NCPA - National Center for Policy Analysis

A Ukrainian Cautionary Tale

March 28, 1997

While other developing countries are racing to institute political and economic reforms to attract international capital investment, the government of Ukraine appears to be doing all it can to alienate would-be investors.

Frustrated by shifting bureaucratic regulations and orders, the Motorola Corp. has announced that it is pulling out of a $500 million investment less than two weeks after, a Motorola-led consortium was chosen as one of three winners in a hotly contested tender to launch cellular phone networks. Other western companies have also complained about arbitrary and powerful bureaucrats in the former Soviet republic.

Here are some of the government's actions which outraged Motorola:

  • The Ukrainian Ministry of Communications at the last minute announced an increase in user-fees for the allocation of frequencies on which digital mobile communications operate -- an increase described by the company as "completely unreasonable" and "much higher than anywhere else in Europe."
  • Motorola officials say they had been assured previously that the company would not be charged for the frequency and only went ahead with plans after the assurances were given.
  • Company representatives only learned of the fee -- reportedly $65 million annually -- from newspaper reports.

After Motorola threatened to pack its bags and leave and after intervention by the U.S. ambassador, the government relented on the fees.

  • Then it slapped them back on again after the frequency awards were made.
  • Moreover, although only two frequencies were supposed to be placed for bidding, state officials sprang a third frequency award on the bidders when the awards were announced -- the third going to a Ukrainian company without any known sources of funding or operational experience.
  • Finally, adding insult to injury, the Minister of Communications announced one day after the licenses were awarded that he was putting the frequency allocations on hold for five months because "not all the winners are at the same level of preparedness."

International observers say this story helps explain why Ukraine has attracted the ire of the U.S. government and multilateral lending agencies like the World Bank -- and a paltry $1.4 billion in foreign investment since 1991.

Source: Matthew Brzezinski, "Regulatory Surprises in Ukraine Lead Motorola to Pull Investment," Wall Street Journal, March 28, 1997.


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