Openness to Foreign Investment
GOVERNMENT'S ATTITUDE TOWARDS FOREIGN INVESTMENT
Ukraine encourages foreign trade and investment. Foreigners have the right to purchase businesses and property, to repatriate revenue and profits, and to receive compensation in the event that property was to be nationalized by a future government. However, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts and particularly corruption have discouraged broad foreign direct investment in Ukraine. In fact, although the Government of Ukraine has listed improving the investment climate as a top economic policy goal since the 2004 Orange Revolution, the overall investment and business climate remains poor, as evidenced by its low ranking-- 142 out of 183 economies -- in the World Bank's Doing Business Report for 2010. Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and a high level of corruption in the country, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.
Beginning in late 2008 and continuing throughout 2009, Ukraine's economy was hit hard by the global financial and economic crisis. GDP contracted by an estimated 14% in 2009, and the government turned to international institutions to help it cope with the crisis. The IMF approved a $16.4 billion stand-by arrangement for Ukraine in November 2008, of which $10.6 billion has been disbursed (as of January 2010). Many of the reforms that the IMF, World Bank, and other international donors placed as conditions for their lending would, if implemented, improve Ukraine's macroeconomic situation and the operating environment for businesses. However, as of January 2010, all lending from international institutions was on hold based on the Government of Ukraine's inability to follow through on the conditions for such lending. Ukraine was also in the midst of contentious presidential elections, which take place starting in January.
In some instances, the government's reaction to the recent global economic crisis has been to further restrict investment and free-market business activity, particularly in the financial sector. For example, a November 2009 law on "amendments of laws with the purpose of overcoming the negative impacts of the financial crisis," among other restrictions, reduces the timeframe for receipt of foreign currency proceeds from sales of exports to 90 days; requires conversion of foreign currency investments into local currency; and limits the right to grant foreign currency loans to individuals for payment of medical treatment received overseas or education abroad. In addition, the Ukrainian government, dealing with a growing fiscal deficit, has fallen behind on value-added tax (VAT) refund payments to exporters, with some estimating that the government owed over $2 billion to firms at the end of 2009. These large VAT refund arrears have discouraged further investment in the economy by the affected firms and by potential new investors in export sectors.
Nonetheless, investors are finding opportunities in Ukraine and Ukrainian legislation does provide that foreign investors are authorized to carry out investment activities in Ukraine on the same basis as Ukrainian domestic investors, a principle that was firmly acknowledged upon Ukraine's May 2008 accession to the World Trade Organization (WTO). For its part, WTO accession, and its ongoing Free Trade Agreement negotiations with the European Union, will over time push Ukraine toward a more open and transparent trade regime and help improve the investment climate. Additionally, officials at local levels are increasingly looking to attract investment and create jobs in their regions. In many instances, these local officials have become willing partners for investors in need of land or permits, which frequently are controlled below the national levels. Government officials at all levels have also become more receptive to public-private partnerships to finance and build needed infrastructure, particularly as Ukraine prepares to co-host Euro 2012 Soccer Championship games.
In recent years, the government also set up the Ukrainian Center for Foreign Investment Promotion, a state body commonly known as InvestUkraine (http://www.investukraine.org
). InvestUkraine was created to attract new investment and help investors navigate the labyrinth of institutions and rules/regulation necessary to start and maintain business operations. While relatively new, the organization is improving its operations and overhauling its data portals for investors with USAID assistance.
MAJOR LAWS/RULES AFFECTING FOREIGN INVESTMENT
The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment activity in Ukraine. In addition, the following key laws and regulations pertain to foreign investment:
-- Law "On the Foreign Investment Regime" (1996), which provides for equal treatment of foreign and Ukrainian-owned business with some restrictions in broadcasting and weapons manufacturing;
-- Law "On the Protection of Foreign Investment" (1991);
-- Cabinet of Ministers' Resolution "On the Procedure for the State Registration of Foreign Investment" (1996);
-- National Bank of Ukraine Resolution "On Regulation of Foreign Investing in Ukraine" (2005);
-- Law "On Amending Certain Laws of Ukraine with the Purpose of Overcoming Negative Impacts of the Financial Crisis" (2009).
Both a new Civil Code and a competing new Commercial Code went into effect on January 1, 2004. Lawyers and judges continue to grapple with how to implement the two laws, whose approaches to the regulation of business activities are contradictory. The Commercial Code has a number of provisions considered to be incompatible with market economics, and most experts believe it should be eliminated entirely.
In October 2001, the Ukrainian Parliament passed a Land Code. It provides for private ownership of land, facilitating the privatization of land for agricultural purposes, but also provided for a moratorium on agricultural land sales. In late 2009, Ukraine's Parliament vetoed an extension of this moratorium, but agricultural land sales are still not possible. The Land Code also prohibits foreign ownership of farmland.
RESTRICTIONS ON FOREIGN INVESTMENT AND REVIEW COMMITTEES
Under Ukrainian law, certain types of business activity may be pursued by state-owned enterprises only. These include some natural monopolies, the rocket industry, the production of bio-ethanol, and the printing of banknotes and blank securities forms.
In addition, Ukrainian law authorizes the government to set limits on foreign participation in "strategically important areas," although the wording is vague and rarely used in practice. Generally, these restrictions limit the maximum permissible percentage of foreign investment into Ukrainian firms in these sectors. For example, the share of foreign investors' participation in a Ukrainian publishing house is limited to 30%. A company's "strategic status" can be lifted by Parliament, on the recommendation of the Cabinet of Ministers, and foreign entities would then be allowed to participate. Although foreigners are prohibited from founding TV or radio stations, they can invest into already established entities in this area.
Ukraine's Anti-Monopoly Committee implements anti-monopoly, competition, and consumer protection legislation under the March 2002 Law "On Protection of Economic Competition." New companies and mergers/acquisitions face strict controls. Most investments, joint ventures with multiple partners, and share acquisitions require the Committee's approval. Those violating fair competition rules may be fined up to 10% of the prior year's turnover. If unfairly gained profit exceeds 10% of income, up to three times the normal penalty can be collected. The applicant, defendant, or a third party may appeal a Committee decision, but the appeal must be filed within two months after the decision is taken.
Ukraine's law On Amendments to Certain Legislation to Overcome Financial Crisis, which entered into force on November 28 also requires all foreign investment to be registered with local authorities or with the National Bank of Ukraine.
The State Property Fund oversees the privatization process in Ukraine. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers claim, however, that a common abuse of privatization laws is the adjustment of the terms of a privatization contest to fit the characteristics of a certain, pre-selected bidder. Few major, new privatizations have been conducted since the privatization rush of 2004. In 2005, Ukraine revoked the privatization of the Krivorizhstal steel factory, which had been sold to a group of domestic investors for $800 million, and subsequently sold it in a fair tender to Mittal Steel for $4.8 billion, in what is generally viewed as Ukraine's most transparent major privatization to date. Since then, Ukraine has taken no further steps to reverse previous privatizations, although Prime Minister Tymoshenko often threatens to take such action.
No major privatizations took place in 2009, largely due to constant political wrangling over the privatization process. The government has identified the large chemical producer Odesa Portside Plant, the state telecommunications company Ukrtelekom, the Kryvorizhskyy Ore Mining and Processing Plant, and producer of turbines for power plants Turboatom as priorities for privatization, but none have been achieved. Attempts at privatization in recent years were often marked by controversy.
CUSTOMS AND DUTIES
Burdensome customs clearance procedures are a disincentive to investment in Ukraine. Imported goods entering Ukraine often still must be "cleared" by a number of state bodies, some of which do not operate 24 hours a day, causing extended delays. Corruption also remains a serious problem, and businesses report that Customs officials frequently demand bribes or special "fees" to expedite clearance. Companies have identified improper customs valuation procedures -- i.e. Customs officers valuing goods well above their true value, thereby raising the customs duties owed -- as a major obstacle to doing business in Ukraine.
Import duties are calculated in accordance with the law "On the Customs Tariff of Ukraine." Upon becoming a WTO Member, Ukraine applied new, lower MFN rates to goods originating from WTO Members, in accordance with Article I of the GATT 1994. On December 17, 2008, Parliament belatedly adopted an amendment to the law "On the Customs Tariff of Ukraine" to institutionalize the new, lower MFN rates. Imports from the United States are subject to the MFN rate. Preferential rates are applied to imports from twelve countries with which Ukraine has a Free Trade Agreement (FTA) or other preferential trade agreement, mostly from the CIS.
In March 2009 GOU imposed a 13% surcharge to a certain categories of goods, namely cars and refrigerators, justifying this action by a weak balance-of-payments position resulting in a low level of international currency reserves. This surcharge was in place for 6 months and hasn't been extended thanks to consultations with the WTO and bilateral negotiations with the United States, the European Union, and other countries.
The customs tariff schedule comprises more than 11,000 tariff lines. Most customs tariffs are levied at ad valorem
rates, and only 1.5 percent of tariff line items (down from 5.97 percent prior to WTO accession) are subject to specific or combined rates of duty. These specific and combined rates apply primarily to agricultural goods that are produced in Ukraine, such as grains, poultry products, sugar, and vegetables like carrots and potatoes. The average applied tariff rate fell to 4.95 percent after WTO accession. For agricultural goods, the average applied tariff rate is now 9.11 percent (down from 13.8 percent before WTO accession). For industrial goods the average applied rate is now 3.71 percent (down from 4.4 percent before WTO accession).
Ukraine is not yet a signatory to the WTO Agreement on Government Procurement (GPA), but committed to initiate negotiations for GPA membership within two years of WTO accession. Ukraine has requested to become an observer to the GPA and is actively preparing its initial offer to begin the process of GPA accession.
Ukraine's procurement system had, until 2008, operated based on the 2000 law "On Procurement of Goods, Works, and Services Using State Funds." Although this procurement law was originally largely in line with international practice, amendments made in 2004-2006 opened the system to widespread corruption and moved it away from international norms. Authority to carry out central oversight and policy development for the government procurement system was stripped from the Ministry of Economy, and those policy and oversight functions were dispersed across several bodies, weakening oversight and policy making, and creating various conflicts of interest and overlapping functions. The amendments also granted the Tender Chamber of Ukraine, purportedly a nongovernmental organization, the authority to monitor the procurement process and to undertake key operational functions that were inherently governmental. The Tender Chamber soon became the center of the procurement system's corruption and lack of transparency.
Parliament, responding to widespread complaints of the corruption and dysfunctional nature of the system, repealed the law on government procurement, including all amendments, on March 20, 2008. In place of the law, the Cabinet of Ministers issued a decree establishing temporary provisions for government procurement based largely on the procurement law as it existed in 2004, before the troublesome amendments. Under those temporary provisions, the Tender Chamber was eliminated, and the Ministry of Economy resumed its role as the central oversight and policy body for the procurement system and began to institute real reform. The Constitutional Court subsequently ruled the temporary provisions unconstitutional on technical grounds, however, leaving Ukraine without a functioning government procurement system. The Cabinet of Ministers quickly issued a new decree on October 17 closely tracking the previous temporary provisions. The constitutionality of the October 17 decree is not yet clear, although it was meant to meet the constitutional issue raised by the Court. The continued unclear legal status of the decree complicates dispute resolution in the area of procurement.
A new draft procurement law is working its way slowly through the legislative process.
The Cabinet of Ministers decree currently in force requires that all government procurement of goods and services valued at more than UAH 100,000 (approximately $12,000) and public works valued at more than UAH 300,000 (approximately $35,000) must be procured through competitive tenders.
However, in the midst of the financial crisis, the GOU introduced a type of "buy Ukrainian" clause into temporary provisions governing procurement, requiring all procurement to be made from domestic firms or their official representatives. Procurement from foreign firms is possible only if there is no analogous product or service produced in Ukraine. The clause is in effect until January 1, 2011. Further amendments to the decree, adopted on December 8 banned intermediaries from participating in procurement. Only producing companies can participate in procurement tenders. The latter amendment was envisaged as a means to fight corruption in the procurement system, but has complicated participation in procurement even further. Even when a "buy Ukrainian" clause was not in effect, foreign companies generally won only a tiny fraction of the total tenders. Among the problems faced by foreign firms were: (1) the lack of public notice of tender rules and requirements; (2) covert preferences in tender awards; (3) the imposition of conditions that were not part of the original tender requirements; and (4) ineffective grievance and dispute resolution mechanisms, which often allow a losing bidder to block the tender after the contract has been awarded.
|Measure ||Index/Ranking ||Year|
|TI Corruption Index||146||2009|
|Heritage Economic Freedom||152||2009|
|World Bank Doing Business||142||2010|
|MCC Govnt Effectiveness||-0.22 (index)||2009|
|MCC Rule of Law||-0.23 (index)||2009|
|MCC Control of Corruption||-0.27(index)||2009|
|MCC Fiscal Policy||-1.9 (index)||2009|
|MCC Trade Policy||84 (index)||2009|
|MCC Regulatory Quality||-0.26 (index)||2009|
|MCC Business Start Up||0.975 (index)||2009|
|MCC Land Rights Access ||n/a|
|MCC Natural Resource Mgmt||83.14 (index)||2009|
Conversion and Transfer Policies
RESTRICTIONS ON CONVERTING/TRANSFERRING FUNDS
The 1996 Law "On Foreign Investment" guarantees the "unhindered transfer" of profits, revenues, and other proceeds in foreign currency after taxes and other mandatory payments.
While foreign investors may repatriate earnings, companies must obtain a license from the National Bank of Ukraine (NBU) for some operations. For repatriation of hard currency, each transaction over $50,000 must be approved by the NBU. The NBU also charges a fee to review the transaction. Foreign exchange is readily available at market-determined rates, but in the last year these rates have proven to be volatile, presenting additional challenges to investors. By November 2009, the exchange rate for Ukraine's currency, the hryvnia (UAH), had stabilized somewhat and was trading at about UAH 8 per one dollar.
Moreover, the market hryvnia exchange rate often differed from the official exchange rate, putting additional currency risk on business. As part of Ukraine's IMF program, the NBU imposed a 2% limitation on deviation between the official exchange rate and the interbank exchange rate in May 2009 to force the two exchange rates to converge. This has had limited success.
Investors note that the NBU has as many as four "official" rates depending on the type of activity for which the money will be used. For example, exporters may enjoy a more favorable rate. On the other hand, a pension fund tax is levied on transactions to purchase hard currency. While the 2009 Budget Law lowered this tax from 0.5% to 0.2%, (under pressure from the IMF), the lack of a 2010 Budget Law has caused the Pension Fund to call for a return to the previous tax rate of 0.5%. In turn, the NBU ruled that this was a valid claim, issuing a directive to banks to impose the higher rate.
On June 24, Ukraine's parliament (the Rada) amended regulations on foreign investment. Designed to limit the impact of the financial crisis, the amendments have instead complicated investment procedures. The new requirements entered into force in November and will be in effect until January 1, 2011. According to the new rules, foreign investors should open investment accounts with local banks. Foreign capital should be transferred to investment accounts in foreign currency, but the actual investment should be transacted in hryvnia only. All foreign investment should be registered. In response to complaints from investors about the new legislation, a draft law was submitted to the parliament to reverse most of its provisions; however, this draft has not yet been acted upon.
Additionally, in late 2008 the NBU issued a series of regulations designed to respond to the financial crisis and the devaluation of the hryvnia, which in practice have made repatriating funds and investment returns a more lengthy and cumbersome process. This includes limiting individual residents' and non-residents' monthly transfers of foreign currency to 15,000 hryvnia ($1900) without supporting documentation (e.g., court decision, contract, purchase invoice, etc.) or up to an equivalent of 75,000 hryvnia a month with supporting documentation. Exemptions are allowed for medical expenses abroad or travel related to said expenses; or payments connected with a death in the family abroad; or money transfers made to enforce court or law enforcement decisions; as well as transfers made as part of a permanent departure from Ukraine. Overall, while repatriating of funds is still permissible, it has become a much more lengthy process as the Government seeks to address capital flight and the global financial crisis.
As of November 2008, short-term foreign currency loans (six months) by foreigners to Ukrainians have been subject to new restrictions. Loans to Ukrainian borrowers can no longer be paid directly to a foreign counterpart without a transfer through the borrowers' bank account, which must be in a Ukraine-based bank (foreign or domestic-owned), absent a special license from the NBU. In addition, interest rates which can be applied to each tranche of a loan to a Ukrainian borrower under a single facility are now capped based on the NBU's rates for loan agreements of similar terms. Previously, the NBU had relaxed the cap on foreign currency loans by foreigners to Ukrainians in an effort to attract foreign lending to Ukraine. To limit the outflow of foreign currency from Ukraine, the parliament also as of November 2009 banned early repayment of foreign currency loans received from non-residents.
Investors convert their earnings into foreign currency through commercial banks, which purchase foreign currency on the electronic inter-bank currency market. Commercial banks may trade foreign currency in electronic form with other banks through participation in electronic inter-bank currency market, regulated and operated by the NBU. To purchase hard currency, companies must provide their banks with a copy of their foreign trade contracts. In an attempt to expedite purchases of hard currency, in March, 2005, the NBU cancelled the requirement that companies obtain State Tax Administration permission to purchase hard currency. Commercial banks must announce their clients' intentions to sell on inter-bank currency market if the transactions exceeded $500,000. The Law "On the Circulation of Promissory Notes" provides an opportunity for payments in foreign currency and issuance and circulation of promissory notes, in accordance with the 1930 Geneva Convention "Providing a Uniform Law for Bills of Exchange and Promissory Notes."
At present, there is no legal parallel market that investors might use to remit returns on their investment such as convertible instruments or foreign currency denominated bonds, although this is an item that the Ministry of Finance and NBU have considered in the past. There is no legal limit on the inflow or outflow of funds for profits, debt service, capital gains, returns on intellectual property, or export/imports; although again, this process has become significantly more complicated and time consuming due to recently passed and planned NBU regulations seeking to control currency flows.
Direct investors seeking to liquidate and repatriate their investments face stringent documentary requirements, though the NBU has stated its willingness to waive requirements if documents from the original transactions are no longer available. On December 4, 2007, the NBU issued a new regulation requiring nonresident investors who wish to convert dividends or divestment income into foreign currency to provide proof of the initial foreign investment, making such operations more difficult.
Expropriation and Compensation
Under the 1996 Law "On the Regime of Foreign Investment," a qualified foreign investor is provided guarantees against nationalization, except in cases of national emergencies, accidents, or epidemics. Expropriation of property is rare, although in May 2008, the government abruptly cancelled a Production Sharing Agreement with a U.S. company to explore for oil and gas in the Black Sea. International institutions have recommended that definitions of expropriation and nationalization in the foreign investment law and bilateral treaties be expanded to include indirect and creeping expropriation. Courts can determine whether owners of privatized enterprises failed to pay for an enterprise or to implement investment commitments in a privatization sale. Failure to pay or invest allows the GOU, with court permission, to revoke ownership and resell the property.
EXTENT AND NATURE OF INVESTMENT DISPUTES
The Embassy continues to provide advocacy on behalf of U.S. investors. For many years, investment disputes frequently have involved key problems with the investment climate such as the lack of adequate rule of law, fair and impartial dispute resolution mechanisms, and enforcement of domestic court and international arbitration decisions. Another problem is poor corporate governance (inadequate protection for shareholder rights, inadequate disclosure, asset-stripping, and voting fraud). Currently, there is no single point of contact in the Ukrainian government tasked to help resolve business and investment disputes involving foreign companies. Most U.S. businesses have little confidence in Ukrainian courts. Commercial contracts may permit the parties to use international arbitration or specified foreign courts to settle disputes. Though Ukrainian legislation recognizes international arbitration decisions, in practice such decisions can be very difficult to enforce in Ukraine.
Corruption continues to lie at the heart of many investor disputes. Laws and regulations are vague, with considerable room for interpretation, providing officials at every bureaucratic layer ample opportunities for rent seeking.
DESCRIPTION OF UKRAINE'S LEGAL SYSTEM
In the event of a commercial dispute, a foreign investor may seek recourse through a number of institutions. Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided by international treaties. All other disputes involving a foreign investor must be settled in the Ukrainian courts, in courts of arbitration, including international arbitration courts, or other bodies of dispute resolution chosen by the parties to the dispute.
Ukraine's court system consists of the Constitutional Court and the courts of general jurisdiction. The Constitutional Court has exclusive jurisdiction over interpretation of the Constitution and laws of Ukraine and acts as final arbiter on constitutional issues. Courts of general jurisdiction are organized by territory and specialty and include: (i) local courts; (ii) appellate courts; and (iii) Supreme Courts. Local courts are either courts of general jurisdiction (including military courts) or specialized courts (i.e. commercial and administrative courts). Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in disputes connected with legal relations in the area of state government and municipalities (except military disputes).
Since Ukraine is a civil law country, the exercise of judicial power is based solely on the application of statutes. Court decisions do not constitute binding precedents, although Supreme Court and Supreme Commercial Court decisions are summarized, to introduce uniformity to the interpretation and application of the applicable legislation, and are followed by the lower courts on a quasi-mandatory basis.
Commercial courts of Ukraine accept jurisdiction over disputes between legal entities, including foreign legal entities, Ukrainian legal entities and individual entrepreneurs, arising out of the conclusion, modification, termination, and performance of commercial agreements (including privatization). Commercial courts are also in charge of administering bankruptcy cases and certain cases initiated by the Antimonopoly Committee of Ukraine and the Accounting Chamber.
Administrative courts handle tax, customs, and certain antimonopoly disputes.
ENFORCEMENT OF RIGHTS
Investors criticize Ukraine's legal system for its inefficiency, burdensome procedures, unpredictability, corruption, and susceptibility to political interference. Even when they obtain favorable decisions, investors claim the decisions are sometimes not enforced. The enforcement responsibilities fall under the State Enforcement Service, which reports to the Ministry of Justice.
The procedure for recognizing and enforcing foreign court decisions is regulated by Section 8 of the Code of Civil Court Procedures of Ukraine. In accordance with the Code, a foreign court decision is recognized and enforced in Ukraine if such recognition and enforcement is provided for in international treaties, the mandatory nature of which has been endorsed by the parliament, or based on a mutual ad-hoc agreement with a foreign state whose court has rendered a decision that is to be enforced in Ukraine.
The State Enforcement Service implements decisions rendered by foreign courts and arbitration tribunals in accordance with the Law "On Enforcement Proceedings." The Law "On Implementing Decisions and Applying Practices of the European Court of Human Rights" entered into force on March 30, 2006. Along with a subsequent Cabinet of Ministers implementing Resolution, the law obligates the Ministry of Justice to ensure implementation of the Court's decisions.
A new Civil Code and a competing Commercial Code both went into effect on January 1, 2004. Lawyers and judges have since grappled with how to implement the two conflicting laws. Despite heavy criticism of the Commercial Code by businessmen and GOU officials, Parliament has not yet taken action to amend or annul it. The Civil Code ensures protection of the rights of private property, of engaging in contracts, and of entrepreneurial activity. It provides a unified framework for economic regulations.
The Civil Code is generally market-oriented and modern, but the Commercial Code is often contrary to market economy principles and directly contradicts provisions of the Civil Code in numerous instances. The Commercial Code aims to preserve a privileged position for the public sector of the economy and allows for governmental interference in private commercial relations. Further, in both codes gaps in regulation exist. The existence of these two codes creates uncertainty in planning and structuring transactions, and leaves questions surrounding transactions unanswered. Problems arising from these two codes also surface in the resolution of disputes, as courts are not able to resolve the conflicting provisions of the codes, or are not able to fill in the gaps in regulation that arise as a result of the missing provisions in the codes. Finally, other commercial laws have not been harmonized with these codes.
A 1999 bankruptcy law provides for debtor-led reorganization, a meaningful moratorium on payment and collection of pre-existing debt, and a tax forgiveness provision. Creditors protect their rights under the law by electing a creditors' committee, which is actively involved in the bankruptcy proceedings. Most observers believe the bankruptcy laws should be amended to provide more protection for creditors. Notice provisions, protections for the rights of minority shareholders, and procedures for valuation and the sale of assets to satisfy liabilities are undeveloped.
Problems with corporate governance in Ukraine involve corporate ownership, shareholder rights, transparency, and disclosure. The Law "On Companies" offers scant protection for minority shareholders against insider dealing, asset stripping, profit skimming, and share dilution. Corporate finance is restricted. Some examples of shareholder rights abuses include limited disclosure, capital restructuring without shareholders' consent, and shareholder voting fraud. Nevertheless, a Company Register that was established in 2004 improved transparency. A new Joint Stock Company law, which came into effect in April 2009, introduced principles of sound corporate practices that meet international standards.
Corporate governance in Ukrainian companies is usually based on three-tier system and includes general meeting of shareholders, a supervisory board, and an executive body (either single or collegial). The executive's body activity and financial performance of a company is controlled by a revision commission.
BINDING INTERNATIONAL ARBITRATION
Ukraine enacted an international commercial arbitration law in February 1994, which parallels commercial arbitration laws set forth by the United Nations Commission on International Trade Law. Ukraine is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitration Awards. Some investors have problems enforcing foreign arbitration awards in Ukraine. Foreign arbitral award enforcement procedures in Ukraine are regulated by a number of statutes and regulations, including the Section 8 of the Civil Procedural Code and a law "On Enforcement Proceedings." In early 2000 Ukraine ratified the Washington Convention, providing for use of the International Center for Settlement of Investment Disputes (ICSID), an internationally recognized mechanism for resolving investment disputes between investors and the GOU. The U.S.-Ukraine Bilateral Investment Treaty (BIT), signed in November 1996, recognizes arbitration of investment disputes before the ICSID. One major investment dispute involving a U.S. company was resolved in May 2006 through a combination of direct consultations with the Ukrainian government and international arbitration by ICSID.
There are no known cases of performance requirements imposed on foreign investors other than those clearly spelled out in privatizations conducted via open tender. Ukraine eliminated measures that conflict with the WTO Agreement on Trade-Related Investment Measures (TRIMs) in the automobile industry and other sectors in the context of its accession efforts.
Ukraine modified its foreign investment law of 1996 to provide foreign investors a number of state guarantees, the most important being the unhindered and immediate repatriation of profits and stable regulations for the time of the investment. Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company's charter fund. Some restrictions apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property.
VISA/WORK PERMIT REQUIREMENTS
A passport valid for six months beyond the planned date of travel is required for entry. U.S. citizens do not require a visa as long as their length of stay in Ukraine is less than 90 days and their purpose of travel is tourism, private travel, or business. A U.S. citizen must have a valid Ukrainian visa if their planned stay exceeds 90 days or if their purpose of travel is other than tourism, private travel, or business. The Government of Ukraine does not issue visas at its borders or ports of entry. Visas must be obtained in advance by those who need them. For information about current visa requirements and application procedures, please contact the Embassy of Ukraine
in Washington, D.C., or the Ukrainian Consulates General in Chicago
, New York
, or San Francisco
Upon arrival in Ukraine, U.S. citizens generally will be registered for an authorized stay of 90 days. In some cases, it may be possible to extend this registration for an additional 90 days. However, this extension is valid only for continuous stay in Ukraine, but may not allow re-entry to the country. Requests for extension are processed through the Ministry of Internal Affairs' Office of Citizenship, Immigration, and Registration
(OVIR), and must be submitted at least three days before the current registration expires.
All foreign citizens must have either permanent resident status or a work permit if they intend to work in Ukraine. Work permits are issued by the Ministry of Labor, which then allows the foreign citizen to apply for an IM-1 visa at a Ukrainian Consulate abroad. Upon entry to Ukraine, the visa holder must submit his or her passport with the IM-1 visa to their local OVIR office, which will put a stamp in the passport allowing the holder to depart and re-enter Ukraine. In most cases, a work permit is valid for one year, after which an extension must be obtained from the Ministry of Labor. The extended work permit must then be registered with OVIR. Dependents of IM-1 visa holders do not automatically receive the same status. If they intend to remain in Ukraine over 90 days, dependents must obtain their own visa. This visa must then be submitted to OVIR along with the sponsor's IM-1 visa, which should result in a stamp being placed in the passport to allow travel in and out of Ukraine.
Right to Private Ownership and Establishment
The Constitution of Ukraine guarantees the right to private ownership, including the right to own land. A new Land Code consistent with the Constitution was adopted on October 25, 2001. The Land Code provides for foreign ownership of non-agricultural land and clarifies the rights of foreign investors.
The major provisions of the Land Code address the right of individuals to own, buy, and sell land. It classifies land into seven categories, based on potential use including agricultural, industrial, and natural reserve lands. The mix of state control and ownership rights varies with each type of land. It is easier to own, buy, sell, and mortgage industrial land than agricultural land. A longstanding moratorium on the sale of agricultural land remains in effect. The Land Code continues to restrict agricultural land purchases by any one legal entity to no more than 100 hectares until 2015. The Land Code also prohibits foreigners from owning agricultural land directly. The creation of a legal Ukrainian-registered business to purchase and manage land in Ukraine is not prohibited. The Land Code codifies the state's right to oversee private land transactions via registration, the court system, and dispute mediation, as well as broad government/state rights to "influence" the land market.
Ukraine's Law "On Ownership" recognizes private ownership and includes Ukrainian residents, foreign individuals, and foreign legal entities among those entities able to own property in Ukraine. It permits owners of property (including foreign investors and joint ventures) to use property for commercial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. The Law "On Ownership" is not comprehensive and mechanisms for the transfer of ownership rights are weak. Some difficulties have arisen when foreigners acquire majority control of enterprises, with the government or the current management in some cases continuing to exercise effective control of company decisions.
Protection of Property Rights
Ukraine's policymakers have launched several initiatives over the past several years to develop a mortgage market, which have resulted in a strong increase in the number of mortgages and laid the legislative and administrative groundwork for a functioning mortgage market. Adoption of the Law "On Withholding Land Shares in Kind" in 2002 and the Law "On Mortgages" in 2003 was particularly important. The GOU created the State Mortgage Institution (SMI) in October 2004 with authorized capital of UAH 50 million ($6.6 million) as a liquidity facility largely aimed at putting downward pressure on lending rates by allocating capital efficiently. The SMI began issuing corporate securities during the first quarter of 2007. On July 17, 2009, the Cabinet of Ministers issued a resolution defining the SMI's authority and supervision over its activity.
USAID helped create a pledge registry, the first of its kind in the former Soviet Union, which applies to individuals' obligations with regard to movable property and tax liens. Though rudimentary, the registry is nationwide, providing a more transparent lending market for personal property.
The use of mortgages in Ukraine to secure ownership in property is growing rapidly -- apartments, houses, office buildings, other types of buildings, and summer house (dacha) plots have secured mortgages. Mortgage lending more than doubled in 2007, and increased by another 56 percent in the first eleven months of 2008 to reach UAH 78 billion (roughly $10 billion). Nearly all mortgage lending is for residential real estate loans, and the vast bulk of all mortgages -- about 88 percent -- is denominated or otherwise linked to a foreign currency, mostly U.S. dollars. New lending, however, came to a virtual halt in late 2008 as a result of the ongoing financial crisis, as the real estate market experienced a severe correction and the local currency faced a sharp devaluation against the U.S. dollar. The number of nonperforming mortgage loans tripled during first nine months of 2009. Lack of available lending caused many construction companies to suspend existing projects and refrain from new investment, slowing down mortgage market development. In an attempt to add liquidity to the system the State Mortgage Institution placed UAH 500 million (US$ 62.5 million) worth of bonds in 2009. Most of them were bought by the state-owned bank Oshchadny.
INTELLECTUAL PROPERTY RIGHTS (IPR)
The GOU has substantially improved its enforcement of IPR in recent years, in part to meet its WTO accession requirements as well as to fulfill expectations as it negotiates a free trade agreement with the European Union. Ukraine's IPR-related legal base is now almost fully in compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international norms. Law enforcement bodies have stepped up efforts to seize IPR-infringing goods and to prosecute those involved in their trade. Perhaps most importantly, illegal production of pirated and counterfeit goods has been halted almost completely. On April 24, 2008, the Office of the United States Trade Representative lowered Ukraine's designation in its Special 301 Report from Priority Watch List to Watch List. The GOU still faces serious IPR enforcement problems, however, including widespread retail piracy, the transshipment of pirated and counterfeit goods, internet piracy, and government use of illegal software. The Ukrainian government meets regularly with U.S. Government officials and with U.S. and domestic industry representatives to monitor enforcement efforts through the U.S.-Ukraine IPR Enforcement Cooperation Group. Ukraine also meets biannually with European Commission officials as part of an EU-Ukraine Intellectual Property Dialogue.
Despite the significant reduction of illegal production of optical discs, pirated discs remain widely available, particularly in large open-air markets throughout the country's larger cities; the Petrivka market in Kyiv is the most notorious. Industry representatives estimate piracy levels for music and video at more than 60%, and for computer software at 84%. The transshipment of pirated and counterfeit goods, particularly optical discs produced in Russia, remains a serious problem, as does government procurement and use of unlicensed software. The use of optical media is beginning to decline, as smugglers and retailers begin to switch to Flash memory cards, which are physically smaller and have greater storage capacity than optical discs.
Internet piracy is a nascent and growing problem in Ukraine. Many Ukraine-based websites offer pirated material for download with the full knowledge of their Internet Service Providers (ISPs). Industry groups estimate that out of the roughly400 ISPs in Ukraine, 150-160 of them support websites offering pirated material. Microsoft has also complained that Local Area Networks (LAN), some of which cover entire Ukrainian cities, allow for widespread software piracy. On-line mail order sites also distribute pirated material.
Ministry of Internal Affairs officials have pointed to some successes in stopping mail order piracy, but admit that file sharing and downloading is much more difficult to combat. GOU representatives have argued that Ukrainian law does not give law enforcement officials clear authority to shut down websites, although sometimes ISPs can be persuaded to do so voluntarily. Because they are most often shut down without going through the courts, however, these sites can easily reappear on a new ISP or in a modified format. The U.S. Government works with the Ministry of Internal Affairs and trains law enforcement officers to combat internet piracy.
Royalty Collecting Societies
Rights holders have complained that some royalty collecting societies collect fees for public use of copyrighted material without authorization and do not properly return royalty payments to rights holders, and that the overall level of royalty payments in Ukraine remains low. To address these industry concerns, a draft amendment to the Copyright Law has been registered in Ukraine's parliament and is awaiting consideration. This law also specifically defines camcording in cinemas as a violation of the law.
Ukraine has improved its protection of undisclosed test data, such as that from drug trials, from unfair commercial use (TRIPS Article 39.3). In 2006, Parliament passed amendments to the law "On Medicinal Drugs," introducing a five-year period for the protection of undisclosed information in the course of registration of medical drugs, and to the law "On Pesticides and Agrochemicals," introducing a ten-year protection period for agricultural chemical products. Local representatives of large international pharmaceutical companies are generally satisfied with the new law but continue to complain of a lack of transparency by GOU bodies responsible for granting market approval for generic drugs.
Parliament passed a legal amendment in April 2008 to bring Ukraine's treatment of geographical indications (GIs) in line with WTO rules (TRIPS Articles 16, 17, 22, 24), and to meet certain requests made by the European Union. Ukraine and EU continue to discuss this problem in the framework of FTA negotiations.
Patent and Trademark
Trademarked and copyrighted goods must be registered for a fee in the Customs Service's rights holder database in order to be guaranteed protection. Counterfeit goods, including products that contain protected trademarks, remain readily available in Ukraine. Counterfeit apparel products are particularly common. Most counterfeit goods are not produced in Ukraine, but are imported, although industry has reported instances of production of counterfeit cigarettes. There has also been growth in the amount of counterfeit pesticides on the market, which, according to industry, accounts for about 30% of the market. Ukraine does not have the technical capability to destroy some forms of counterfeit pesticides, complicating enforcement efforts.
To prevent counterfeit products from reaching the market, industry suggests that Ukraine should amend and streamline crop protection products' registration procedures with the Ministry of Environment.
The Ukrainian Ministry of Health does not routinely check the validity of patents when it grants marketing approval in Ukraine.
Judicial System for IPR Protection
Civil IPR lawsuits remain rare because of a general lack of confidence in Ukraine's legal system, and because there are few judges properly trained in IPR law. Law enforcement officials also complain that too many IPR cases result in small fines only, ranging from 1700-3400 UAH (200-400 USD) for criminal cases and averaging just 250 UAH (30 USD) for administrative cases. The U.S. Government has worked closely with the Government of Ukraine to provide specialized IPR training to judges.
Transparency of the Regulatory System
BUREAUCRATIC REGULATORY PROCEDURES
The number of regulations, required certificates, and inspection regimes in Ukraine imposes a significant regulatory burden on private enterprise. While the time and costs related to business registration have been reduced, the GOU still requires enterprises to obtain numerous permits to conduct business. The Law "On Permits System in Economic Activity," which entered into force in January 2006, canceled more than half of the required permits and increased the number of locations for obtaining permits six fold. The government also tried to expand "One-stop Registration Shops" that allow new businesses to be registered within two to three days, instead of a month, as in the past. Per new cabinet orders, there is a silent consent provision on permit applications in which the permits are automatically approved if there has been no decision made on them after 30 days have passed since submission. Once these cabinet orders are fully implemented, corrupt officials in multiple agencies/ministries will lose their ability to create additional and unnecessary costs and delays for private businesses. The World Bank "Doing Business 2010" report on 183 countries rated Ukraine 134th for ease in starting a business, down from 126th in the 2009 report. "Doing Business 2010" estimates that on average it takes 27 days and approximately $154 (5.8% of GNI per capita) to open a business in Ukraine; OECD averages are 13 days and 4.7% of GNI per capita.
Ukraine applies both activity and import licensing regimes. The Law "On Licensing Certain Types of Economic Activities" of June 2000 (and amended on January 17, 2002) provides a list of activities subject to licensing. Licensing applies to nearly 60 economic activities and is meant for protection of human, animal or plant health, the environment, public morals, and national security, or for prudential regulation of the financial sector. Businesspeople continue to cite burdensome activity licensing requirements as an impediment to commerce in Ukraine. Fees are described as high and compliance time consuming, particularly for telecommunications equipment.
Import licenses are required for some goods. The list of goods covered by the licensing regime and the license terms are decided annually by the Cabinet of Ministers. As of June 10, 2009, the list included pesticides, alcohol products, sugar and sugar syrup, prepared food products containing cocoa, optical media production inputs, some industrial chemical products and equipment containing them, official foreign postage stamps, excise marks, officially stamped/headed paper, checks and securities, some goods that contain sensitive encryption technologies, and ozone-depleting substances.
While the import licenses themselves are granted automatically to applicants, some products require prior approval, which may or may not be automatic, from the relevant administrative agency before receiving the necessary import license from the Ministry of Economy. In 2008, the Ministry of Environment significantly tightened procedures for obtaining its approval to import goods that are potentially ozone-depleting. The stricter procedures delayed shipments and significantly increased business costs for importers of a wide range of goods, including aerosols, refrigerators, mascara, lipstick, toothpaste, and coffee makers. Throughout the WTO accession negotiations, the United States sought assurances from Ukraine that it would not impose restrictive import licensing requirements without adequate WTO justification, (e.g
., on imports of mass-market, commercially-traded goods containing encryption that are covered by the Information Technology Agreement).
For some goods, product certification is a prerequisite for an import license. Importers can request that a foreign facility be certified as in compliance with Ukraine's technical regulations that apply to imports. The U.S. distilled spirits industry reports that this option usually involves a burdensome and costly inspection visit by Ukrainian government officials. If approved, the supplier receives a certificate of conformity valid for 2 years to 3 years and avoids the burden of certifying each shipment and mandatory laboratory testing upon arrival in Ukraine.
Proposed draft laws and regulations are available for public review on the official website of Parliament and executive government agencies, but there is no formal procedure for submitting comments.
Current Ukrainian legislation envisages a mandatory financial inspection of a business entity per year and requires a minimum of 10 days notice. Non-financial inspections (i.e. taxes, fire safety, sanitation, etc.) can be burdensome impediments to doing business in Ukraine.
TECHNICAL REGULATIONS: STANDARDS, TESTING, AND CERTIFICATION
U.S. and other foreign companies have long regarded Ukraine's system of technical regulations as a significant obstacle to trade and investment. Ukraine has passed several new laws and governmental decrees in recent years aimed at bringing Ukrainian practices in this area into line with the WTO Agreement on Technical Barriers to Trade (TBT), but significant problems remain. Based on the old Soviet system, the Ukrainian technical regulations system is characterized by burdensome, ex ante
control, and widespread compulsory standards, and it differs markedly from systems in Europe and OECD countries.
Contrary to accepted international practice, standardization in Ukraine is not a voluntary procedure through which manufacturers can ensure specific properties of a process or product, but rather a part of the state regulatory system. Standards are compulsory for virtually all goods, and many services. Mandatory certification is required in Ukraine for over 400 types of goods and services and remains applicable de facto
for an even larger number of goods and services. Mandatory certification is often required without regard to the products' actual level of risk to the public, or to other types of regulation already applicable. Mandatory certification in Ukraine is applicable both to domestic products and to imported goods in most cases, generally irrespective of whether they already have proof of conformity with applicable international technical regulations. In addition, mandatory certification applies to produced goods rather than to the production process, thus forcing manufacturers to complete certification procedures repeatedly or to submit proof of conformity assessment for each batch of products.
Most current standards were created under the Soviet Union, do not correspond to international standards, and are typically far more restrictive and prescriptive than necessary. The International Finance Corporation estimates that over 12,000 of Ukraine's standards still need to be harmonized with international standards.
The State Committee for Technical Regulation and Consumer Policy (DerzhSpozhyvStandard), the standardization and certification body in Ukraine, is simultaneously responsible for developing and approving standards, issuing certificates, conducting inspections of producers, and ensuring market surveillance and protection of consumer rights. This confusion of functions, including the bundling together of commercial certification functions with state supervision functions, combined with the fact that the same organization provides certification services and appoints other certification bodies, means that there are considerable conflicts of interest and excessive discretionary powers. Appropriate resources, such as modern analytical equipment and reactants, are not available in most DerzhSpozhyvStandard laboratories. Depending on the type of product, testing, and applicable certification scheme, the certification process can take from 3 days to 1 month. Experts allege that government officials responsible for issuing licenses often require businesses to provide documents that are not mandatory, deliberately conceal information in order to confuse a potential licensee, or delay issuing documents in order to induce licensees to offer a bribe.
During WTO accession negotiations, Ukraine pledged to continually review the list of products subject to mandatory certification and to reduce the number of products on this list, if the legitimate objectives could be met in a less trade-restrictive manner. DerzhSpozhyvStandard attempted to add fruits and vegetables to the list in 2009, but reversed its decision late in the year. In a positive move, they removed all items from the food certification list with the exception of baby food and alcoholic beverages. An April 2008 amendment to the law "On Standards, Technical Regulations, and Conformity Assessment Procedures" helped to ensure that Ukraine's authorities would accept the results of alternative methods of conformity assessment, including those performed in the United States. Ukraine's National Accreditation Agency is an affiliated member of the International Laboratory Accreditation Cooperation (ILAC), and in 2009 it made a first step on the way to full membership – signing an Agreement with European Cooperation for Accreditation (EA) about personnel accreditation. Once it becomes an ILAC member, Ukraine should significantly increase the acceptance of test results of laboratories accredited with, and notified by, ILAC member bodies.
SANITARY AND PHYTOSANITARY (SPS) MEASURES
Ukraine applies a range of SPS measures that restrict imports of a number of U.S. agricultural products, among them, pork, beef, and poultry. Industry has repeatedly complained that Ukraine's certification and approval process is lengthy, duplicative, and expensive. Over the past several years, Ukraine has passed amendments to several laws and regulations, most importantly to the law "On Veterinary Medicine" and the law "Quality and Safety of Food Products and Food Raw Materials," to bring its legislative and regulatory framework into compliance with requirements of the WTO SPS Agreement.
The following SPS issues may be of particular importance to companies doing business in Ukraine:
Overlapping State Authorities: Ukraine has maintained a complex and nontransparent oversight system for human and animal health measures that involves overlapping authority by the Veterinary Service, Sanitary Service, and DerzhSpozhyvStandard. Several legislative amendments passed as part of the WTO accession process made progress but did not solve entirely the problem of overlapping authority.
Beef, Beef Products, and Pork: A U.S.-Ukraine bilateral agreement reached during WTO negotiations addresses the terms of U.S. exports of beef, beef products, and pork to Ukraine. Although Ukraine has allowed the entry of certified U.S. beef and pork that meets veterinary certificate requirements, the lack of a functioning protocol on pork or on live swine for breeding continues to limit U.S. exports. Ukrainian veterinary authorities conducted a system audit of the U.S. system in 2007 but call for further audits, and in the meantime insist on individual plant inspections of U.S. producers. In 2009, raw animal products, feed additives, livestock feed, and other products of animal origin were made subject to mandatory certification by Ukraine's State Committee for Veterinary Medicine.
Biotechnology: Ukraine has not established an approval process for agricultural biotechnology products. The absence of an approval process has resulted in unpredictable sales conditions for corn products, soybeans, and meal. The United States is working with Ukraine to establish procedures governing biotechnology that are supported by science-based risk assessment principles and guidelines, including those of the WTO SPS and TBT Agreements, the Codex Alimentarius, and the International Plant Protection Convention (IPPC). Although Parliament passed a law in 2007 establishing the framework for the creation, testing, and use of products of biotechnology, the necessary implementing regulations to open the market are still under development.
In 2009, Parliament passed laws requiring all food product labels to include information about the presence or absence of biotechnology (GMO) content. In addition, two additional pieces of legislation that call for absolute bans on the import and sale of biotechnology in Ukraine were introduced and are being considered in Parliament.
Efficient Capital Markets and Portfolio Investment
The Ukrainian banking system consists of the National Bank of Ukraine (NBU) and commercial banks. The NBU is responsible for monetary policy, licensing of commercial banks, and oversight of their activities. There are 185 banks registered in Ukraine, including 49 with foreign equity participation. The five largest banks control 34% of the market, representing the lowest market concentration level in all of central and Eastern Europe. Foreign capital represents 34.2% of total capital in the banking sector as of November 1, 2009. Ukraine remains a cash economy, but the use of credit cards and ATM machines is on the rise. In absolute terms, however, the banking sector is still fairly small. Total bank assets in Ukraine are about UAH 885 billion, with total loan assets of UAH 727 billion (as of October 2009).
In 2004-2008 Ukraine's banking system expanded rapidly and played an important role in the development and modernization of the economy as a whole, and in providing wider groups of the population with access to credit. However, the reliance of banks on foreign borrowing to fund domestic lending operations made Ukraine's banking system sensitive to international shocks. With the global financial crisis, foreign credit dried up for Ukrainian banks in late 2008 and Ukraine's banking sector came under pressure.
In November 2008, the Government announced it had agreed to an IMF stand-by loan of $16.4 billion and an overall economic stabilization program. In addition to helping Ukraine meet its external debt commitments from 2008 - 2010, the loan was to be used to recapitalize the banking system. The audit of the banking system conducted under the IMF program identified systemically important banks in need of recapitalization. To streamline recapitalizations, the National Bank of Ukraine (NBU) raised the share of subordinated debt which could be counted as capital from 50% to 100%. In 2009, the state recapitalized three banks, raising the number of state-owned banks to five. The NBU also introduced provisional administrations in banks where solvency problems were most acute. Fourteen banks were under provisional administration by the National Bank of Ukraine as of December, 2009.
The banking crisis virtually froze corporate and consumer lending. Corporate lending grew by only 4% over the first ten months of 2009 and consumer lending fell by 12.7% over the same period. Non-performing loans are estimated at about 30% of the banking sector's total loan portfolio, and the problem was growing as of the end of 2009. While the NBU's official estimation of non-performing is only 8.8%, this official estimate takes into account the overdue part of the problematic loan only, not the full outstanding loan amount. Insufficient foreclosure and bankruptcy procedures prevent fast resolution of bad debt and force banks to accumulate large provisioning to cover possible losses, which limits lending opportunities and slows recovery from the crisis.
In January 2002, the law "On Banks and Banking Activity" eliminated discrimination against foreign-owned banks. It entrusted the NBU with issuing banking licenses and included provisions to prevent money laundering. The NBU sets minimum capital requirements each year to be met by the banks by the year-end. Current minimum capital requirements range from EUR 10 million (UAH 74.2 million) to EUR 20 million (UAH 148.4 million). Foreign-licensed banks may carry out all activities that domestic banks do and there is no ceiling on their participation in the banking system, including operating via subsidiaries in Ukraine. In November 2006, the Rada approved an amendment to the law "On Banks and Banking Activity" permitting foreign banks to operate via branch offices. Foreign banks have significantly increased their presence in Ukraine's banking sector in recent years, usually through the acquisition of Ukrainian banks.
It is also worth noting that in December, 2009, the PFTS Association, which owns the Ukraine's largest stock exchange, increased its authorized capital and sold the additional shares to the Russian exchange MICEX, giving MICEX a 50% ownership in the PFTS Exchange.
Ukraine's anti-money laundering regime (AML) is established by the Law on Prevention and Counteraction to Legalization (Laundering) of the Proceeds of Crime or Terrorism Financing, with the primary financial monitoring function assigned to the State Committee for Financial Monitoring. Ukraine's AML regime received two unfavorable reviews in 2009: one from the Financial Action Task Force (FATF), the primary worldwide body that oversees AML efforts, and the other from the Council of Europe's Committee of Experts on the Evaluation of AML Measures and the Financing of Terrorism (Moneyval). The reports of these bodies criticized both Ukrainian legislation and its implementation. It now appears that FATF may well, in February 2010, place Ukraine on a list of countries whose AML efforts are unsatisfactory – a designation that could be coupled with a general warning to banks and businesses engaged in banking in Ukraine. Some efforts in 2009 to improve Ukraine's AML legislation proved fruitless, as when the president vetoed a set of amendments to the general AML legislation, which Parliament passed in November 2009.
In 2009, in an attempt to limit the foreign currency outflow from the country, Ukraine's parliament adopted a law banning all foreign currency lending in Ukraine. The law also forbade early repayment of loans taken internationally before the law came into effect. The measures entered into force on November 24 and will be in effect until January 1, 2011. The parliament is expected to amend the legislation in view of complains from the banking sector and investors.
As a reaction to the sharp drop in bank deposits in late 2008, the NBU moved to impose restrictions on early withdrawal of deposits and ordered banks to review their existing deposit base and better classify accounts. As the deposit outflow subsided, the NBU canceled the ban on pre-term withdrawal of bank deposits in May, 2009. Deposit guarantees were doubled to $20,000. The government also took steps to implement the bank resolution plan foreseen in the IMF loan agreement.
Currently, based on the 1996 Law "On Insurance," only insurance companies registered in Ukraine may carry out insurance operations. There is a lower minimum capital requirement for domestic insurance companies than insurance companies with foreign shareholders. Foreign insurance companies can invest in local companies, but to operate locally they are required to open branch offices. Parliament adopted amendments to the Law "On Insurance" in November 2006 and May 2007, however, that give foreign companies the right to operate in Ukraine through affiliates five years after Ukraine's WTO accession. Ukraine joined the WTO in 2008.
Ukraine has eleven registered, privately-owned stock exchanges. In the spring of 2009, the Russian RTS jointly with 21 Ukrainian investment companies created a Ukrainian Exchange. Twelve percent of trade volumes went through the newly established Exchange over the first eleven months of 2009. Thus, the Exchange became a real competitor to the PFTS, Ukraine's largest exchange. The PFTS is a broker/dealer SRO (self-regulatory organization) and electronic trading system, which saw it market share drop from 90% to 56.3% in 2009. The exchanges operate largely in compliance with international best practices. There is increasing competition in this sector, with plans underway to incorporate "market-maker" capabilities. The Ukrainian Interbank Currency Exchange (UICE) has begun cooperating with NASDAQ-OMX to bring new technologies into the local market. In practice, however, significant trading continues to be done off-exchange, with some estimates placing this number at 90% of all securities market trading. The remaining exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises.
Ukrainian law allows for the following types of securities:
-- share securities (shares, investment certificates);
-- debt securities (bonds of enterprises, state bonds of Ukraine, bonds of local loans,
treasury obligations of Ukraine, savings (depository) certificates, bills of exchange);
-- mortgage securities (mortgage bonds, mortgage certificates, mortgages, certificates
of funds of operations with real estate);
-- privatization securities;
-- derivative securities;
-- title securities
Most of these markets are still in a nascent stage. Although the equity market in particular has grown in recent years, it is still very small when compared to stock markets in other emerging markets of central Europe and does not yet act as an important source of capital for Ukrainian companies or investment destination for domestic savings.
There are no legal restrictions on the free flow of financial resources needed to support growth in the product/factor markets. Credit is largely allocated on market terms and foreign investors are able to get credit on the local market, utilizing a variety of credit instruments. However, the market environment lacks transparency, enforcement of key laws and regulations remains weak, and investors (domestic and foreign) continue to face significant uncertainty. This includes low market confidence (hurt further by the 2008 global financial crisis), transitional accounting standards, a lack of accurate company information, inadequate protection of minority shareholders' rights, and a macroeconomic environment that, despite marked growth and economic modernization in recent years, remains volatile. Rulings of the Securities and Stock Market State Commission (SSMSC) and Financial Services Regulator (FSR) have insufficient enforcement power and are not always followed by the courts. The SSMSC and FSR also face problems with budgetary and political independence, which they are actively seeking to address.
In 2008, the NBU and a group of Ukraine's largest banks founded the All Ukrainian Securities Depository (AUSD). The new entity is expected to end the disputes between the market-owned securities depository MFS and the state-owned National Depository of Ukraine (NDU). Since October 2009, the AUSD was registered as successor of the MFS and owner of 97% of its shares. Depository operations by AUSD are largely in line with G-30 requirements. The state-owned NDU remains in existence, but has little practical function. Over 380 licensed registrars continue to operate in Ukraine. Many are seen as "pocket registrars" and have been used in the past to disguise or eliminate ownership records.
Principal laws, decrees, and regulations governing Ukraine's capital markets include: the law "On Securities and Stock Exchanges" (1991), replaced in May 2006 by the law "On Securities and the Stock Market" (2006), the law "On Business Associations" (1991), law "On Joint Stock Companies" (2008), a Presidential Decree "On Investment Funds and Investment Companies" (1994), the law "On State Regulation of Securities Markets" (1996), the law "On the National Depository System" (1997), the law "On Accounting and Financial Reporting" (1999), the law "On Bankruptcy" (1992), the law "On Collective Investment Institutions" (2001), and the law "On Financial Services" (2001).
The new law "On Joint Stock Companies" (2008) represents a major improvement over the law "On Business Associations" which was vague and did not support basic shareholders rights and facilitates a large number of corporate governance abuses (including share dilution, asset stripping, and dubious transfer pricing). The new law aims to define critical conditions and standards for establishing, governing and closing joint stock companies, while also significantly improving legal protections for minority shareholders and filling numerous loopholes in the legal framework. It is largely in compliance with EU Directives on corporate governance and incorporates OECD Principles for Corporate Governance.
The Law "On Securities and Stock Market" (2006) represents a major improvement over the prior Law "On Securities and Stock Exchanges" (1991), especially regarding internationally compliant disclosure requirements for listed companies, issues of transparency of ownership, and the new rules for insider information and insider trading.
The Law "On Collective Investment Institutions" encourages the creation of mutual funds, introduces the idea of a licensed asset manager, regulates the establishment and operation of subjects of mutual investment, provides guarantees of ownership rights to securities, and protects rights of exchange market participants. The Law "On the Circulation of Promissory Notes" (2001) provides a framework for the circulation of promissory notes in accordance with the Geneva Convention of 1930. The legal framework and regulatory system for portfolio investment does therefore exist, although substantial work remains to insure it is properly applied and enforced.
Competition from State-Owned Enterprises (SOEs)
The vast majority of Ukraine's state-sector was privatized in the 1990s and early 2000s, and the state sector is now estimated to comprise less than 10% of Ukraine's economy. Nonetheless, the state sector, according to Ukraine's Ministry of Economy, is one of the largest in Europe in terms of size and contains more than 5,000 business entities. The sector is rather inefficient and often loss-making.
In general, private enterprises, including foreign firms, compete on equal terms with public enterprises. Private firms, however, are barred, under Ukrainian law, from engaging in certain types of business, including in the areas of certain natural monopolies, the rocket industry, and the production of bio-ethanol. Fixed land telecommunications systems and energy transit networks, including the transmission of electricity, have not yet been opened to private competition.
Ukraine does not maintain or operate a sovereign wealth fund.
Corporate Social Responsibility (CSR)
Corporate Social Responsibility is a new concept in Ukraine that has not yet taken hold in the mind of the consumer and is just beginning to gain ground amongst producers in the country. International companies continue to be the strongest proponents of CSR within Ukraine and have made efforts to transfer the idea of CSR over to their Ukrainian affiliates. With help from The American Chamber of Commerce, The East Europe Foundation, the U.N. Global Compact Initiative, and other NGOs, Ukrainian companies have been made aware of the potential long-term benefits of CSR as they relate to positive exposure for a company in relation to its philanthropic projects or programs.
The main obstacle facing the advancement of CSR initiatives is the unwillingness of the Parliament to pass legislation that will offer tax exemptions to companies that participate in CSR activities. On November 1, 2009, the first public hearing was held on CSR by the Parliamentary Committee on Regulating Policy and Entrepreneurship. To date, the only bill that has been passed but not signed is a green bill that will allow companies that display efficient waste management practices the option to sell reprocessed waste products within Ukraine. Apart from this one incentive, any Ukrainian or international company must be willing to undertake CSR projects without tax or legislative assistance. The American Chamber of Commerce remains engaged with Members of Parliament regarding the advancement of CSR through introducing tax-beneficial drafts, albeit unsuccessfully to date.
From the perspective of consumers, CSR initiatives are seen as positive outreach by companies but are more viewed as the exception rather than as the rule. Consumers do not expect companies to develop, finance, or complete projects that do not directly affect growth or profit. Aside from a "Go Green" ad campaign led by the U.N. Global Compact Initiative, which asks individual citizens to do their part by conserving water and electricity and which promotes recycling, there is little in the way of social responsibility by consumers.
Foreign firms that work inside of Ukraine do not need to follow CSR principles but generally follow and are judged by NGO's on the following standards: AccountAbility's AA1000 standard, Global Reporting Initiative's Sustainability Reporting Guidelines, Verite's Monitoring Guidelines, Social Accountability International's SA8000 standard, and the ISO 14000 Environmental Management Standard. The Centre for CSR Development Ukraine, which was founded by the East Europe Foundation, has become an active proponent of CSR and holds numerous events throughout the year to promote, advertise, and recognize CSR initiatives and successes. In December of 2009, the Centre held its first awards presentation for Ukrainian companies that exemplified strong CSR cases in Ukraine. Firms submitted their business cases to an international panel organized by the Centre and were judged on company contributions to Labor Relations, Protection of Consumer Rights, Community Development, Communication in Reporting, Environmental Protection, and in developing programs to counter Human Trafficking. The winners of this year's competition were Siemens Ukraine for programs in higher education, Tetra Park for recycling efforts, and Kiev Star Communications for environmental contributions. While the recipients were honored by business colleagues and representatives of the Government of Ukraine, there were no financial rewards and the tax situation remains unchanged. Per reporting by the Global Compact Initiative (GCI), there are 89 companies within Ukraine which are currently members of GCI and of these, 61 companies have submitted their annual CSR reports, making Ukraine competitive in CSR reporting efficiency amongst European countries.
Ukraine is largely free of significant civil unrest or any organized anti-American domestic political movements. Occasionally, mass demonstrations occur in larger cities, such as Kyiv, and are usually sponsored by individual political organizations.
There also have been increasing incidents of racially-motivated violence; groups of "skinheads" and neo-Nazis target people of Asian, African, or other non-European descent, as well as religious minorities, in Kyiv and throughout Ukraine.
Corruption, which pervades all levels of society and government and all spheres of economic activity in Ukraine, is a major obstacle to foreign investment. Ukraine worsened in Transparency International's Year 2009 Corruption Perception Index (CPI). The country moved down to 146th place in 2009 on the list of 180 countries, from 134th place in 2008. In 2009, Transparency International rated Ukraine at 2.2 points on the CPI's 10-point scale.
Corruption stems from a number of factors, such as a lack of institutional traditions of transparent decision-making and low societal understanding of the importance of corporate governance and transparency. Low public sector salaries fuel corruption in local administrative bodies such as the highway police, the health system, the tax administration, and the education system. Corruption within the Customs Service often makes it more difficult and more costly for businesses to import/export goods. High-level corruption ranges from misuse of government resources and tax evasion to non-transparent privatization and procurement procedures. In short, corruption impacts the daily lives of Ukraine's citizens and important decisions taken at the state level.
Ukraine's prosecution of corruption is based on the law "On Combating Corruption," which was passed in October 1995. The law is rarely enforced, and on the rare occasions it is enforced, it is normally aimed at lower-level state employees or used retributively in political vendettas. In January 2006, President Yushchenko signed a decree committing Ukraine to honor its obligations to the Council of Europe, which include several anti-corruption provisions. In September 2006, the President signed a separate decree adopting a national anti-corruption strategy that directed all branches of government to support these efforts, and the Government of Ukraine followed up by adopting an Action Plan to implement this strategy. In October 2006, the President submitted to parliament a package of draft laws on anti-corruption and ratification instruments for the Council of Europe Criminal Law Convention on Corruption and the UN Convention against Corruption. In August 2007 the President announced a list of several "anti-corruption initiatives" including the setting up of a single anti-corruption agency that would develop a comprehensive anti-corruption policy and implement various anti-corruption measures. In 2009, the President signed into law a package of anti-corruption legislation that will come into effect in April 2010. The legislation is described by experts as progressive and in correspondence with international best practices. The most significant provisions of the legislation include broadening the definition of those that may be considered subject to corruption, requiring civil servants to submit to financial and other anti-corruption inspections, and strengthening criminal and administrative liability for corrupt acts.
From 2007 – 2009, the U.S. Millennium Challenge Corporation funded Ukraine's proposal for a Threshold Country Program aimed at reducing corruption. This two-year program provided about $45 million in assistance to reform the judiciary, streamline regulatory procedures, institute internal assets declaration and inspector generals, enhance civil society and media monitoring of corruption, and reduce corruption in higher education admissions through standardized testing. The MCC program also introduced comprehensive conflict of interest and financial declaration legislation that comports with international standards and best practices.
Although government action is still limited and uncoordinated, fundamental changes have taken place in the GOU's attitude towards corruption. Gone are the days when GOU officials refused to admit that corruption existed in Ukraine. Government and parliamentary officials now openly discuss the problem of corruption with USG contacts and with the press and public at large. In March 2005, Ukraine ratified the Council of Europe Civil Law Convention on Corruption and became a member of the Council of Europe's Group of States Against Corruption (GRECO). GRECO has concluded its Joint First and Second Rounds of Evaluation of Ukraine and published its report in October 2007. Parliament has passed laws to ratify the Council of Europe Criminal Law Convention on Corruption, signed in January 1999, and the UN Anticorruption Convention, signed in December 2003. However, ratification of these Conventions will come into effect only when additional implementing legislation is adopted. Ukraine is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Bilateral Investment Agreements
BILATERAL INVESTMENT AGREEMENTS
The Bilateral Investment Treaty between the United States and Ukraine came into force on November 16, 1996. The following countries have also signed bilateral investment agreements with Ukraine: Albania (2004), Austria (1996), Argentina (1995), Armenia (1994), Azerbaijan (1997), Belarus (1995), Belgium (2001), Bosnia and Herzegovina (2002) Bulgaria (1994), Brunei (2006), Canada (1994), Chile (1995), China (1992), Cuba (1995), Croatia (1997), the Czech Republic (1994), Denmark (1992), Equatorial Guinea (2005), Egypt (1992), Estonia (1995), Finland (2005), France (1994), Gambia (2006), Georgia (1995), Germany (1993), Great Britain and Ireland (1993), Greece (1994), India (2001), Indonesia (1996), Iran (1996), Israel (1995), Italy (1995), Jordan (2005), Hungary (1995), Kazakhstan (1994), Korea (1996), Kuwait (2002), Kyrgyzstan (1993), Latvia (1997), Lebanon (1996), Libya (2001), Lithuania (1994), Macedonia (1998), Morocco (2001), Moldova (1995), Mongolia (1992), the Netherlands (1994), OAE (2003), Oman (2002), Panama (2005), Poland (1993), Portugal (2003), Russia (1998), San-Marino (2006), Saudi Arabia (2008), Singapore (2006), Syria (2002), Slovakia (1994), Slovenia (1999), South Korea (1996), Spain (1998), Sweden (1995), Switzerland (1995), Tajikistan (2001), Turkmenistan (1998), Turkey (1996), UK (1993), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), Yemen (2002).
The United States and Ukraine signed a new Trade and Investment Cooperation Agreement (TICA) on April 1, 2008. The TICA established a joint U.S.-Ukraine Council on Trade and Investment, which is working to increase commercial and investment opportunities by identifying and removing impediments to bilateral trade and investment flows.
OPIC and Other Investment Insurance Programs
The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in Washington on May 6, 1992. OPIC resolved a long-standing dispute in December 2009, allowing it to reopen for business in Ukraine after an almost ten-year hiatus.
In July 2002, the Board of the U.S. Export-Import bank opened facilities for short and medium-term (up to seven years) lending for commercial and sub-sovereign projects. Ukraine is a member of the Multilateral Investment Guarantee Agency (MIGA).
Ukraine has a well-educated and skilled labor force with nearly a 100 percent literacy rate. As of June 2009, unemployment (ILO methodology) increased to 9.9 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. Reports indicate that underemployment is also growing, and for the first half of the year it constituted 16.5 %. Workers are being sent on unpaid vacations or having hours reduced. Registered unemployment increased to 4.4%.
Wages in Ukraine remain low by Western standards. As of November 2009, the nominal average monthly wage in Ukraine was UAH 1950 ($244), 1.7% more than in October. Real wages decreased 10.4% between January and November 2009, compared to the same period in 2008. The highest wages are in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers.
The minimum monthly wage in October was UAH 650 (USD 81), but in a populist move before the presidential elections, the parliament passed amendments to the 2009 budget establishing, as of November 1, the minimum wage f UAH 744 (USD 93). Ukraine's budgetary shortfall for 2009 and political infighting between the Prime Minister and the President have meant that the increase has not yet been implemented, however.
In 2004 Ukraine began a comprehensive pension reform program, based on international standards, which envisaged a three-pillar system: Pillar I, a solidarity system, Pillar II, a mandatory accumulation system, and Pillar III, a voluntary private pension system.
For Pillar I, retirement payouts are determined on the basis of the individual's labor records and contributions. The system follows "pay as you go" principles, meaning the contributions of today's workers fund today's pensioners. Despite major reform, the Pillar I system remains financially unsustainable. Major systemic issues, such as the need to increase the retirement age, provisions for early retirement, and the level of the minimum pension payments, still need to be resolved. At 17% of GDP, Ukraine spends the highest amount on pensions in the region, and with a declining and rapidly aging population, costs continue to rise rapidly. Employer contributions at 33.2% of wages exacerbate shortfalls in financing by encouraging substantial underreporting of income to evade high pension contributions. A significant percentage of workers in the gray economy, particularly in the agrarian sector, do not contribute to the pension fund but have accrued entitlement to these same resources. The result is growing pressure to subsidize basic pensions using revenues from the general government budget.
Pillar II, the Mandatory Accumulation System, is not yet enacted in Ukraine, although the draft legislation passed the first reading in April 2007. The 2003 law on Mandatory Pension Insurance includes preconditions for the operation of the Mandatory Accumulation System and the Cabinet of Ministers recently pushed back the likely commencement date of the system until 2014 when it is felt these preconditions may be met. Once enacted, the law will mandate that each Ukrainian worker contribute to an individual retirement account. The law is designed to pre-fund a part of the public pension to relieve pressure on the current "pay as you go" system. The success of Pillar II will depend on achieving long-run fiscal sustainability of the first pillar and establishing the necessary operational systems. When implemented, Pillar II will generate substantial domestic long-term savings to finance economic growth. Depending upon who participates in the system when the scheme starts, contributions could be between $US 60 to 145 million each year.
Pillar III, voluntary private pension funds, began operations at the end of 2004. These funds are the only effective, tax-favored method workers have to supplement their retirement income through voluntary savings. Since 2004 the number of private pension funds has grown rapidly, but they still remain a minor financial actor. The financial crisis has impacted the industry and some rationalization has occurred with perhaps more in the future. In an economy with over 16 million workers, 50 active funds service about half a million participants and have assets of under $100 million. Moreover, Ukraine's underdeveloped capital markets do not provide private pension funds with sufficient sound, long-term investment opportunities. At the end of September 2009 48.3% of assets were invested in bank deposits, 19% was invested in Ukrainian corporate bonds, 8% in Ukrainian Government Bonds and 8.8% in Ukrainian equities. The legal framework required to support successful private pension funds is still weak and regulatory oversight is even weaker. Various international donor initiatives are supporting the Ukrainian government's efforts to strengthen the legal framework and effectiveness of regulatory oversight. Due to weaknesses in market structure, non-transparency, lack of public trust, and low income, however, private pension funds are not likely to be a major source of investment funds in the near future.
Ukrainian workers are generally accustomed to "top-down" management practices and therefore tend not to demonstrate initiative. A younger, more independent-minded generation is slowly moving into the workforce, and it is becoming easier to find professional personnel who function independently.
Although investors may encounter government resistance to trimming the work force to an efficient level, across-the-board demands to maintain employment levels are disappearing. Ukrainian enterprises often still maintain much of the social infrastructure of their immediate community (schools for local children, cafeterias, and medical facilities). While many local officials are willing to work with businesses to identify social services that an enterprise must support, such arrangements should be clearly spelled out before investments are started.
Ukraine's Labor Code remains outdated and inappropriate for a market economy. The government has drafted a new, more modern Labor Code with assistance from the International Labor Organization, but Parliament is still considering the draft legislation.
Foreign Trade Zones/ Free Ports
Ukraine has in the past maintained special economic zones (SEZs), but in 2005 canceled all tax exemptions (i.e., from land tax, corporate income tax, import duty, and VAT on imports) to investors in all SEZs to stop large-scale misuse of these zones for tax evasion and smuggling. While some officials argue for restoring the SEZs, there has been no movement in recent years.
Foreign Direct Investment Statistics
FOREIGN DIRECT INVESTMENT
According to Ukraine's State Statistics Committee, as of October 2009 the total stock of FDI in Ukraine was $38.6 billion (about 33% of GDP), or $838 per capita. This was a 2% increase from October 2008, when the total stock of FDI stood at $37.6 billion, or $813 per capita. -a slowdown from over 20% annual growth in the FDI inflow demonstrated over the last 3 years.
FDI BY COUNTRY
As of October 1, 2009 Ukraine's major investors included: Cyprus (21.3% of total FDI), Germany (17.1%), the Netherlands (9.9%), Austria (6.6%), the United Kingdom (6.1%), Russia (5.3%), France (4.1), and the United States (3.6%). Cyprus remains a popular offshore destination for Ukrainian and Russian enterprises through which to channel investments.
FDI BY INDUSTRY SECTOR DESTINATION
Over the first 9 months of 2009, 24.0% of new FDI went to the financial sector, 8% -- to real estate, 20.7% -- to industry and, 10% -- to domestic trade. The FDI received by the financial sector during the period was mostly connected to bank recapitalization programs.
FDI FROM UKRAINE
As of October 1, 2009, Ukraine's FDI to other countries stood at USD 6.2 billion (6% of GDP). 93% of the investment from Ukraine or USD 5.77 billion went to Cyprus. Cyprus is a popular destination for Ukrainian capital due to a lucrative double taxation agreement between Ukraine and Cyprus concluded back in 1982. The second largest destination of FDI from Ukraine is Russia, which received 2% of Ukraine's FDI or USD 141 million.