Insurance

Nataliia Osadcha, the co-founder of S&P Investment Risk Management Agency

Throughout the entire period of the Ukrainian state formation, business was accompanied by political and economic instability. Six presidents have changed during 27 years of the development of Ukraine, we have experienced two revolutions, a complete transformation of external state relations and a country’s development course.

At the same time, business remains the most sensitive to political changes throughout all the stages of the development of Ukraine, especially during the re-election of the president and parliament of the country, change of government. Every change is a separate epoch with its own rules, goals and consequences both for the country and for the business as a whole. At all times, stability remains the main goal for business, as well as saving assets and obtaining planned profit, regardless of any political fluctuations and changes.

After the second revolution –  Revolution of Dignity – with the start of hostilities in the Donbas and the annexation of the Crimea, our country experienced a deep political and economic crisis. However, , macroeconomic performance has improved recently. Ukraine has begun to show steady economic growth. From an economic point of view, the financial crisis has made the country more attractive to foreign investors: inflation, falling asset prices, a decrease in the cost of labor and production costs. At the same time, the decline in investment in recent years was mainly due to military actions, despite the fact that the war was not at an active stage.

There is tough competitiog during the period of markets’ consolidation. Large international business is trying to find new, economically interesting markets, especially, if these markets are geographically located in Europe. Ukraine is exactly such a market. What makes Ukraine an attractive country for foreign capital:

• there is no free agricultural land market (due to the moratorium on the sale of agricultural land);
• the privatization of large state enterprises which are interesting for large foreign players, has not yet completed;
• there are no toll roads, and public-private partnership is just beginning to emerge;
• the largest area in the center of Europe with the population of 42.3 million people;
• more than 42 million hectares of agricultural land.

All this is impressive, still, there are risks inherent in the developing countries, and Ukraine is no exception. Every five years, a large-scale change of political power takes place in the country, which leads to changes in legislation and, sometimes, even the entire course of the country’s development.

Ukraine is now again on the verge of political change, and forecasts are extremely different: from the complete crisis to an unprecedented victory of democracy. Honestly speaking, nobody can give a clear forecast of how events will develop and what changes will take place. Time will tell.

The second major risks are business ones. This category includes changes in the business climate and legislation announced by the previous government and the president declared in regulations and “rules” of doing business in Ukraine. The main risk, like 27 years ago, when Ukraine had just started its way as an independent state, remains the risk of losing assets. In fact, this risk has become less relevant over 27 years, as in other developing countries. Another important risk remains financial one associated with economic performance. Political, business and financial risks are interconnected, they interact closely and are the result of each other.

In fact, the above-mentioned risks in an economically attractive environment is not something unique for Ukraine. Any developing country is a market with potentially high risks and at the same time high profit rates. To be successful in any developing country, you need to learn how to correctly calculate these risks, that is, consciously accept the fact of their existence and learn how to manage them. Risk management exists exactly as long as humanity exists. It is just that the term is not familiar to everyone, but this does not mean that we do not do these actions for 24 hours every day. Going out of the house, we are looking at the weather forecast and choose clothes according to it, we take or not take an umbrella, calculate the time spent in traffic jams to get to the scheduled meeting on time. In the snowfall, we change the wheels of our cars, set the alarm signal in houses or apartments for the safety of our lives, minimizing the risk of a possible unwanted intrusion. We constantly calculate our risks, but not always, we do that in business.

To protect your business from loss of assets and other risks, the first rule is to clearly understand the existence of risks, identify the threats they carry and determine how to manage them.

As a risk minimization specialist and a business consultant with more than 20 years of experience in asset protection and risk minimization in Ukraine, I can say that you can not only calculate a lot of risks, but also successfully minimize them. And if, after analysis, it turns out that the risks are very high and their minimization or prevention are impossible, you can save time, money and health simply by stopping such an unjustifiably risky business project.

So, where does risk management begin, and at what stage is it better to apply it in the realities of Ukraine? The risk management process must be implemented at the earliest stage of a business project. The perfect start is the stage of a business plan (calculation, analysis, the formation of financial indicators, ownership structure, partnership, the procedure for acquiring assets and their structure, management, etc.). At at this stage, risk management is not only necessary, it is vital for the implementation and receipt of what has been carefully calculated by experts in the business plan. When we calculate risks at the “zero” stage, we take into account everything that can at least somehow adversely affect the implementation of the project in the future or lead to the loss of an asset. Political risks will not be so important or fundamental factor if attention is paid to mechanics. Properly structured partnership relations (taking into account the system of checks and balances), the correct procedure for acquiring an asset and structuring a transaction, the stage and process of starting construction work, are correctly defined. They will give you high guarantees, and regardless of the change of power in the country and political balance of power, you will remain with your business. There are actually a lot of examples. Let’s see how many foreign companies which “entered” the country during the period of political cataclysms, are still doing business successfully. Some have been successful in Ukraine for over 27 years. And no matter during what period of political relations these companies “entered” the market: if the risks are calculated correctly, they will remain here for a very long time. There are also a lot of negative examples when a business lost millions or even hundreds of millions of dollars. Unable to cope with risks, they simply left the Ukrainian market, having suffered multimillion-dollar losses. I’ve been studying such situations for a long time, so, I can say that in 90 percent of negative cases, investors made significant mistakes. Mistakes often occur at the beginning stage of the business plan implementation. The main mistake is that companies do not identify the Ukrainian market as high-risk, do not accept this fact as a necessary element of the formula. If this element is not taken into account in the formula, all components of your business plan will fail. And the company will not get the planned business and financial results. Investors make different mistakes:

• hopes that the guarantees given to them by the government will be respected (for a political change of power every five years it is unreasonable to rely on government guarantees, which perhaps will not be at this time);
• hopes that partners will be honest and keep their word (will not be, if you do not force this, will not make the partner unprofitable to violate the agreement);
• hopes that small legal inaccuracies will not have significant consequences (as practice shows, there were always minor inaccuracies in the basis of the most complex conflicts);
• the hope that nothing bad can happen to you, so, there is no need to spend money on insurance. As practice shows, 95 percent of success is the detailed preparation and calculation of all possible risks and probability of these risks occurring. This statement is true regardless of whether you go to the mountains, plan diving, rafting or prepare for serious investments in a country like Ukraine. Without a detailed plan, guide and risk calculation, this is a frivolous and risky undertaking with an uncertain outcome.

Implementing risk management process during the formation of a business plan gives a high chance of success. At the stage of the business functioning, risk management should already be implemented directly in all business processes of a company and, especially, in management decision-making processes.

For example, the decision to start building a large business object should not only include risk auditing, but also be the subject of discussion at the highest level of company’s CEO and business owners, the conscious acceptance of the identified risks and taking steps to minimize them.

Companies which are not only engaged in long-term planning but also have a precise coordinate system which helps to get into the planned future, have been and will remain successful. However, without a conscious risks calculation, this does not seem possible.

S&P Investment Risk Management Agency is a multi-level consulting company. Our company has been accompanying a large foreign business in Ukraine for almost 12 years. Our main directions are risk management, crisis management (taking companies out of crises of different complexity levels), reputational protection (essential factor for overcoming crises), and legal services. Our specialists combine various expert knowledge and deep practical experience as crisis managers, business consultants, PR specialists, GR, lawyers, tax agents, investigators, detectives, strategy consultants, and many other professions. This combination distinguishes S&P Investment Risk Management Agency among other companies. We calculate and minimize for the business in Ukraine the following types of risks: business, investment, financial, reputational and legal ones.

We act as business consultants for companies with the purpose of preventing business conflicts and their actual avoidance, and minimizing potential negative consequences. For those companies that are already in a business conflict, for example with a client, counterparty, competitor or government/law enforcement agency, we not only develop a strategy for successful conflict resolution, but we also use various tools and accompany the business until the successful conclusion of a crisis/conflict. Moreover, our high-level lawyers allow us to provide our clients with a full range of consulting services. At the same time, the essential difference between our company and the classical legal consulting is that the legal strategy that we develop is derived from the risk management and crisis management strategies. Therefore, legal instruments are selected and provided to the client together with a risk minimization strategy. In this case, the legal strategy itself and its implementation are fundamentally different from standard legal tools and moves.

Despite the fact that legal services are only one of the lines of our company activity, it is highly appreciated by leading independent ratings and experts. This year, the experts of the Kyiv Post editorial office conducted the first independent study of the legal services market in Ukraine. S&P Investment Risk Management Agency is in the TOP 50 of the best law firms in Ukraine and occupies 4th place in the category “Transparency and Responsibility”. For us, the high appreciation of the Kyiv Post is a very important indicator of our expertise and achievements.

Kyiv Post is the first and the most popular Ukrainian English-language newspaper that publishes topical news of the world and Ukrainian business every week. In April, the edition published an independent ranking of TOP 50 Law firms in Ukraine. The S&P Investment Risk Management Agency not only took rightful place among the best legal companies in Ukraine but also entered the TOP 5 Law firms in Ukraine in the Transparency and Responsibility category, in which took an honorable 4^th place.

For the first time in 12 years, S&P Investment Risk Management Agency has taken part in the national ranking due to its independence and high reputation among Kyiv Post experts.

The Kyiv Post ranking was based on the comprehensive, honest, non-commercial analysis of Ukrainian legal firms. Kyiv Post team monitored competent ratings in Ukraine and abroad to define which companies’ features are most valuable for clients. Candidates were ranked in five categories: responsibility, approachability, internationality, social balance and common strength of a legal firm. To evaluate the reliability and quality of companies, the experts and team of the Kyiv Post developed the most objective method based on mathematical formulas.

Publishing its first ranking, the Kyiv Post edition expressed its hope that impartial research will become the basement for trust in rankings from both community and legal entities side. The 50 best legal services providers were selected first of all for the quality of service they guarantee to clients. The researchers did not take into account the scale of firms. The bases of the evaluation were transparency, approachability and benefits, which their activity brings to Ukrainian society and business. The ranking compilers mainly oriented to businesses which need legal support and ongoing advice for efficient work. A follow up from Kyiv Post readers showed that results of such kind research are appreciated. They motivate companies to improve and show readers the true market leaders in legal services.

We are proud of the trust of the independent Kyiv Post experts! The best value of our activity is the results of work performed.

The special feature of S&P Investment Risk Management Agency is in effective combining of risk management, crisis management, reputational protection and jurisprudence. Herewith, the legal strategy development and its appliance fundamentally differ from standard legal tools and mechanisms. We believe we help businesses change the economic system from the inside.

Our performance over the past three years (in figures):

• additional tax requirements and fees for companies have been reduced in the total amount of 400 million UAH;
• thanks to successful proceedings, VAT in the amount of 50 million UAH have been returned to business;
• illegally blocked VAT in the amount of 370 million UAH has been returned to the current amount;
• 25 criminal proceedings against foreign companies have been canceled in the total amount of 950 million UAH;
• trainings for more than 45 foreign companies have been conducted.

Over the past year, business losses due to illegal actions by the State Environmental Service have amounted to $200,000,000. The co-founder of S&P Investment Risk Management Agency, PhD, MBA, risk management business advisor, and attorney Natalia Osadcha explains how the scheme of stopping ships in ports operates.

We have repeatedly discussed the difficulties of business “interactions” with the Environmental Inspection in previous publications. Using one of our cases as an example, we detailed step by step how environmental officials skillfully and subtly manipulate terminology with a single goal – to prevent a vessel from leaving a Ukrainian port. A full year has passed since the publication of our first article. Unfortunately, no positive changes have occurred during this time. Once again, we must revisit the issue, analyze, forecast, and investigate where the real problem lies. The irony is that, a year later, a client has approached us again with a painfully familiar problem – a vessel being detained in port.

Our client is the owner of a grain cargo. The ship was detained in port because a stamp reading “Radiological Control: Import/Export Prohibited” mysteriously appeared on the bill of lading. It is important to note that under current legislation, this type of cargo is not subject to environmental control, and radiological control is conducted only if the cargo exhibits radiation emissions. Our client’s cargo successfully passed through the automated control system in the port. Nevertheless, without any valid grounds, the State Environmental Inspection stamped the bill of lading with “Radiological Control: Import/Export Prohibited,” indicating that the cargo was radioactive and that the vessel carrying such cargo could not leave the port.

Just like a year ago, it was only after the cargo owner officially contacted the State Environmental Inspection that the situation started to become clearer. It turned out that the Environmental Inspection had no claims against the cargo itself. Instead, the prohibition stamp was placed on the bill of lading based on allegations that the vessel had violated environmental protection laws. According to the regulatory authority, the ship was polluting the country’s internal waters. Despite the cargo being in perfect order, the vessel remained detained in the port, causing massive financial losses for both the cargo owner and the shipowner.

If environmental officials had acted within the framework of existing legislation, they would have issued an administrative violation report and calculated the environmental damage caused by the vessel. However, they had no legal right to detain the ship in the port.

In reality, the shipowner was never presented with a water sampling report, a protocol of water composition and characteristic measurements, or any official documentation confirming the vessel’s violation. There was no record of an offense committed by the ship, no administrative violation protocol, no fine, and no calculation of damages. The only thing issued was the stamp “Radiological Control: Import/Export Prohibited” on the bill of lading, resulting in a one-week delay and total losses exceeding $150,000.

In response to official inquiries about the reason for the ship’s detention, environmental officials shamelessly admitted that the Environmental Inspection simply had no other mechanism to detain a vessel, so they resorted to using a stamp intended for radiological control of goods.

The illegal actions of officials have catastrophic consequences. According to information published by the Better Regulation Delivery Office (BRDO) on Facebook, the estimated business losses due to the unlawful use of the “Radiological Control: Import/Export Prohibited” stamp by the State Environmental Service amount to approximately $200,000,000 per year. This figure does not even include the daily losses from vessel and cargo downtime, which range from $15,000 to $30,000 per day.

The situation was expected to improve with the introduction of Ukraine’s new Law No. 2530-VIII, adopted on 06.09.2018, “On Amendments to the Customs Code of Ukraine” and certain other laws regarding the implementation of the “single window” mechanism and the optimization of control procedures for goods crossing Ukraine’s customs border. Unfortunately, the law only made minor adjustments to how environmental officials operate, without changing the final outcome—ships continue to be unjustifiably detained in ports. The only difference is that instead of stamping “Radiological Control: Import/Export Prohibited,” environmental officials now issue direct bans on vessels leaving the port. However, they are only legally permitted to do so in one specific case—if the cargo exhibits radiation emissions (exceeding permissible radiation levels), as determined by Customs authorities.

Regarding our case, we made every effort to secure the release of the vessel. The issue of holding government officials accountable for the unlawful detention of the ship and cargo, as well as recovering damages from them, remains unresolved. Until a precedent is established and businesses take a firm stance, the system will continue to operate as it has, with only minor adjustments. Ultimately, the choice remains in the hands of businesses—just as it always has.