5.11 Tobacco investments and development of the national economy 

Several studies have examined privatization programs in transitional economies and found significant variations in the outcomes. The general consensus is that privatization in transitional economies has been heavily influenced by political factors that did not necessarily result in "optimal" post-privatization ownership structures (Kauffman and Siegelbaum, 1996, World Bank, 1998).

Privatization agreements were reached behind closed doors without any transparency. International tobacco companies (such as Philip Morris, RJ Reynolds, Reemtsma, and BAT) that have purchased state-owned cigarette enterprises have won significant concessions from governments: (1) exemption from profit taxes for 4 years; (2) governments consent to discuss tax adjustments with the private enterprises before making changes.

The TTC assert that their investments promote general development of the economy of Ukraine. It should mean that due to tobacco joint ventures, other enterprises in Ukraine receive additional orders and it promotes development of the national economy. If the orders are received by enterprises of other countries, it promotes development of the economy of these countries.

In previous sections of this chapter we provided facts that the investors mostly assist the mechanical engineering (equipment) and agriculture (raw tobacco) of the European Union countries. However, investors are not limited to these industries. For example, Philip Morris imports cigarette paper from Austria, and filters for "Prima-Lux" (Reemtsma) are imported from Switzerland. Reemtsma cigarette packs in Cherkassy are printed in the city, but by a German joint venture print shop called "Grafia". 

Ukrainian manual labor is primarily used for production, while the top managers of most factories are foreigners. The general director of the Pryluki factory was Peter Quittenbaum, who was replaced by D.Zimmerman, and at this factory the citizens of Germany, UK, India, Chile and other countries were employed. Oscar Siffert and other foreigners governed the closed Lviv factory, and Ronnie Lindquist and Paul Patrick managed RJR-Ukraine. The managing director of Philip Morris-Ukraine was George Fara, who was replaced by Mirek Zelinski. Only Reemtsma employs Ukrainians in positions of management.

The foreigners were employed as top managers despite the fact that a considerable part of the investments was spent training the employees of the tobacco factories. Only Philip Morris-Ukraine invested one million dollars in training. The educational structures of Ukraine have not received anything, since all of the money was paid to foreign structures. The cost of training was incomparably higher than the cost of training in the best Ukrainian universities. For example, the investments were used to train 250 employees of the Kiev tobacco in Germany (up to 1 year, at costs up to 70 thousand DM.). These expenses exceed the salaries of the trained employees, but if we consider these expenses as support of the TTC to their educational institutions, they are logical, while the Ukrainian economy again received nothing from these investments.

The only example of new factory construction is the Kiev factory (which has replaced the old factory). The Swiss firm Promos was hired on as the general contractor. Swiss workers have done the higher paid kinds of work such as installation of the equipment, leaving the cheap work to Ukrainian construction workers.

It is hard to disagree with director of "Tyutyun-Impex" (tobacco fermented enterprise) Mr. Vladimir Chopik, who once said: "Multicompanies Philip Morris, RJR, Reemtsma and BAT today are not interested in giving Ukrainians the chance to earn money, but only to use their lungs".