James Marson in Kyiv -

Custodians are supposed to look after other people's shares, not end up in custody themselves. But that's what happened to one sub-custodian in Kyiv recently when he tried to tender some shares for a client.

He was first harassed, as the registrar claimed the stamps on the documents were illegible, and then was told the power of attorney was out of date. Finally, "the registrar claimed, the documentation was forged, the police were called, the sub-custodian was arrested and questioned at the police station," says a senior custodian in Kyiv who asked not to be named. Eventually, the custodian was released, but only after the deadline for registering a tender for the shares had passed.

Ukraine may be the only true democracy in Eastern Europe, but its laudable political system still doesn't work very well. Despite the rosy light that illuminates the country, corporate governance abuses are widespread and scams or abuses of the rules that have been long since abandoned in places like Russia are still a daily occurrence in Ukraine.

Despite the change of regime, Ukraine remains one of the most difficult places to do business in the Commonwealth of Independent States (CIS) and has bucked the trend of putting in rapid progress in recent years: the country slid one position in the latest World Bank's "Ease Of Doing Business" to finish near the bottom of the list at 145 of 181 countries surveyed and is now 25 places behind Russia, which has a far worse reputation for corruption and inefficiency. "Ukraine ranked lower this year in nearly all of the report's subject areas compared with last year, including starting a business, dealing with construction permits, employing workers, protecting investors, trading across borders and enforcing contracts. Ukraine marginally improved its standing in terms of employing workers and registering property, and significantly improved the ease of obtaining credit," says Danylo Spolsky of Galt & Taggart in Kyiv.

Marcus Svedberg, chief economist at East Capital, says that countries normally follow a "J" curve during the transition from authoritarian regimes to real democracy. Clearly, Ukraine is in the bowl of the letter J now, but knowing where you are doesn't make it any more fun to do business.

"It's like Russia in the 1990s - the wild, wild east," said David Penstone, global head of sales and business development at UniCredit markets and investment banking. The problem is so bad that many heads of securities services at major banks contacted for this article declined to comment on the conditions for custodians in Ukraine. "They are scared of the consequences," one of their colleagues said, asking not to be named.

Legislative logjam

Since the politicians behind the "Orange Revolution " took power in 2006, Ukraine has lurched from one crisis to another; the population goes to the polls for a third time in as many years to vote in a general election in December as the various political parities slug it out for political control. The upshot is little legislative work has been done in the meantime, which makes custodians' life hell because they rely more than most in the domestic capital market on clear regulation.

The frustration amongst custodians is palpable and in lieu of government action, they have banded together to find quick fixes to their worst problems. The leading custodians, including UniCredit, ING and SEB, have formed a lobby group to press for improved transparency and push the reforms along. The members are also using the group to bring some standardization to the documentation requirements by creating a unified list to follow - work the regulator should be doing.

That's not to say nothing has been done. Last year, a new investment law was introduced, replacing the law that had been in effect since 1991, which introduced badly needed definitions of qualified investor as well as banning insider trading (something Russia has yet to do). More significantly, President Victor Yushchenko signed into law a new law on Ukrainian Joint Stock Companies. Moreover, the IMF bailout deal struck the same month, comes with strings attached that should produce more liberalising changes in the coming months.

The new JSC law is a badly needed update of the rules covering the structure of businesses and how they can work. The bill defines pubic and private ownership, introduces rules for a mandatory buyouts following major share transactions, includes significant improvements for minority shareholders' rights and contains a number of other provisions designed to tackle the plague of illegal "corporate raiding." Finally, the law calls for the dematerialisation of shares over the next two years, which is touchstone for custodians. But there is still a mass of work to do.

As with many of the reforms that appear in the CIS, the demands of business change practices and run well ahead of legislative reform. The inflow of foreign direct and portfolio investment that Ukraine has enjoyed in the last two years is already having an impact on corporate governance. "This money is more demanding. It wants not only to know about a company's business affairs, but also has a thirst for information about how the company is managed," says Nick Piazza, the author of the first report on corporate governance, while he was still at Concorde Capital. Many companies have responded - oligarch Rinat Akhmetov's System Capital Management is the most obvious example - by restructuring and cleaning up both their act and corporate structure.

But until the political infighting is settled and someone emerges as a clear victor, custodians and businesses will be left to muddle through and cope with the obvious abuses as best they can. "Ukraine is the most bureaucratic of all emerging markets," Penstone says. "The issuer is judge and jury. Issuers only roughly say what documents they need. They seem to make it up as they go along."

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