internal profits. The scope of virtual interlocutors does not boil down to call-centers alone. Chatbots can be very efficient and execute a variety of other tasks, including:

  • Collection and processing of client data
  • Corporate database inputting
  • Surveys and feedback on products
  • Event, business trip notification and planning
  • Messenger newsletters (that are much more efficient than conventional e-mail newsletters). Practice shows that the open rate for messenger letters is at least 85%, whereas an e-mail newsletter has only 10-30% tops

For small enterprises, chatbots can also prove very useful. By incorporating the benefits of chatbots and messengers, small companies can abandon the costs to develop a website or mobile application. A facebook account synchronized with a chatbot is all you need to enable clients to make purchases via the social network as if they used some official ultracertified company website. In this scenario, contextual adverts on facebook still remain to be the main instrument to engage customers. As a result, one does not have to make spendings on Google Ads anymore. Which cuts the owner’s costs greatly.

Chatbots in Ukraine. In Ukraine, PrivatBank had become a chatbot pioneer after it integrated a chatbot with their Privat24 application. It processes applications without sacrificing the quality of customer service, thus, making a human operator’s life easier. Human aid is only needed in situations that chatbots cannot solve on their own. PrivatBank’s chatbots also work with Telegram and Viber allowing for online payments and transfers.

There is also a case of chatbots being used on the Ukrainian media market, such as the one introduced by 1+1 (Ukrainian tv company) that uses Viber. A chatbot like this can broadcast, say, ‘Tantsi z zirkamy’ (Ukrainian show based on the British Strictly Come Dancing). The chatbot has generated around half a million subscribers since its creation. These results once again prove that algorithms can be highly effective in digital marketing.

State agencies also study up on the chatbots. As far as public services are concerned, there is already a chatbot by the name ‘Derzhsluzhbovets Taras’ (Public Servant Taras – translator’s note) available for Telegram and Facebook users. Its purpose is to aid people with e-declarations and give step-by-step instructions to fill them out. Basically, its creation was a response to a large number of mistakes and errors when it came down to e‑declarations.

Cost. New technologies are very common to require considerable expense for implementation. Theoretically, chatbots should be the same story. However, they are an exception. Simple algorithms do not take much time to create and do not require huge investments. Chatbot developers offer package solutions by reference to their scope of application. If you do not wish to engage third parties, the Internet is full of free platforms to create chatbots.

Chattypeople is considered to be one of the best (creates bots for Facebook only, comes free-of-charge), FlowXO (where one can create bots for different messengers; most features are paid), Facebook Messenger Platform (a paid service that is more difficult to use, however, it is official and has better integration with the Facebook messenger).

The most expensive bots are based on artificial intelligence and machine learning technologies. These include virtual assistants for mobile phones, corporate assistants. The cost of such virtual interlocutors may exceed US$100,000.

By the way, the cryptocurrency market has the most expensive bots. In 2018, Exenium launched an ICO to create a chatbot-based cryptocurrency exchange directly connected to the messenger. The company collected a softcap of US$1.2 million.

Hold.me, a self-service platform that uses a chatbot to communicate with customers on behalf of the company worker, collected over US$1 million. One of the most interesting cases of ICO launches is Dropil that raised US$60 million to develop a commercial chatbot Dex. The chatbot was designed to analyze market volatility and find the most promising areas. After its great success, a new bot Arthur was developed to arbitrate the cryptocurrency. It helps to find the best place to exchange cryptocurrencies and, thus, maximize benefits.

Risks. Despite obvious advantages, chatbots, same as any other asset, must be used as intended. Otherwise, their implementation with the business will not give the desired effect.

First of all, one should keep in mind that chatbots can replace real communication only in simple conversations. One would need a human consultant to solve complicated issues. The only exception is for the services that offer food delivery, ticket purchases, medical appointment bookings, etc. They are very simple, and the likelihood that one would need help from a human employee is very low.

At the same time, it is important to ensure optimal performance of a chatbot. That is, the program should work quickly without errors and lags. Otherwise, there is a great risk of losing a client. No one will appreciate a code that confuses the input data with something else or responds too slowly.

Also, keep in mind that it is unwise to disguise a bot as a human being. It is better to warn customers that they are talking to a chatbot. First of all because honesty matters. CEB survey finds that above all customers appreciate honesty in companies. Secondly, by warning people in advance, one can avoid confusion if the bot malfunctions. Imagine a conversation with a client, then something goes wrong and the bot suddenly starts duplicating own messages. The person will decide that the company staff is weird and will not come back in the future. However, if a customer knows that he/she speaks to a bot, it will be self-evident that the bot is malfunctioning and, perhaps, will even be that very person to inform the support about the issue.

Author: Sergey Belyasov

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Strategic goals and long-term vision are just as important for any company as the ability to quickly adapt to market changes, achieve results, meet deadlines, and be proactive when it comes to troubleshooting. Strategic planning enables a company to have a firm market position because the management will take decisions based on long-term business goals.

What is strategic planning?

There is a number of definitions of strategic planning. They are all similar. We treat strategic planning as an identification of long-term goals and business areas that, once implemented, can ensure a sound long-term performance and good adaptability to the changing conditions of external markets.

A strategic plan should be long-term and provide for flexibility so it can be altered when necessary. In essence, it is a program for a company to operate over long periods of time. It has to be adapted to the everchanging business and social environment.

Strategic planning stages:
• Identify company’s mission (key objective).
• Form strategic goals.
• External environment analysis.
• Find general strategy.
• Analyze strategic alternatives.
• Develop functional and resource-oriented subsstrategies.
• Implement, control, and assess results.

An analysis of external environment allows determining positive and negative factors (threats) for the company: political, economic, scientific and technical, social, international, etc. It is also crucial to analyze market factors such as macroeconomic analysis of supply, demand, and competition.

A master strategy is the heart of strategic planning. Depending on the company development cycle, there are basic strategies to choose from:

  • growth strategy — company’s intention to increase sales, profits, capital investments, etc.;
  • stabilization strategy — a good solution for volatile sales and profits;
  • survival strategy — defense strategy used to go through a deep crisis.

Substrategies can be divided into two groups: functional and resource-oriented.

Functional strategies include:

  • marketing strategies,
  • production strategies,
  • R&D and experimental strategies.

Resource-oriented strategies are:

  • human resources and social development strategies,
  • logistical support strategies,
  • organizational strategies,
  • investment strategies,
  • financial strategies,
  • technical development strategies.

To implement a strategy one would have to develop programs, budgets, and procedures for short- or long-term, which altogether can qualify as a strategy implementation plan. Strategies can be evaluated both through quantitative criteria (return, size of sales, earnings per share) and through qualitative measurements (personnel’s qualification).

Strategic planning objectives

Strategic planning allows you to set realistic goals for the future, allocate resources (required to obtain these results), as well as steps needed to achieve these goals and objectives.

The main goal of strategic planning is to create and reform business and products.

Among other key goals of strategic planning is the selection of directions and arrangement of processes so that a plan can hit the targets set, including in unforeseen events such as that can affect company in a negative way.

Among other things, strategic planning:
• ensures the company is ready to use potential advantages to cement its success;
• allows for a comprehensive analysis of potential challenges and threats;
• enhances coordination of actions while meeting the targets;
• creates conditions enabling the management to develop strategic thinking and make accurate forecasts;
• allows to allocate resources more rationally and efficiently, and concentrate them on key business areas.

At the same time, the managing partner at INTALEV Boris Starinskiy noted in his article ‘Strategic Planning’ that the basic concept of planning is that the environment is constantly changing and the future is open to question. For that reason, it is unrealistic to accurately define the company’s work for many years in numbers. However, it is quite possible to establish market trends and factors that will influence a particular business, which is the first objective of strategic planning. The second one is mapping out a plan of actions that would create maximum competitive advantages for the business in the future.

According to the expert, it means that the purpose of strategic planning is outlining how the external environment will change and how different scenarios can potentially transform a company.

Planning horizon: Ukrainian realities

On average, strategic planning covers a span of 3 to 10 years. However, the timing largely depends on the company size. As the business systematization and effective management expert Kirill Kunitskiy notes in his blog, large companies can plot a course for 5 to 10 years, small companies — 1 to 2 years, while overall owners should think about long-term development as well. According to Kirill, companies should hold strategic sessions as part of the strategic planning that would require company officers to develop a vision and goals for the next year. To that note, it is important for strategic planning to include all key officers.

The expert identifies three types of goals: quantitative, qualitative, and organizational.

Quantitative goals: turnover, profit, number of clients, average payment amount, profit margin, etc.

Qualitative indicators: desirable product features, geographical activity, professional level of the team, market reputation, etc.

Organizational goals: organizational structure, business processes, automation, etc.

The company’s management should assess which parameters will become the cornerstone of business planning and jointly develop a common vision of these indicators at the year-end.

According to Kirill Kunitskiy, it is important to divide main goals into intermediate goals in quarter increments. In fact, the entire strategy should become a set of projects that need to be implemented to achieve the main goal.

As the expert added, it is also important that all employees become aware of the vision and strategic goals.

Boris Starinskiy indicates that the horizon of strategic planning is usually quite long — 20-30 years ahead. At such periods of time, it is impossible to give a precise estimate of when certain events take place. However, one can still see general trends, make preparations, and wait. When there are signs of a predictable situation, companies can use a premade scenario and start the production or sales. Some other company without such planning can indeed make similar decisions but will lose time as a result, which is a crucial factor in competition.

Anastasiia Baidachenko, a strategic business consultant, says that the optimum horizon of strategic planning in Ukraine is 3 years. According to the expert, it is important to understand that for Ukrainian companies, preparation and adoption of a strategic development plan will not align with identical plans in developed economies or countries where legislation is rarely changed. Another point to bear in mind is that Ukraine is a small country compared to other economies and, therefore, will be influenced by large states that supply resources or technological products. “The importance of technological changes has skyrocketed over the last 5 years, and in some industries serious technological changes will take place only once a year” — said the expert.

According to Anastasiia, for the Ukrainian business, it means a necessity to:
• identify significant factors influencing the business and assess their significance;
• form action scenarios at the stage of strategic planning;
• be prepared to adapt the strategic development plan annually.

Elena Siumak, Head of Strategic and Business Planning at Kreston GCG thinks that regardless of the business scale, one can use any planning horizon, and strategic planning stages will be very much alike with a few differences in details, formalization, approaches to analysis and diagnostics, tracking processes, etc.

“Both the owner and top management should have a clear understanding of a long-term business development trajectory, which will prove useful when it comes to real-life decision-making. Ukrainian business now finds itself being even more integrated with the world economy and cannot continue to ignore the necessity for strategic planning to be able to compete with those who have long mastered this toolkit” — added Elena.

Errors, problems, and solutions

According to Borys Starynskyi, Ukrainian companies make many mistakes during strategic planning. One of the most common is to assume that market growth will repeat its pattern, and competitors will act as they used to. In practice, everything is quite different. Besides, strategic planning does not always factor in macroeconomic factors that are very important in modern realities.

Anastasiia Baidachenko draws attention to the following error of Ukrainian companies when it comes to strategic planning: they are often to apply such models as ‘right here, right now’ or ‘skim the cream’.

“Companies are well aware that the existing business model will not be functioning well, say, due to restrictions imposed with new laws, strong international players entering the market or rapid increase in competition. That is why the business tries to maximize gains, enjoy their quasi-monopoly, increase short-term earnings while virtually making no effort in the target segment to satisfy their customer, generate and add some value, build-up loyalty” — said the expert.

She adds that owners are dimly aware of what their business is developing into in 2 to 5 years.

“Owners are likely to seek for a new niche where they can apply their skim-the-cream model if the current one offers fewer benefits. It is also important to start strategic planning by reference to the needs of the target segment and values that a company can bring” — said Anastasiia Baidachenko.

Elena Siumak referred to the lack of basic planning as the main error at Ukrainian companies:

“When ‘studying’ the western experience, post-Soviet states for too long clamored that their best practices do not strike roots in our realities and that stereotypes are still impossible to overcome”. Which is quite logical when doing nothing is the answer. That is why Ukrainian companies, on one hand, have sighed with relief in naive faith that planning or even strategic planning is no matter of theirs and, on the other hand, always fuss over never-ending gaps in the planning. Not many people have wits to link these factors together” — she noted.

In fact, Elena Siumak thinks that one of the pillars for balanced and rapid growth is strategic planning tools.

“In Ukraine, it became more and more evident in the context of personal development, which can be seen from an increased popularity of training sessions, workshops, and other educational platforms about personal strategic planning, which is not the case with business planning. Small and medium businesses believe it is very expensive and meaningless due to the high volatility of the external environment, large companies tend to actually use planning instrument but are often very bulky to keep them updated. However, there is good news too. For small- and medium-sized companies, there are approaches to strategic planning that fit their size when planning does not resemble a cannon shooting at a flea” — said Elena.

As to the strategic planning challenges before Ukrainian companies, Anastasiia Baidachenko pointed at the need to build multi-faceted models and factor in non-linear development scenarios.

“Modern businesses are forced to operate under aggressive changes, and decade-old models sputter as efficient companies are becoming non-profitable all of a sudden. It is crucial for owners and managers to be ready for new approaches, to recognize errors, and to learn from them. This can often imply an assignment of managerial duties to officers of the new generation or independent board of directors” — she explained.

Bottom line

Strategic planning is a comprehensive tool for problem analysis and troubleshooting. In the context of strategic planning, there should be a management plan designed to arrive at the company’s targets and accomplish its mission. A strategic plan allows owners and senior management to understand the long-term development vector and help to make efficient decisions.

Conclusion is that strategic planning is the cornerstone of a balanced and exploding growth for any company.

Source: “Financial Director” [Ukrainian – “Finansovyi Dyrektor Kompanii”, No. 6 / June / 2018

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Many countries support the construction of additional gas pipe along the Baltic Sea belt enabling Russia to supply gas to Germany around Ukraine. No doubt, some countries are against it.

There are many motives and conflicts of interest involved. To understand these motives is to answer the question whether Nord Stream 2 will arrive at a successful completion and if Ukraine can actually prevent it.

Supporters and their motives:

Russia. This stakeholder does not need much explanation. Russia’s actions have proved many times that natural gas is not a bargaining commodity but rather a tool to impose pressure and own agenda on Europe. Once Nord Stream 2 is operational, Russia can snowball the pressure and cement its influence in the region.

Besides, Russia can minimize its dependency on Ukrainian transit and inflict additional damage on it. After all, without the gas transit Ukraine can lose 3% of GDP (according to the National Bank of Ukraine).

Germany is among the initiators of Nord Stream 2. Once Germany has the gas transit directly from Russia, they solve their dependency on transit states and gas wars that Ukraine and Russia are notorious of.

This one is some weighty reason. That said, by concentrating two gas pipelines in its territory, Germany becomes a major gas hub for Europe.

From there, the issue will go beyond the gas problem for other European states as Germany is going to receive some hefty transit profits. Not to mention that 4 Germany companies are engaged in the construction, and the resultant profits will render the project even more alluring.

At the same time, the Germans will not have to spend a penny since Russia promises to cover all costs. How can anyone resist such a beneficial offering? Well, there is not much choice anyway. Surely, the USA is there with a shale gas alternative.

However, the US gas is more expensive. Supplying it is even more difficult since Russia is closer on the map than the States.

The rejection of the US gas is also politically motivated. As of now, Trump pursues a rather aggressive trade policy.

Let us remind you of the last-year steel and aluminum duties imposed by Washington. At the same time, the US president demands Germany to refuse from a highly lucrative Nord Stream 2. Does not look like a fair bargain between the US and Germany.

Sweden, Switzerland, and other countries that agreed to the construction. Most of them benefit from Nord Stream 2.

For instance, in Sweden Gazprom plans to establish some facilities to construct the pipeline, which promises Sweeden some solid earnings to the budget.

Switzerland is a little bit different story. Firstly, it is a Swiss company Nord Stream AG that committed to constructing the pipeline, which, yet again, is going to generate tax dividends for the budget.

In addition, Swiss revenues include freight traffic gains from Allseas AG, a piping company that also undertook to implement the project. In this case, the daily gains account for around EUR 300,000.

France, Czech Republic, the Netherlands, and other EU countries have a similar situation. There are large companies registered in these states that are also engaged in Nord Stream 2 (French Engie, Czech NET4Gas, Dutch Wasco, Coatings Europe BV, etc.). The unwillingness to lose these gains and, naturally, sour relations with big companies are the drivers that govern politics in these states…

Engie, by the way, is one of the shareholders in Nord Stream 2. The company has made multiple statements that they are going to back up the project under any circumstances.

Nord Stream 2 opponents:

Among the main opponents are Ukraine, USA, and Poland.

Ukraine. It goes without saying that Ukraine becomes highly exposed. The state is going to lose some hefty 3% of its GDP, and the transit pipe is expected to become a burden after the gas goes through Nord Stream 2 around Ukraine. For us, Nord Stream 2 is the top of concerns.

Poland has a similar problem. Same as Ukraine, it risks losing gas transit and all the resultant benefits.

It is safe to say that both countries now use any opportunity to criticize the project.

The problem is that these two states have little valid reasons to prevent the construction. Both Ukraine and Poland accuse Russia of a gas pressure on Europe and call for alternatives to the Russian commodity.

The government’s efforts have not brought a solution yet. Last year, the European Commission stated that it had no powers to block Nord Stream 2. It turned out EU regulation had had no mention of export pipelines and, thus, could not apply to external suppliers.

USA. On one hand, there is USA, which is against Nord Stream 2. Europe for them is a highly important market to sell their shale gas. It is unacceptable for them to have such a market lost. And in this case, it is not only about losing the market, but giving it to Russia — a state that they have tense relations with.

Until recently, US efforts to prevent the construction were rather inefficient. Americans threatened with sanctions or tried to appeal to Europe’s sense of justice urging them to support Ukraine and Poland and avoid short-sighted actions.

The result was that the sanctions turned out to be not as serious as expected and more importantly insufficient to prevent the construction.

Moreover, the US now finds itself in a situation where the left hand does not know what the right hand is doing. Even though the US government is against Nord Stream 2, large US banks have a different view.

For example, in November 2017, JP Morgan Chase together with the Japanese Mizuho Bank Ltd. and Sumitomo Mitsui Banking Corp. issued a EUR 1bn loan to Gazprom.

This means only one thing — the White House has limited influence to cut off international funding for Russian corporations. Their hands are tied.

Bottom line

As you can see, the opponents of Nord Stream 2 are clearly losing to supporters. Not only in numbers but in reasoning as well.

For most countries, the new gas pipeline promises impressive economic benefits and rids of transit dependency.

Is there anything that opponents can offer? Not much, really. Except for obvious threats clamoring that Europe becomes dependent on the Russian energy. Which is not going anywhere even without Nord Stream 2. Once constructed, Europe obtains more benefits, so why not use them?

What can, however, tip the scales is a reasonable alternative to Nord Stream 2. Something that will make Europe change its opinion.

Perhaps if the threat of upcoming trade wards between the EU and US is resolved, together with a great many of other old problems, then a compromise on Nord Stream 2 may become possible. Which is something hard to believe. Financially, it is a highly lucrative project for Europe overall and the business in particular.

To that note, we can assume that the second gas pipeline along the Baltic Sea can actually take place, and Ukraine has to be prepared for it. Ukraine should at least create a renewable energy sector, diversify and normalize coal supplies and maintain its nuclear facilities in a safe and operational order.

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Russia’s actions over the last six months in the Sea of Azov caused Mariupol and Berdiansk ports to decrease the number of ship calls by 10%. This decreased the port performance greatly. However, the situation remains stable in the region as ports continue to work according to Volodymyr Omelian, the Minister of Infrastructure. He also added that Russia uses the illegal Kerch Bridge and navy in the Sea of Azov to discourage ships from calling in Berdiansk or Mariupol ports.

At this moment, Ukraine together with international partners works on relevant sanctions against Russian ports in the Black Sea. The minister also said that discussions are being held about different scenarios to counter Russia’s actions especially taking into account that Russian ports forbid EU-registered vessels to call.

Omelian also added that the Russian party is to compensate for all these losses. The Ministry of Infrastructure estimated direct losses incurred by Ukraine from the Kerch Bridge to account for UAH 500 million per year.

Now when Russian board guards inspect ships, some companies actually redesigned their routes to go through other ports in the region. However, the Mariupol port remains to be the key destination for such commodities as steel. According to Serhii Vovk, Director of the Center for Transport Strategies, the Mariupol port has huge importance for Azovstal and Ilyich Mariupol Steel Works, and these entities simply cannot reorient towards other ports.

Railroad connection

The most obvious way to offset losses from the Kerch Bridge is to further development of railway communications between Mariupol and the mainland (i.e. increasing the handling capacity of the railway junction at Kamysh-Zoria that accommodates railway trains coming from the Mariupol railway hub) — said Andrii Popov, Partner at an audit and consulting firm Kreston GCG.

On one hand, it allows Mariupol metallurgical plants to directly unload some of the steelworks at Black Sea ports. On the other hand, it will allow the Mariupol port to compensate losses from the cargo turnover by concentrating some of the agricultural and other products (which need large cargo carriers) from all over Ukraine.

As for the further calls to Azov ports, it is important to understand how much geopolitics and economics are embodied in this 10% decline Andrii Popov added.

Source: “Novoe Vremya”

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First, let us explain what a low-tax jurisdiction is. They should not be equated to offshores. In short, any offshore is a low-tax jurisdiction but not every low-tax jurisdictions is an offshore.

Classic offshores (such as Panama, Belize, BVI, etc) are those where:

– company’s activities are not taxed (provided the company does business in the country of registration);

– companies only pay a fixed annual fee;

– financial statements are not provided to public authorities (however, minimum accounting is necessary).

Classic offshore companies are in a steady decline as far as their scope of application is concerned. Their use is confined to the banking compliance, transfer pricing laws, international anti-corruption law. In other words, offshores are a fairy tale meeting its end now.

Stronger measures to counter fraud drew interest to low-tax jurisdictions – onshores. They are not considered offshores but when certain conditions are met, they can be used as low-tax jurisdictions. Some offshores such as Cyprus eventually became low-tax onshores.

Companies registered there are required to keep accounting records, submit tax reports to local regulators and undergo an independent audit.

Low-tax jurisdictions and Ukraine

In Ukraine, the increased interest towards low-tax jurisdictions owes to a stricter transfer pricing legislation rather than to the international tax planning issues.

The Ukrainian transfer pricing legislation has only appeared in 2013. Shortly after the laws, the Cabinet of Ministers adopted a list of low-tax jurisdictions (Resolution No. 1042 as of 25 December 2013) that included 93 countries. Foreign economic transactions with these states, when certain pricing criteria are met, become subject to transfer pricing control and require annual reports to be submitted to the State Fiscal Service of Ukraine about all controlled transactions and transfer pricing documents to substantiate their prices.

Since then, the list of low-tax jurisdictions have changed several times, some states and territories were added and some were excluded. As of 1 January 2018, for example, the list included 85 countries (Resolution No. 1045 as of 27 December 2017) and the last revision included 78.

This begs the question: how come the list of low-tax jurisdictions is so frequently edited and what does it mean for the business?

First, the jurisdictions are selected by the Cabinet of Ministers based on several criteria:

– corporate income tax (corporate tax) 5 or more percentage points lower than in Ukraine;

– states that have no information exchange agreements concluded with Ukraine;

– enlisted states do not timely or fully exchange the tax and financial information in response to SFSU requests.

If the second and third conditions are mainly a prerogative of offshore jurisdictions, the first one is a little bit more complicated. In practice, much depends on how Ukrainian regulatory authorities interpret the corporate tax rates in other countries. Practice also shows that there may be misunderstandings in this case.

It is important to mention that, at first, the Tax Code contained one more condition: public access to information about the corporate ownership structure. When it comes to opening the registers, many countries have not advanced as far as Ukraine did. However, enlisting them as controlled was indeed thoughtless.

More specifically, from 14 May 2015 till 31 July 2015 Austria was in the list of low-tax jurisdictions. After receiving a verbal note from the diplomatic mission of the Republic of Austria that contained clarifications pertaining to effective fiscal regimes, the country was excluded from the list.

A similar situation occurred at the end of 2017 when Hungary, Georgia, Latvia, Estonia were enlisted as low-tax jurisdictions. This decision (especially in Hungary and Baltic countries) provoked a public outcry, and the Cabinet of Ministers had to withdraw its decision at the end of January.

One of the reasons for that, at least for Estonia and Georgia, were a Withdrawn Capital Tax (WCT) instead of the corporate tax (i.e. a tax levied on profits withdrawn from a business as dividends). I would like to point out that it is quite a progressive form of taxation that provokes debates as to its adoption in Ukraine. Perhaps, WCT will be indeed implemented in Ukraine. However, it is highly unlikely since the major external creditors are against it (due to the imminent decline of tax revenue and difficulty to project the WCT yield compared to the corporate tax).

Apparently, having decided to settle the disputes on the enlisting of certain countries in low-tax jurisdictions, the Ukrainian tax bodies decided to act in a more targeted fashion. Resolution No. 480 as of 4 July 2017 broadened the very concept of low-tax jurisdictions by adding countries instead of certain incorporation forms that use preferential tax regimes (similar to our flat tax for self-employed). Incorporation forms such as partnerships or partnerships in commendam are very common in Europe and other countries. It is interesting that the list of low-tax jurisdictions now includes some states in the US: Delaware, California, Nevada, New Jersey, New York, Texas, and Florida.

What’s in it for the Ukrainian business?

Financial, legal, and commercial units running foreign economic activity will have to carefully track all the legislative changes in low-tax jurisdictions. Otherwise one will have to pay UAH 480,000 as a fine for a failure to submit the transfer pricing report (in 2017).

Our transfer pricing practice shows that the changes in low-tax jurisdictions often remain unnoticed. This case may especially be relevant in companies without a transfer pricing policy, that do not engage external auditors or tax advisors and in those companies where transfer pricing duties are assigned to accountants alone.

The result is underestimated tax risks on part of owners and top management, who become dragged into litigations with the revenue service, not to mention the additional charges and extra risks exposing almost all activities at the company.

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