Foreign direct investment in Ukraine increased 50.3 percent to $2.5 billion in the first half of 2007, as compared to the same period in 2006. Unfortunately, continued growth in FDI can be jeopardized by both deeds and words. Any talk of opening up long settled privatizations or of renegotiating agreements with investors can drive away capital as surely as can damaging laws and regulations. Many investors are waiting, looking to Tymoshenko's 2005 record as Ukraine's prime minister.

Early in that tenure, Tymoshenko announced a renationalization policy, whereby the state would reclaim major industrial assets that had been "improperly" privatized during the Kutchma regime and would re-auction them to the highest bidders. The list of companies targeted for review and possible renationalization ran as high as 3,000. In response to an outcry from the business community and with the intervention of the president, the list was reduced to 20-30, and then finally to just a handful. Procedures were spelled out for valuing the targeted assets, for appealing the new valuations, for public auctions and for transfer to new owners. The entire concept of second guessing the original privatizations of distressed assets and ignoring applicable statutes of limitation, was bad enough; the appeal procedures, because of their complexity, compounded that.

The result was to freeze foreign investment for 6-9 months -- slowing down the country's economic growth, which officially plummeted from double digits in 2004 to slightly over 2 percent in 2005. No large projects moved to closure while the government sought to refine the renationalization policy. Ultimately, the policy was abandoned, with the exception of one major renationalization, that of Ukraine's largest steel mill, Kryrovstal. The company, which had been purchased by Messrs. Pinchuk and Akhmatov in 2004 for approximately $800 million, was reprivatized and sold in an open auction to Indian entrepreneur Lakshmi Mittal for an astounding $5 billion. Although the renationalization policy itself was uniformly criticized, memories of the financial bonanza from the sale of Kryrovstal linger.

As presidential elections approach in 2010, and politicians are faced with the question of how to fund social handouts, a similar policy may begin to look appealing. A few recent developments suggest that property rights could be threatened in the future or previously settled disputes reopened, with a tacit nod from Ukraine's ruling politicians. For example, Tymoshenko has publicly stated that the state should consider breaking up privately owned energy distribution networks such as Dneprogas. And takeover attacks have been reported regarding port properties and a refinery owned by Tatneft. However, no defined program, such as the renationalization program of 2005, has yet been articulated.

Tymoshenko has tempered her rhetoric. She has spoken of the importance of stable rules governing foreign investment. At the same time, she is hedging her bets, publicly rejecting a broad reprivatization policy but reserving the right to challenge select privatization projects in court. This, presumably, would involve mobilizing the Procurator's office to charge current owners with failure to follow privatization procedures or to meet their investment commitments. Or, it could involve mobilization of tax, anti-monopoly or other regulatory authorities to levy crushing claims and penalties on target companies. This has been a common practice in post Soviet states, often fueled by a competitor anxious to acquire the challenged assets. Any of these practices could be damaging to Ukraine's economy, leading to market distortions and creating trade barriers. Such actions would undercut the very purpose of WTO accession for Ukraine.

Any reversal of the current stable investment environment would be a big mistake, but could happen readily, given Ukraine's easily manipulated court system. Ukraine should guard against such reversals, recognizing that the buyers of decayed assets of 5-10 years ago have restored and increased the value of those assets and improved Ukraine's economy. All investors, domestic and foreign (including Russian investors), should be treated equally; statutes of limitations on challenges to imperfect privatization procedures should be honored. In addition, Ukraine should continue its efforts to clean up its court system. World Trade Organization accession and resultant benefits promise much for the people of Ukraine, but these benefits will only be realized if WTO liberalization is accompanied by a competitive market not burdened by government interference in the economy or official corruption. To allow otherwise would undo market reforms in Ukraine and send foreign direct investment to neighboring countries.

(Sarah Carey is chairman of the board of the Eurasia Foundation. Shanker Singham is chairman of the International Roundtable on Trade and Competition Policy Inc. and author of "A General Theory of Trade and Competition.")

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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