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Ukraine Auditing 10,000 Buttons Torments Opposition Businesses

Yaroslav Rushchyshyn likes to call the antique clothing irons displayed at his Ukrainian factory the “backup line,” for when authorities punish him for criticizing government policies by shutting down the power.

He’s only half joking. Rushchyshyn’s Lviv-based Jsc Trottola, which makes women’s garments for such retailers as Inditex SA (ITX)’s Zara chain, has endured what he says are spot tax audits and truck inspections. It’s an example of state pressure that “kills off investment” to the former Soviet republic, delays production and erodes profits, he said.

“Nobody trusts that it is possible to make money in Ukraine in a fair way,” said Rushchyshyn, who backs the political opposition. “Nobody has faith that tomorrow the authorities won’t take their hard-earned money from them.”

More than two years after President Viktor Yanukovych’s election quelled the Orange Revolution’s promise to end political corruption in Ukraine, more than a dozen company owners say they worry the nation may be returning to the era of Leonid Kuchma. President from 1994 to 2005, Kuchma was isolated by the European Union and the U.S. for selling assets to cronies and thwarting efforts to develop a free market.

Executives affiliated with the opposition say the harassment is particularly targeted at them. The shift to a more authoritarian rule gained western attention after opposition leader Yulia Tymoshenko was convicted in October 2011 of abuse of power and sentenced to seven years in prison.

Banned T-Shirts

Steelmaker PJSC Stalkanat-Silur’s Odessa plant was temporarily seized in January by authorities, halting production, the company announced at the time. Stalkanat-Silur’s owner, Vladimir Nemirovskiy, is a campaign contributor to Arseniy Yatsenyuk, the co-leader of Tymoshenko’s Batkivshchyna party. In Kharkiv in the east, Arsen Avakov, a former governor who supports the region’s opposition, said last month his bank was forcibly liquidated. He is seeking an arbitration court ruling on the closure.

Prostoprint.com’s owner, Denis Oleinikov, moved to Croatia after policemen trashed his Kiev office for printing a T-shirt mocking Yanukovych, he said in a June interview. And the Ukrainian unit of White Plains, New York-based Bunge Ltd. (BG), was accused of tax embezzlement, according to the company. It denies the charges.

The economy is paying the price for Yanukovych’s policies. The EU froze a key trade agreement after Tymoshenko’s jailing, foreign investment is slowing and the stock index turned in eastern Europe’s worst performance this year. The hryvnia, the currency, is down 7.1 percent against the euro since July 23, compared with a 1.5 percent drop in the Hungarian forint and the Polish zloty’s 1 percent decline.

Overhauled Taxes

The declines came even after Parliament passed tax-code changes that for the first time united and organized all related tax laws, lowered the corporate tax burden and streamlined customs payments.

It wasn’t enough, said Anna Derevyanko, executive director of the European Business Association in Kiev, adding that the association supports the customs-code overhaul.

“If you ask businessmen whether those changes help them in their work, only a few would say yes,” she said in Yalta, Ukraine, at the Sept. 14-15 Yalta European Strategy Conference. “The majority of the population should feel improvement from changes, not a small group of privileged people.”

Ukraine slipped this year in the World Bank’s Ease of Doing Business survey to 152nd place among 183 nations, the lowest in Europe and below Burkina Faso and Liberia. The European business association rates Ukraine’s investment climate 2.19 out of 5, saying “the overall picture remains mostly unfavorable.”

‘Fast Modernization’

Yanukovych, speaking at the conference in Yalta, said the key to protecting the former communist country from the effects of Europe’s economic crisis is “fast modernization.” He called for more investments to help bolster the economy.

“We want to become an attractive country for investments and an easy place to start a business,” Yanukovych told the conference attendees. “We want to have sustainable economic growth, helped by business and investments.”

Darka Chepak, Yanukovych’s spokeswoman, didn’t respond to text messages and emails over three days seeking comment about Ukraine’s treatment of businesses.

The political developments in Ukraine come as Russian President Vladimir Putin stamps down on public dissent with legal action and jail sentences, including the incarceration of three members of the female opposition punk band Pussy Riot.

“Ukraine is making a step back to the Soviet past, not even back to the wild 1990s,” said Olga Shumylo-Tapiola, a visiting scholar at Carnegie Europe in Brussels. “It’s moving toward a self-contained system, where a small group enjoys life and the rest of people are a grey mass.”

Stalled Accord

The EU in December last year indefinitely stalled negotiations toward an association accord, a first step toward integration and membership. While European Commission President Jose Barroso told the Yalta conference via a televised link that the EU wants to be “closer and closer,” he also said Tymoshenko deserved “a free and transparent trial.”

The blonde-braided Tymoshenko served as prime minister under former President Viktor Yushchenko, who was elected in a revote in 2004 after Yanukovych’s electoral victory was thrown out by the Supreme Court. Five years later, with the world sinking into recession and Tymoshenko and Yushchenko split politically, Yanukovych won the presidency. A parliamentary vote is scheduled for October.

“The world is watching the Tymoshenko case with the elections in a few months,” Condoleezza Rice, national security adviser to former President George W. Bush, told the Yalta conference. “I would hope Ukraine’s leaders will recognize that democracy requires listening to citizens. Any democracy that doesn’t have opposition is not a democracy.”

Poorest Country

The economy has grown every quarter since 2009, with gross domestic product expanding 3 percent in the second quarter, faster than neighboring Poland’s 2.4 percent. Other former communist countries, including Slovenia and the Czech Republic, were in recession.

Even so, Ukraine is the third-poorest country in the region after Moldova and Albania. Its growth stems from exports of goods such as steel and grain and isn’t a reflection of stable economic fundamentals, said Alexander Valchyshen, head of research at investment bank Investment Capital Ukraine in Kiev.

GDP per capita in Ukraine will total $1,976 this year, according to the International Monetary Fund. Bulgaria, the poorest country in the EU, will probably end 2012 with GDP per capita of $4,794. Poland will have GDP per capita of $10,967 for 2012 and Russia, Ukraine’s former Soviet partner, will see GDP per capita increase to $9,674, according to the IMF.

Soccer Spending

Since the start of 2010, when Yanukovych took office, foreign direct investment has totaled $12.4 billion, some of it stimulated by the Euro 2012 soccer tournament, an event clinched by his predecessor. In the first 2 1/2 years under Yushchenko’s rule, which started at the beginning of 2005, foreign direct investment totaled $17 billion, according the country’s statistics committee.

“The perception is that institutions are weak, the legal system is weak, corruption is high,” Valchyshen said an interview at his Kiev office, “The global investment community in key global financial centers, like London, Frankfurt, New York, sees Ukraine’s economy as off their radar screens.”

The Ukrainian Equities Index (UX) is down 28 percent since the beginning of the year, compared with an 11 percent gain in Poland’s benchmark WIG20 Index. (WIG20) It was Europe’s second-worst performance after Cyprus.

Sale Wishes

“I hold some Ukrainian shares but only very little, and I would like to sell if the market improves slightly because of political uncertainty,” said Margarete Strasser, who helps manage 500 million euros ($650 million) at Pioneer Investments Austria in Vienna. “I don’t see any restructuring and I don’t see any improvement in the system itself.”

Traders at brokerages and local investment banks including Troika Dialog and Dragon Capital staged a one-hour halt in trading on the Kiev Stock Exchange yesterday to protest a law passed by Yanukovych’s allies in Parliament.

It would create a new a monopoly on such services as clearing and payment transactions, said Oleg Tkachenko, chief executive officer at Ukraine’s benchmark exchange. It “will be an additional push that would force Ukrainian issuers and investors to escape,” he said in an e-mail.

Trottola’s Rushchyshyn first felt state pressure in the early 2000s, when he sided with the Orange Revolution against Kuchma, who had picked Yanukovych to succeed him.

Rushchyshyn’s activities included a donation of 1.5 million hryvnia ($184,450) to Orange Revolution activists and the publication of an opposition newspaper. He was rewarded by a team of tax auditors who sat at his office for weeks going over books. Some counted tens of thousands of buttons on inventory, he said. He’s laid off half his 2,000 workforce since 2008.

“We have a big problem because people working for the state have this Soviet mentality,” Rushchyshyn said. “We as a country don’t have respect for the businessman. We don’t respect people who work.”

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