Matthew Brzezinski   Wall Street Journal   16-Apr-1998   The Ukrainian government is plundering Ukraine, II
"In the dimly lit lobby, the only service available at night is at a kiosk that sells gnarled sausages and canned meats displayed behind a grease-smeared window.  Prostitutes crowd the entrance.  There's no hot water.  Although the room does have a view, the only warmth comes from a space heater.  A double room costs $220.  And the establishment doesn't take credit cards." Matthew Brzezinski
April 16, 1998

Kiev's Dreary Hotels Offer Microcosm of Reform Failures


KIEV, Ukraine One recent morning in a leading hotel here, a hostess shuffled up to a table where two men were having breakfast.

"You can't talk here," she snapped.  "If you want to talk business, go to the business center."

One of the men, it turns out, was Antonio Maria Costa, the secretary-general of the European Bank for Reconstruction and Development.  And he was discussing the EBRD's decision to hold its general shareholder meeting in Kiev next month.

The meal over, the hostess handed Mr. Costa the tab $48, service not included and another surprise: "We don't take credit cards and you can't charge it to your room," she huffed at the man who has signed off on more than $600 million in EBRD loans to Ukraine.  "Don't you have cash?"

Checking In

When Ukraine makes its debut before an audience of global money managers early next month, more than a thousand of the world's leading bankers will get to negotiate through their own morning meals here.  For many, checking into Kiev's state-owned hotels will be a telling glimpse of the glacial pace of reform and the difficult investment climate in this huge former Soviet republic.

Founded in 1989 to help former Soviet states make the transition to market economies, the EBRD has regularly held its annual conference in the region, allowing host cities to become showcases for visiting bankers.  Billions of dollars in investments can ride on making a successful sales pitch during the events, designed to attract big international money to opportunities in such places as Sofia and St. Petersburg.

Some of these pitches have been a hit.  The first, held in Budapest in 1992, so impressed visitors that the country has received no less than $15.63 billion in foreign direct investment as of the end of last year.

But this year's meeting isn't anything like that.  There's no buzz about deals or about noteworthy privatizations in Ukraine.  Nor is the interest in Ukraine's debt and equity markets more than fleeting.  Instead, the talk among visitors centers on how to survive a few days in Kiev.

However trivial that might sound, Kiev's foot-dragging on privatizing hotels and opening the market to the international hospitality business may end up costing the country dearly.  Just ask Mark Holtzman, the president of ABN Amro Bank's corporate-finance division for Central and Eastern Europe.

"I probably won't attend," he says over a recent breakfast of yogurt and fruit salad at the Moscow Marriott.  "But if I do, I'll bring a sleeping bag."  Mr. Holtzman says it isn't just the idea of roughing it in a hotel without hot water that sours many money managers on Ukraine.  What really bothers them, he says, is how the dreary Soviet-era hotel scene reflects the country's business climate as a whole.

Shooting Star

It wasn't supposed to be like this.  Three years ago, when Kiev landed the EBRD annual meeting, investors and analysts pegged the country as a future star.  Privatization was about to kick off in earnest.  Foreign investment was ready to pour in.  Standards of living were expected to soar.  And Kiev was set to sprout gleaming Hilton, Sheraton and Inter-Continental hotel towers in time for next month's financial festivities.  The EBRD conference was meant to give Kiev a chance to bask in an investor spotlight that has long been trained on neighbors such as Poland, Hungary and Russia.

But none of those things happened.  Last year, revenue from privatization was only $36 million, and even that trickle whipped up a backlash in Ukraine's communist-dominated Parliament.  Foreign investment since independence in 1991 through 1997 amounted to a paltry $2 billion for a country the size of France, compared with $1.1 for tiny Slovenia.  Industries still pretty much run the way they did when the Politburo set quotas.  Pension and wage arrears in the public and private sectors top $5 billion.  And while Lenin's tomb in Moscow's Red Square is today surrounded by five-star hotels and luxury shopping complexes, Kiev remains the only major European capital without a single Western-standard hotel.

Now, as the May 9-12 meeting approaches, EBRD officials fear that the occasion will merely highlight the unfulfilled potential that has frustrated Ukraine's Western backers over the past several years and made this nation with its rich farmland, abundant natural resources and industrial promise into one of the region's biggest reform disappointments.

"Ukraine is reaching an impasse," says the EBRD's Mr. Costa in an interview.  "Either the place moves forward or the consequences could be serious."  The best the EBRD conference can hope to do is to "act as a catalyst for reform," he adds, citing the harried efforts now under way to spruce up a dozen hotels in central Kiev.

Ukrainian officials naturally bridle at such grim assessments, saying much of the fault lies with foreign investors themselves.  "I agree that we have our problems," says Oleg Taranov, Ukraine's point man on preparations for the meeting.  "But isn't it precisely the EBRD's mandate to attract capital to countries like ours?  What we need is foreign investment to prod reforms."

Mr. Taranov brandishes a directory that resembles a telephone book, explaining that it details investment Ukrainian opportunities and has been printed in English especially for participants of the EBRD meeting.  "We are ready to privatize and demonstrate our wish to do business with foreign investors," he promises.

But Mr. Taranov a banker, oil trader and former parliamentarian is already being forced to tear pages from his hefty manual because the left-dominated parliament, flexing some muscle after the communists' big win in March legislative elections, has scratched dozens of enterprises from the sell-off list.  Some of the failed privatization deals include a huge alumina plant in Mikolayev; the Frunze oil refining equipment factory in Sumy; the Nikopol smelter near the port city of Odessa; and 27 regional electricity distributors.

Deja Vu

For old Kiev hands, these U-turns evoke a sense of deja vu.  Mr. Taranov, after all, is the same official who led Kiev's negotiations with prospective foreign property developers who brought over $1 billion of potential real-estate deals to city hall for approvals two years ago.  Ukraine President Leonid Kuchma personally signed off on several of the developments.  Investors lining up financing for the deals included such groups as German engineering conglomerate Hochtief AG; Brooke Group Ltd.'s Liggett Group Inc.; the World Bank's International Finance Corporation; and the property arm of South Korea's Daewoo Group.  Hotel operators such as Hilton Hotels Corp. were so confident of demand for Western accommodations that they guaranteed the owners a minimum profit margin, a rare concession by industry standards.

But the projects all became tangled in red tape and shifting legislation, and not one has materialized.  "Look," says Mr. Taranov, in response to criticism of the property deals, "individual investors have to adjust to our laws.  But if hundreds come, we will tailor our laws to their needs."

Meanwhile, the capital's existing hotels have gone on charging Western rates without investing a kopek to upgrade.  Take the Moskva, a sullen hulk on the city's Independence Square.  Various Western investors tried to privatize it, but Ukraine's parliament refused.  Now, street urchins prowl the parking lot.  In the dimly lit lobby, the only service available at night is at a kiosk that sells gnarled sausages and canned meats displayed behind a grease-smeared window.  Prostitutes crowd the entrance.  There's no hot water.  Although the room does have a view, the only warmth comes from a space heater.  A double room costs $220.  And the establishment doesn't take credit cards.

"We tried many times to get something off the ground in Kiev.  But the local officials and their friends running the old Intourist hotels were not accommodating," says Michael Shahar, who runs a Belgian subsidiary of London-based Trans World Metals Ltd., the trading conglomerate that controls about 40% of Russia's aluminum industry.  Mr. Shahar gave up on Kiev.  Instead, he built Ukraine's only five-star hotel, the Ukraina Grand, in Dnipropetrovsk, an industrial city in the heart of the country.

Public-Relations Fiasco

Kiev Mayor Olexandr Omelchenko doesn't seem fazed by the criticism.  "We may not have hotels, but when Western bankers see our women they won't care," the mayor told state television last December.

Despite the bravado, the mayor is apparently anxious to avoid the kind of public-relations fiasco that surrounded Kiev's first international event: Miss Europe 1997.  After staying overnight in accommodations provided by the pageant's organizers, a dozen contestants fled to their embassies and demanded to be escorted on the first plane out of the country, amid concerns about sexual harassment.

This time around, Mr. Omelchenko has ordered Kiev to put on its best face.  Throughout the city, cranes at abandoned construction sites are creaking back into action.  Road crews are rushing to resurface pockmarked streets.  Neglected parks are being landscaped, crumbling buildings repainted, and packs of wild dogs rounded up.  Nearly $80 million has been spent on the three venues for the conference, and the city is lending $70 million at very low rates to refurbish 17 hotels 15 of which are majority-owned by various government bodies.

The problem is, the money for refurbishing the hotels was found only several months ago and now builders are racing against the clock.  The lobby of the Lybid Hotel off central Victory Square looks like a war zone.  Bags of cement flank the entrance.  Workers in army fatigues scurry over mounds of sand.  A doorman scrutinizes a guest arriving with baggage in tow, and then barks, "Chevo?" ("What do you want?")

No wonder American Express Travel Services has been retained to ease check-in procedures during the conference.

A Tough Choice

Lybid managers say they hope to have six of 17 floors roughly a third of its 260 rooms upgraded to Western standards in time for the May 9 influx of bankers.  The Dnipro across town says half its 190 rooms will be ready.  EBRD organizers say the total number of rooms throughout the city suitable for participants probably won't top 2,000.  That's one reason why only 1,700 invitations to the meeting have been sent this year compared to 17,000 in 1997, when London hosted the conference.

Many observers warn that the last-ditch effort could amount to a case of too little, too late.  "I'm afraid that a lot of participants are going to leave disappointed" says Joszef Horvath, a Hungarian responsible for organizing the EBRD's conferences in Eastern and Central Europe.

One sign of hope does emerge at the check-in desk at the Lybid, where the receptionist appears to have taken hospitality lessons.  "Would you like a room with a television or one with hot water?" she asks courteously.

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