When driving a car, it is essential to look forward to assess changing road conditions, new obstacles, and new opportunities. Prudent drivers—and investors—regularly check the rear view mirrors, but their main focus is on the future.

In a recent essay, Thomas Theiner uses a selective list of acquaintances’ past investment failures to critique James Brooke’s argument that Ukraine is becoming Europe’s new ‘frontier economy.’ Theiner essentially argues that investors should drive through Ukraine looking largely through their rear view mirrors.

But here on the ground in Ukraine, changes are taking place.

Tim Ash, who has chronicled Ukraine’s economic evolution in his regular blog and Kyiv-based newspapers since independence twenty-five years ago, sees the changes. The Ukrainian Venture Capital and Private Equity Association sees them, in the form of new investors. Investment firms like Horizon Capital, Western NIS Investment Fund, and ICU see them. Many of these companies are having one of their busiest summers ever.

According to the Venture Capital Association, Ukraine now leads Europe in IT investment, with over $370 million invested and order books in excess of $1.5 billion. Bunge, the agribusiness giant, recently launched a $300 million investment in the port of Nikolayev. In the West, new investments are causing a labor shortage and rising commercial rents in Lviv.

Major international investment firms now are taking second looks at Ukraine. Asset values are at all-time lows. Average salary levels are half those of coastal China. And Ukraine borders the world’s largest consumer market, the European Union. China spends millions marketing its ten-day “Silk Road” to Europe, but Europeans are waking to the fact most of Ukraine, with lower wage rates than China, is only one day by road or rail from the EU.

Theiner claims the fight against corruption is little more than window dressing to Western donors. But the government has made significant structural changes in the last two years, including:

• Cutting corruption in gas contracting, saving $8.5 billion a year at Naftogaz;
• Breaking domestic gas fraud, saving around $10 billion a year in overpriced gas imports;
• Reforming Ukrnafta, converting losses to a $5.3 billion profit;
• Introducing a transparent, computerized tendering system, saving an estimated $2.1 billion a year;
• Recovering stolen assets from the clan of former President Viktor Yanukovych worth over $4 billion;
• Reforming the VAT system to cut fraud, saving $40 million a year;
• Reforming the processes for electing managers in state enterprises and introducing Western accounting, cutting out an estimated $5 billion in annual fraud.

Yes, corruption is still a major problem. But foreign investors are learning simple ways to protect their investments. After working for two decades in Ukraine without paying a bribe, I have some practical advice that will enable investors to avoid the scenarios Theiner described.

First, support the local community. In the Soviet era, whole towns and cities were built around factories. Company managers who succeed here do so when they take time to understand the complexities of local socio-business relationships. Before making a major investment in a particular municipality, meet with the local mayor to explain what the investment would mean for his town. Buy locally to fuel the local economy. Pay taxes locally so that the region benefits. Run training programs for young people from the community. 

Second, most of the cases of corporate theft cited by Theiner occurred when the investor failed to protect his interests. Under Ukrainian law, a general director has absolute power; if the investor does not put controls in place to restrict the general director’s authority, the company could be at risk. Restrictive covenants in employment contracts are legal and enforceable.

Third, it’s not clever to compete with a local oligarch, who may have gained his wealth by having the right people in his pocket. 

Finally, there are two sides to tax issues. According to the prime minister’s office, only 26 percent of companies pay their taxes in full. Is it any wonder that the tax office is often aggressive? But random checks were declared illegal by the government of former Prime Minister Arseniy Yatsenyuk. Today, the tax office needs very strong grounds for an enforcement inspection. On the positive side, Ukraine cut payroll taxes in half and is now far more competitive in this area than France, Italy, or the United Kingdom.

Business involves risk-reward management. In Ukraine, the rewards can be high, but only if the risks are managed properly. It is not a market for the faint-hearted, nor for those seeking a quick buck. It takes time to understand the country’s nuances and complexities.

When moving into Ukraine, keep an eye on the rear view mirror, but look forward through the windshield, bug stains and all.When driving a car, it is essential to look forward to assess changing road conditions, new obstacles, and new opportunities. Prudent drivers—and investors—regularly check the rear view mirrors, but their main focus is on the future.

In a recent essay, Thomas Theiner uses a selective list of acquaintances’ past investment failures to critique James Brooke’s argument that Ukraine is becoming Europe’s new ‘frontier economy.’ Theiner essentially argues that investors should drive through Ukraine looking largely through their rear view mirrors.

But here on the ground in Ukraine, changes are taking place.

Tim Ash, who has chronicled Ukraine’s economic evolution in his regular blog and Kyiv-based newspapers since independence twenty-five years ago, sees the changes. The Ukrainian Venture Capital and Private Equity Association sees them, in the form of new investors. Investment firms like Horizon Capital, Western NIS Investment Fund, and ICU see them. Many of these companies are having one of their busiest summers ever.

According to the Venture Capital Association, Ukraine now leads Europe in IT investment, with over $370 million invested and order books in excess of $1.5 billion. Bunge, the agribusiness giant, recently launched a $300 million investment in the port of Nikolayev. In the West, new investments are causing a labor shortage and rising commercial rents in Lviv.

Major international investment firms now are taking second looks at Ukraine. Asset values are at all-time lows. Average salary levels are half those of coastal China. And Ukraine borders the world’s largest consumer market, the European Union. China spends millions marketing its ten-day “Silk Road” to Europe, but Europeans are waking to the fact most of Ukraine, with lower wage rates than China, is only one day by road or rail from the EU.

Theiner claims the fight against corruption is little more than window dressing to Western donors. But the government has made significant structural changes in the last two years, including:

• Cutting corruption in gas contracting, saving $8.5 billion a year at Naftogaz;
• Breaking domestic gas fraud, saving around $10 billion a year in overpriced gas imports;
• Reforming Ukrnafta, converting losses to a $5.3 billion profit;
• Introducing a transparent, computerized tendering system, saving an estimated $2.1 billion a year;
• Recovering stolen assets from the clan of former President Viktor Yanukovych worth over $4 billion;
• Reforming the VAT system to cut fraud, saving $40 million a year;
• Reforming the processes for electing managers in state enterprises and introducing Western accounting, cutting out an estimated $5 billion in annual fraud.

Yes, corruption is still a major problem. But foreign investors are learning simple ways to protect their investments. After working for two decades in Ukraine without paying a bribe, I have some practical advice that will enable investors to avoid the scenarios Theiner described.

First, support the local community. In the Soviet era, whole towns and cities were built around factories. Company managers who succeed here do so when they take time to understand the complexities of local socio-business relationships. Before making a major investment in a particular municipality, meet with the local mayor to explain what the investment would mean for his town. Buy locally to fuel the local economy. Pay taxes locally so that the region benefits. Run training programs for young people from the community. 

Second, most of the cases of corporate theft cited by Theiner occurred when the investor failed to protect his interests. Under Ukrainian law, a general director has absolute power; if the investor does not put controls in place to restrict the general director’s authority, the company could be at risk. Restrictive covenants in employment contracts are legal and enforceable.

Third, it’s not clever to compete with a local oligarch, who may have gained his wealth by having the right people in his pocket. 

Finally, there are two sides to tax issues. According to the prime minister’s office, only 26 percent of companies pay their taxes in full. Is it any wonder that the tax office is often aggressive? But random checks were declared illegal by the government of former Prime Minister Arseniy Yatsenyuk. Today, the tax office needs very strong grounds for an enforcement inspection. On the positive side, Ukraine cut payroll taxes in half and is now far more competitive in this area than France, Italy, or the United Kingdom.

Business involves risk-reward management. In Ukraine, the rewards can be high, but only if the risks are managed properly. It is not a market for the faint-hearted, nor for those seeking a quick buck. It takes time to understand the country’s nuances and complexities.

When moving into Ukraine, keep an eye on the rear view mirror, but look forward through the windshield, bug stains and all.

Martin Nunn is a journalist and communications consultant with 23 years experience running a successful business in Ukraine, advising national and international companies and senior political figures.