Ukraine

Bureau of Economic and Business Affairs
Report
July 5, 2016

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Executive SummaryShare    

Ukraine continues to undergo historic transformation since the 2014 Revolution of Dignity. As the 2016 Investment Climate Statement goes to press, Ukraine once again finds itself at a crossroads. While many analysts calculate that the economic crisis has bottomed out, hard-fought macro-economic stabilization is at risk if the government does not follow through on tough reforms. In 2016 the Ukrainian Government will have to navigate a number of significant challenges, including an expected reset of both the ruling coalition in the parliament (Verkhovna Rada) and the government, a resurgence of fighting in the east, implementation of the Minsk agreements, negotiation of energy supplies to fuel the economy, continued economic and military aggression from Russia, and, above all, rooting out endemic corruption that has hindered Ukraine’s prosperity for decades. An active, core group of MPs in Ukraine’s pro-European, pro-reform parliament and a Cabinet that includes technocratic experts have demonstrated the country’s strong desire to fundamentally change the way business has been done here since independence – to form a “New Ukraine” and push forward the necessary security, political, and financial reforms. The task ahead is daunting, and Ukraine continues to look to the United States for continued support in many spheres.

Positive and Negative Aspects of Ukraine’s Investment Climate

The Ukrainian economy is showing signs of stabilization in 2016, but the government continues to struggle with structural problems. Ukraine’s currency, the hryvnia, has depreciated nearly 65 percent against the dollar since May 2014. To prevent capital outflows, the GoU has implemented currency controls that have hampered international trade and investment. As an agricultural powerhouse, Ukraine produces sufficient basic foodstuffs domestically (albeit with foreign-sourced inputs like seeds), but relies on imports for most consumer goods, gasoline, automobiles, and clothing. Inflation, which spiked in early 2015 and is projected to moderate to between 12 and 25 percent by the end of 2016, has eroded already stagnant wages and created hardships for the average Ukrainian. Meanwhile, Russia’s ban on Ukrainian dairy, chocolate, fruits, and vegetables has hurt Ukrainian exports. In fact, Russia has fallen behind the EU as Ukraine’s largest export destination in recent years; exports to Russia now make up only 11 percent of Ukraine's total exports and only two percent of food exports. On top of an aging infrastructure system already in need of repair, the conflict has wrought significant damage to freight rail, ports, mines, and industrial facilities (historically centered in the Donetsk and Luhansk regions) and has severely curtailed Ukraine’s heavy industry exports, a key source of precious foreign currency and middle-class jobs. As part of Ukraine’s Association Agreement with the EU, the Deep and Comprehensive Free Trade Area or DCFTA came into effect on January 1. Ukraine successfully negotiated last summer with its creditors to restructure its external debt and subsequently has seen its credit rating improve.

The United States provided two $1 billion loan guarantees, the first in May 2014 and the second in May 2015. A further $1 billion is under discussion, contingent on continuing reform progress. In March 2015, the International Monetary Fund approved a new, four-year, $17.5 billion program for Ukraine – one of its largest programs. Ukraine, however, must continue to meet the IMF’s stringent targets, including gradual elimination of subsidies on residential heating and electricity, reforming state-owned enterprises, maintaining a balanced budget, and pension reform. Many of these necessary steps are unpopular with the public, particularly when combined with the eroded purchasing power and rising unemployment during the past two years. Energy sector reform is ongoing, with key pieces of legislation being passed or drafted by the Rada.

Ukraine’s Key Sectors

Ukraine is the world’s third-largest grain producer (behind the United States and the European Union) and has been a profitable country for foreign investors. Domestically-oriented sectors like banking and construction have traditionally attracted foreign direct investment more than export-oriented manufacturing. Within the manufacturing sector, metallurgy and food processing have attracted investors ahead of machine building and the chemical industry. Even with ongoing reforms to reign in corruption and burdensome regulation, Ukraine is still seen as a difficult place to do business. However, many major U.S. companies are represented here, particularly in the agriculture, consumer goods, and technology sectors.

In spite of the country’s recent political turbulence, Ukraine deserves special mention regarding its IT service and software R&D sector – this sector has demonstrated double-digit growth year-over-year. U.S. technology firms conduct R&D activities in Ukraine and an array of local IT outsourcing companies of all types and sizes serve clients worldwide. The export volume of Ukraine’s software development industry reached at least $2.5 billion in 2015 and is considered the number-three export sector. This sector of Ukraine’s economy shows great potential due to the country’s large, skilled workforce.

Key Watch Items: Crimea and Donbas

Investors should note that the situation in both Crimea (unlawfully annexed by Russia in the spring of 2014), and in occupied territories of Donbas remains dire. The investment climate in both of these areas continues to be poor, characterized by a lack of governance, transparency, and stability. American companies are prohibited from participating in certain transactions in Crimea, which is subject to sanctions under Executive Order 13685 dated December 19, 2014. Media reports suggest that Crimean “authorities” do not respect property rights and have “nationalized” and/or confiscated a sweeping array of business assets. Businesses that do operate there report difficult conditions for their personnel as local “authorities” attempt to enforce foreign law and require the adoption of Russian documentation. The situation in the Donbas (portions of Luhansk and Donetsk oblasts) controlled by Russian-backed separatists continues to be volatile. Those businesses remaining in this zone have reported work stoppages, illegal “taxation,” and the kidnapping of company personnel, all at the hands of the Russian-backed separatists. Banks have ceased operations in the region, and the Ukrainian Government is unable to provide basic services. In addition, road and rail systems in the region are damaged from the conflict, leaving businesses without the means to receive inputs or move product. Finally, significant portions of the Donbas controlled by Russian-backed separatists and most of Crimea experience frequent, extended power outages.

1. Openness To, and Restrictions Upon, Foreign Investment (FDI)Share    

Attitude toward Foreign Direct Investment

The security situation in the East continues to negatively impact the perception of political risk associated with the country, especially at corporate headquarters abroad, where the key decisions regarding FDI are taken. Due to extensive media coverage of the conflict in international media, the whole country is to a large extent associated with the military conflict in the East; no clear distinction is made between different regions of Ukraine. This view is problematic, as business conditions in Western or Central Ukraine materially differ from those in the conflict area, even though one cannot deny that they are not completely independent, as there is likely some impact (e.g. the military draft, foreign exchange restrictions that were taken in response to confidence crisis originating in the East, etc.).

In 2016 Ukraine rose in the World Bank’s “Doing Business” rankings (see Table 1) to 83 out of 189 countries measured – a consistent, 13-place improvement since the 2014 Maidan Revolution. During 2015 the government continued to streamline the process to start a business, with registrations having no cost and taking approximately two to three days. Authorities now process construction permits through a risk-based approval system, eliminating requirements for certain approvals and technical conditions and simplifying the process for registering real estate ownership rights. Ukraine continues to facilitate cross-border trade by releasing customs declarations more quickly and reducing the number of physical inspections. Finally, the government introduced an electronic system for filing and paying labor taxes. In addition to the efforts of central authorities, officials at local levels continue looking to attract investment and jobs to their regions.

Table 1: FDI Indicators

Measure Year Index or Rank Website Address

TI Corruption Perceptions index

2015

130 of 175

http://www.transparency.org/cpi2015#results-table

World Bank’s Doing Business Report “Ease of Doing Business”

2016

83 of 189

http://doingbusiness.org/rankings

Global Innovation Index

2015

64 of 141

http://globalinnovationindex.org/content/page/data-analysis

U.S. FDI in partner country ($M USD, stock positions)

2015

USD 6,698.9

 

World Bank GNI per capita

2014

USD 3.560

data.worldbank.org/indicator/NY.GNP.PCAP.CD

Ukrainian legislation provides for national treatment of foreign investors, in line with its World Trade Organization (WTO) commitments. Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.

Weighing heavily over Ukraine’s FDI climate is the lack of progress in reforming Ukraine’s judiciary. The judicial system in Ukraine has never been an independent branch of power. The courts have often been used as an instrument for confrontation between the President and Parliament. During the presidency of Viktor Yanukovych (2010-2014), courts were actively used for persecution of dissidents, manipulation of election results and prohibition of mass gatherings. The lack of rule of law was one of the driving reasons for the 2014 Revolution of Dignity. Ukrainian civil society continues to demand punishment of judges deliberately involved in illegal decision-making, the guaranteed independence of the judiciary system, and end to corrupt practices in the system. However, resistance in the system and the unwillingness of the political elite to abandon such a convenient instrument for the legalization of their decisions impedes the passing of reforms. Political analysts and media describe the current Rada as pro-European and pro-reform, having made significant strides on urgently needed reforms, including a law strengthening local government and civil service, proposed reforms to public funding of political parties, and numerous pieces of legislation to meet IMF requirements. Additionally, the Rada has passed laws to reduce burdensome business regulations, encourage public-private partnerships, require media ownership transparency, and improve agricultural land policies.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) have not conducted formal reviews since the 2015 Investment Climate Statement. Ukraine's first trade policy review as WTO member is scheduled for April 2016.

Laws/Regulations on Foreign Direct Investment

The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment. In addition, the following laws and regulations pertain to foreign investment: Law "On the Foreign Investment Regime" (1996); Law "On the Protection of Foreign Investment" (1991); Cabinet of Ministers Resolution, "On the Procedure for the State Registration of Foreign Investment" (1996); Law “On Production-Sharing Agreements,” (1999), amended in 2012; The Land Code (2001); 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); Tax Code (2010); Law “On Public-Private Partnerships” (2010); Law “On Preparation and Implementation of Investment Projects Based on the Principle of the Single Registration Window,” (enacted 2012); Customs Code (2012); Law “On Industrial Parks” (2012), Law ”On Amending Certain Laws of Ukraine with the Purpose of Increasing Protection of Investor Rights” (May 2015).

While the legislative framework for protection of investor rights is present, law enforcement remains uneven, as the judicial system needs a comprehensive reform. Laws and regulations are published on the Parliament’s web-site http://rada.gov.ua.

Business Registration

On January 1, 2016, the GoU amended the Law of Ukraine “On state registration of legal and physical entities – entrepreneurs and civil organizations.” This amendment modified the business and property registration system to grant approximately 7,000 notaries full authority to perform State Registrar’s duties, along with accredited banks and Centers for administrative services under City Councils. The amended law also introduces a provision allowing citizens to address any notary office in Ukraine to register their business and legalized online services that had been operating as pilot projects.

The Ministry of Justice of Ukraine launched a website for registration of private entrepreneurs and legal entities at http://irc.gov.ua/ua/el_reg. However, critics have said that the Unified State Registrar, State Pension Fund, State Fiscal Service, the State Committee of Statistics, and authorities need to better coordinate their date.

It takes 11 procedures and 28 days to establish a foreign-owned limited liability company (LLC) in Ukraine (Kyiv). This is slower than the average of World Bank Investing Across Borders (IAB) countries in Europe and Central Asia, but still faster than the IAB global average. In addition to the procedures required of a domestic company, a foreign company establishing a subsidiary in Ukraine must legalize and translate the parent company’s documents abroad. While the registration of a foreign investment is optional, the majority of foreign investors register their investments. The State Registrar should forward new registrations to the State Committee of Statistics of Ukraine, the state social funds (the State Pension Fund, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance), and the tax. However, in practice, the State Registrar does not register with the State Committee of Statistics, and that registration is usually made by the company itself. Companies in Ukraine are free to open and maintain bank accounts in foreign currency.

Company registration is usually processed within three working days. For registration with the tax authorities (for VAT purposes), registration tends to take longer than three days and is supposed to be completed within 14 days. As the registering authority, the State Registrar issues a certificate of registration, which becomes the company's incorporation document. By implementing the one-stop shop system, Ukraine has eased registration with the Pension Fund, the Employment Fund, the Social Insurance Fund, the Industrial Accidents Fund, and the relevant tax authorities (except for VAT registration) through the Registration Office. This new system largely emerged following the Cabinet of Ministers Resolution, dated August 8, 2005, No. 321-��, "On Top-Priority Measures on Expediting Revision of Regulations and Enhancing Registration and Authorization Procedure." Pursuant to Order No. 317 of the State Tax Administration of Ukraine, dated August 8, 2005, No. 317 "On Amending Instruction on the Procedure for Keeping Record of Taxpayers," stand-alone tax registration was abandoned and incorporated into the one-stop shop system. Only a limited number of standard registration documents are available for download. Finally, although documents should be the same throughout the country, different districts use their own templates and not all districts provide templates online.

The World Bank Group provides a following ranking for starting a business in Ukraine:

(The distance to frontier score shows the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. DTF is measured on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier)

(A procedure is defined as any interaction of the company founders with external parties - for example, government agencies, lawyers, auditors or notaries).

(The measure captures the median duration that incorporation lawyers indicate is necessary to complete a procedure with minimum follow-up with government agencies and no extra payments).

(Cost is recorded as a percentage of the economy’s income per capita. It includes all official fees and fees for legal or professional services if such services are required by law).

Ukraine’s Civil Code defines micro, small, and medium-sized enterprises by the following criteria:

1) Micro-sized enterprises employ on average not more than 10 employees over a calendar year with annual revenue not to exceed an equivalent of €2 million estimated by an average annual National Bank of Ukraine rate.

2) Small-sized enterprises employ on average not more than 50 employees over a calendar year with annual revenue not to exceed an equivalent of €10 million estimated by an average annual National Bank of Ukraine rate.

3) Large-sized enterprises employ on average more than 250 employees over a calendar year with annual revenue exceeding an equivalent of €50 million estimated by an average annual National Bank of Ukraine rate.

4) Other economic entities fall under the category of medium-sized enterprises.

In March 2015 the Cabinet of Ministers initiated liquidation of the National Agency on Investments and National Projects and a draft law (No. 1256) “On development and State support for small and medium business in Ukraine” is being prepared for the second reading by the Verkhovna Rada.

Industrial Promotion

Ukraine continues to struggle to build a legal system that effectively protects investor rights. The following major pieces of legislation – in addition to the Tax Code – affect foreign investment into Ukraine:

  • The law On Foreign Investment Regime sets out in broad terms Ukraine's policy on inward investment and the rights and obligations of foreign investors.
  • The Civil Code regulates civil relationships, the establishment of legal entities, and personal property rights.
  • The Commercial Code (enacted on the same day as the Civil Code) governs business relationships. The Commercial Code is intended to regulate issues that are not dealt with in the Civil Code, although in practice there is some overlap.
  • The law On Securities and Stock Market governs the public issuance and trading of securities.
  • The law On Protection of Economic Competition restricts business monopolies. The majority of mergers and acquisitions in Ukraine are likely to require pre-approval from the Antimonopoly Committee.
  • The law On Protection from Unfair Competition aims to protect business entities and consumers from unfair competition.
  • The Environmental Protection Law establishes a framework for pollution fees to be imposed on any legal entity that discharges contaminants into the environment.
  • The Law “On Stimulating Investment Activity in the Priority Sectors of the Economy in order to Create Jobs” envisages tax privileges for investment projects in such priority sectors as agriculture, communal and housing, machine building, transport infrastructure, resorts-recreation, metallurgy (http://zakon5.rada.gov.ua/laws/show/5205-17).

Legislative initiatives are available for viewing on the Parliament’s website (http://www.rada.gov.ua/en) as well as on websites of government agencies granted with legislative initiative authority; the principal agencies are the Ministry of Justice and the Ministry of Economic Development and Trade.

Transparency: The Ukrainian Government is contemplating e-commerce registration as a mechanism to increase transparency. For example, the Government of Ukraine in 2014 implemented an automated VAT-refund system to reduce opportunities for bribery. Electronic government procurement has also been introduced to combat corruption. The newly implemented open-source system of electronic procurement ProZorro is estimated to save about UAH 500 million of budget funds per year.

The World Economic Forum’s 2015-2016 Global Competitiveness Index ranked Ukraine 79 of 140 countries. In particular the report cited as adverse conditions the lack of transparency in policy-making, high level of favoritism in decision-making, poor judicial independence, weak protection of property rights and minority shareholders’ interests, endemic issues with bribery, burdensome regulation, inefficient legal framework in settling disputes and challenging regulations, and weak auditing and reporting standards. The 2015 International Business Compass ranked Ukraine 89th, 20 spots up from its 109 position in 2014. The 2016 WB Doing Business Index ranked Ukraine 83 out of 189 countries, a four point improvement from 2015. The key reform, according to the Index, was made in Starting a Business where Ukraine moved 40 spots up, from position 70 to 30.

Limit on Foreign Control and Right to Private Ownership and Establishment

Aside from ownership of agricultural land, the regulatory framework for the establishment and operation of business in Ukraine by foreign investors is generally similar to that for domestic investors. Accreditation of representative offices of foreign companies and their branches significantly lags behind the simplified registration procedures for Ukrainian business. Accreditation by MEDT takes 60 days and costs $2,000. Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity. Investment permits are not required, but all enterprises must be established according to the form and procedure prescribed by law and registered with the appropriate state authorities. Foreign companies are restricted from owning agricultural land, manufacturing carrier rockets, producing bio-ethanol, and some publishing activities. In addition, Ukrainian law authorizes the government to set limits on foreign participation in "strategically important areas," but the wording is vague and the law is rarely used in practice. Generally, these restrictions limit the maximum permissible percentage of foreign investment into Ukrainian firms in these sectors.

Privatization Program

The new government is looking into further expanding the list of companies slated for privatization in order to increase management efficiencies. The first tender under the new government, of licenses to provide nationwide 3G mobile telecommunications services, was generally regarded as transparent and drew interest of major players in the local market. In February, 2016 the Parliament approved legislation intended to facilitate large privatizations this year. The new legislation allows the State Property Fund to hire foreign advisors, increases transparency of asset evaluation procedures, removes the mandatory requirement to sell 5-10 percent of a privatized entity via a securities exchange and banned Russian and off-shore companies from participating in privatization in Ukraine. In March 2015, the government approved a list of companies to be privatized in 2015-2016. Due to the delays in adopting the legislation, the original privatization plans were postponed. Currently, the government is preparing to privatize 20 large state-owned enterprises in 2016, including an ammonium plant, a large energy generator and several energy distribution companies.

The State Property Fund oversees privatizations. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers note numerous instances of past privatizations adjusted to fit a pre-selected bidder. The new government has made statements that there will be no revisions of past privatizations. Still, some court cases have surfaced from private companies challenging earlier privatizations. Judicial reform is critical to ensure fair treatment of the cases. There will be more privatizations in the near-term as a means to plug budgetary gaps; the transparency of these transactions will be a good indicator of the new government’s approach to business and investment.

Screening of FDI

In April 2015 the Cabinet of Ministers passed a resolution to liquidate the State Agency for Investment and National Projects of Ukraine, which served as a clearing house for state-approved investment projects, in 2011-2015. Instead, a Department for Attracting Investments was established at the Ministry of Economic Development and Trade (MEDT). Thus, MEDT has the lead in the formation of government policy to improve Ukraine’s investment climate and attract new investments. To achieve these goals, the Ministry has developed a plan of business forums in different countries; 2016 fora will take place in the Netherlands, France and Canada.

The ministry responsible for attracting investment is:

Competition Law

The government is reforming Ukraine's Anti-Monopoly Committee (AMC) to ensure fair competition and consumer protection. Based on current legislation, companies found to be violating fair competition rules may be fined up to 10 percent of the prior year's turnover, and if unfairly gained profit exceeds 10 percent of income, up to three times the normal penalty can be collected. New AMC leadership worked with the Parliament to amend a 2002 Law "On Protection of Economic Competition,” leading to the November 15 passage of amendments that made AMC tasks more transparent and predictable, allowed the government to perform stricter controls of mergers and acquisitions, and gave it more effective tools to destroy existing and prevent new monopolies in sensitive sectors such as energy and utilities. The international business community has found the new AMC leadership to be more open and transparent, a significant shift from past years. However, there remain concerns with entrenched corrupt officials at the staff level, as well as an overarching lack of training for investigators and economists. With IMF support, the Government of Ukraine is working to establish a level playing field. USAID is launching an assistance program with the AMC under which U.S. anti-trust advisors will work with AMC and MEDT officials to develop a sound competition policy.

Contact information:

2. Conversion and Transfer PoliciesShare    

Foreign Exchange

In 2014 and 2015, the Ukrainian Government introduced a number of limitations on foreign currency exchange transactions, but started to relax them gradually as the situation began to show signs of stabilization. Limitations include a requirement for a three-day-in-advance application for the purchase of hard currency; a ban on currency purchases for firms that have banking deposits exceeding $10,000. The companies also faced a ban on foreign currency purchases to pay dividends or repatriate proceeds from selling shares of Ukrainian companies. Beginning June 13, 2016 gradual repatriation of dividends accumulated during 2014-2015 was allowed. The 2014 regulations also ban the purchase of foreign currency using loans in hryvnia and require a letter of credit confirmation for a transaction if it requires a purchase of more than $500,000 of hard currency. Hard currency purchases to make advance payments over $50,000 require National Bank of Ukraine (NBU) approval, which also incurs a fee. According to a September 2014 resolution, exporters had to sell 75 percent of foreign earnings in the interbank market, and return export proceeds to Ukraine within 90 days of the sale the limit was eased to 65 percent beginning June 13, 2016. The measures were introduced as a temporary step, but have been extended several times. The government has stated its intention to relax more of these restrictions in the near future.

Remittance Policies

In September 2014, the NBU introduced a ban on purchasing foreign currency to repatriate dividends from Ukraine, and subsequently extended it until June 2016. Although this measure is temporary, it could be extended if market instability persists. Loan payments to foreign entities are permitted. However, a March 2015 NBU resolution banned early repayment of foreign currency loans to non-residents. Generally, investors convert 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 an 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. Commercial banks must announce their clients' intentions to sell on inter-bank currency market if the transactions exceed $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.

At present, there is no developed legal parallel market, such as convertible instruments or foreign currency denominated bonds that investors might use to remit returns on their investments. Based on a March 2015 NBU resolution, investors may repatriate proceeds from selling domestic bonds denominated in hard currency, providing a set of detailed conditions are met.

3. Expropriation and CompensationShare    

According to current legislation, legal expropriation of property is permitted in certain criminal proceedings or in cases of failure to fulfil investment obligations during privatization procedures. Private property may be legally expropriated for military purposes given the special regime in place due to ongoing military action in Eastern Ukraine. Such operations are regulated by the law “On Defense of Ukraine”, the law “On legal regulation of emergency state,” and Martial Law.

On December 15, 2013, a Law on Amendments to Criminal Code and Criminal Procedural Code of Ukraine came into force (http://zakon4.rada.gov.ua/laws/show/222-18). This law introduced special confiscation, which could be applied against third parties in criminal proceeding, both physical and legal entities. A court must order special confiscation during adoption of a court ruling in criminal proceeding. Introduction of special confiscation is controversial: it could contradict existing legislative provisions and create space for abuse within the criminal proceeding.

A draft Law (No. 2540-a) “On amendments to Criminal Procedural Code of Ukraine on certain issues of property arrest in order to eliminate corruption risks while application of such,” dated August 28, 2015, is awaiting a second reading in the Rada. This draft law raises concerns due to its provision for the administration of property arrests based on the sole discretion of an investigator that represents the pre-trial investigation authority.

Post has not received any claims from U.S. companies on cases of expropriation. Since there is no known history of discrimination of U.S. persons in terms of expropriation, it is difficult to point out high-risk sectors prone to expropriation actions.

Special Note on the Donbas and Crimea

Post is aware of numerous illegal expropriation cases in Donbas in which more than 20 strategic enterprises were dismantled and transported to Russia. The Cargill plant in Donbas had been occupied by unknown persons since July 2014. The company had continued to support its Donbas-area employees but in May 2015 decided to end its employment relationship with the employees; Cargill did not retain the employees as representatives and did not expect to be able to access the plant in the foreseeable future.

There has been illegal expropriation reported in Crimea: local illegitimate authorities announced the launch of a local mobile operator utilizing the expropriated equipment of Ukrainian KyivStar Company. A similar expropriation occurred in Donbas.

4. Dispute SettlementShare    

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

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.

Ukraine's judicial 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: local courts, appellate courts, high specialized courts for civil and criminal cases, and 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, with the exception of military disputes.

Commercial courts 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. Under the Constitution of Ukraine, the Supreme Court heads the judicial system and has the power to review decisions of all three branches of the court system.

Among the major problems of Ukrainian judicial system is its incapacity and dependence from prosecutorial influence on judges. Ukraine is ranked 132 out of 140 countries with regard to judicial independence by the Global Competitiveness Index report 2015-2016.

Topics

DB 2016 Rank

DB 2015 Rank

Change in Rank

Enforcing Contracts

98

98

No change

Bankruptcy

Resolving insolvency in Ukraine takes 2.9 years on average and costs 42.0 percent of the debtor’s estate, with the most likely outcome being that the company will be sold in a piecemeal sale. The average recovery rate is 8.3 cents on the dollar. Ukraine’s total score on the strength of insolvency framework index is 8.5 out of 16. Globally, Ukraine stands at 141, improving by one level compared to last year, in the ranking of 189 economies on the ease of resolving insolvency. Ukraine made resolving insolvency easier by strengthening the rights of secured creditors, introducing new rehabilitation procedures and mechanisms, making it easier to invalidate suspect transactions and shortening the statutory periods for several steps of the insolvency process. The relevant laws pertaining to bankruptcy are:

Investment Disputes

Post has noticed a pattern of claims related to tax (including VAT), customs and corporate raiding. Prosecutors are often involved with groundlessly registering criminal cases against one side of disputes. Another common scheme involves prosecutors initiating a baseless criminal proceeding against businesspeople, leading to searches and other actions that disrupt his or her business processes until bribes are paid. Civil society is actively involved in combatting and protesting against corruption and corporate raiding, although unfortunately there are still cases of criminal investigations against activists fighting corruption and corporate raiding.

International Arbitration

Indicators

Country Score

Regional Average

Global Average

Strength of laws index (0-100)

86.6

82.5

85.2

Ease of process index (0-100)

78.1

69.7

70.6

Extent of judicial assistance index (0-100)

72.6

64.4

57.9

The International Commercial Arbitration Law (ICAL, 1994) applies to international arbitration and the Law on Courts of Arbitration (2004) applies to domestic arbitration. A distinctive feature of ICAL is that it incorporates the regulations of two arbitral institutions. The Statutes of the International Commercial Arbitration Court and the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are annexed to ICAL. ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations.

The following commercial disputes cannot be resolved by domestic arbitration: disputes based on commercial contracts, those connected with fulfillment of state demands, disputes involving state secrets, bankruptcy disputes, disputes involving a party exercising state power, disputes over immovable property, intracompany disputes, disputes involving a nonresident party, and disputes in which a judgment of the arbitration court would require the execution of state power by an authorized body. ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intracompany disputes of these enterprises. Arbitrators in domestic arbitrations must have a higher legal education, which is not required in international arbitrations. On average, it takes around seven weeks to enforce an arbitration award rendered in Ukraine, from filing an application to a writ of execution attaching assets (assuming there is no appeal). It takes roughly 13 weeks to enforce a foreign award.

The principal laws governing international arbitration are:

  • Law "On International Commercial Arbitration” of February 24, 1994;
  • Statutes of International Commercial Arbitration Court and the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry, respectively annexed to the Law on I

References:

ICSID Convention and New York Convention

The Government of Ukraine submitted a formal UN communication on October 20, 2015, the text of which can be found here: C.N.597.2015.TREATIES-XXII.1 of 20 October 2015.

Duration of Dispute Resolution – Local Courts

The length of litigation varies on case-by-case basis. Investment and commercial dispute proceedings at the local level generally take from one to six months to reach the resolution stage. In general litigation takes from one to four years, but has seen some litigation cases stretch as long as 10 years. Despite the fact that international arbitration is mandatory for consideration, not all judges recognize international arbitration rulings in practice. Court rulings on commercial disputes are usually followed by subsequent enforcement.

5. Performance Requirements and Investment IncentivesShare    

WTO Agreement on Trade-Related Investment Measures (TRIMs)

There are no current performance requirements or incentives, except for those made as part of privatization agreements. While negotiating its WTO accession, Ukraine eliminated measures that conflicted with the WTO Agreement on Trade-Related Investment Measures (TRIMs) in the automobile industry and other sectors. However, subsequently Ukraine imposed several safeguard duties on car imports, which Japan challenged in the WTO. The dispute settlement body concluded that Ukraine has broken as many as 10 global trading rules and should rescind the duties; the GoU lifted the automobile duties September 2015.

Investment Incentives

Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company's charter fund. Some restrictions do apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property. From January 1, 2013, through January 1, 2018, Ukraine provides a 0 percent Corporate Profit Tax (CPT) on income from projects resulting in job creation in qualifying industries, including high-tech, eco-friendly, and manufacturing and export-oriented industries. The incentive is granted for new projects as well as reconstruction or upgrades to existing enterprises, under certain conditions concerning the value of the investment, the number of jobs created, and salary levels. Ukraine also offers generous depreciation rates for most fixed assets, including property, plant, and equipment for both foreign and domestic investors.

Research and Development

U.S. and other foreign firms are able to participate in government/authority financed and/or subsidized research and development programs on a national treatment basis.

Performance Requirements

Ukraine imposes no performance requirements or incentives except for those related to TRIMs (previously referenced). Ukraine has few requirements that investors purchase from local sources or export a certain percentage of output, with the most notable case being a 50 percent local content law in order for renewable energy sources to receive the “green” incentive tariff. This requirement is a legacy of the old regime and was intended to benefit specific, well-connected oligarchs; it is widely expected to be eliminated by January 2017. However, Members of the Verkhovna Rada’s Energy Committee are considering legislation that would extend the decreased solar energy tariff through 2030, when the green tariff itself is set to expire, and are justifying the extension with an estimated $85 million a year in savings in the solar sector alone. There are no official "offset" requirements, whereby major procurements are approved only if the foreign supplier invests in manufacturing, R&D, or service facilities in Ukraine related to the items being procured.

Regarding government-imposed conditions on permission to invest, in 2014 the government lifted a 2003 ban on foreign investment in sectors considered 'strategic': energy infrastructure and natural energy resource development. Four out of five power generation companies are now privatized and 49 percent of the gas transit system is now eligible for privatization. The trade and sale of agriculturally-zoned land is also banned, forcing many investors to use long-term (49-year) leases instead. The Cabinet of Ministers published a 2016 Action Plan that indicates the postponement of sales of state-owned land is likely to be extended until January 1, 2017, and privately owned land until January 1, 2019. While not binding, the action plan is a strong indication the GoU considers transparent land sales to be a few years off. The Land Cadaster agency responsible for technical implementation is working from this timeline.

Data Storage

Ukraine has no forced localization policies or requirements for foreign IT providers to turn over any source code or provide backdoors into hardware or software applications. Ukraine’s overall regulation of IT infrastructure and Internet Service Providers is unusually free and unregulated – so much so that Internet piracy is rampant and the use of unlicensed software is widespread even the government.

6. Protection of Property RightsShare    

Real Property

Ukraine has a regulatory framework protecting the interests in property, as well as mortgages and liens. The record system is generally reliable and maintained by the Ministry of Justice. Still, judicial reform is needed to ensure efficient enforcement of property rights. The Land Cadaster Law of July 2012 provided for a single land registry; its 2013 launch marked an improvement in land ownership protection. According to the Ministry of Agrarian Policy, the Land Cadaster is only 20 percent utilized and the Ministry has started a comprehensive land audit. Local media estimated that 5 percent of land in Ukraine does not have clear title. Ukraine has improved its ratings in registering property in the WB Ease of Doing Business ratings from #64 in 2015 to #61 in 2016. In an effort to increase protection of shareholders’ rights, in May 2015, the Parliament approved legislation providing minority shareholders the right to file a court claim in the interests of the company demanding restoration of damage done by the management of the company (derivative suit) and introducing the notion of “independent director,” who represent interests of minority shareholders in the public joint stock companies.

Intellectual Property Rights

Ukraine was designated Priority Foreign Country in 2013 in USTR’s Special 301 Report due to the lack of progress in the issues outlined below. USTR changed Ukraine’s designation in the 2015 Special 301 report to the Priority Watch List – an improvement. While the GoU has demonstrated some limited progress in IPR reforms to date, Ukraine continues to have serious IPR challenges. For example, Ukraine is host to some of the largest Internet pirate sites in the world. Further, a number of rogue collecting societies continue to freely operate in Ukraine, collecting royalties but not distributing those royalties to any legitimate rights holders. Industry representatives estimate that the majority of broadcast and public performance market places are unlicensed. In addition to digital piracy, Ukraine’s many open-air markets continue to sell illegally copied music, films, and entertainment software. In the area of software piracy, the GoU has begun limited efforts to license the business software it uses, but admits that 40 to 80 percent of the software used in government ministries and enterprises remains unlicensed.

Collection Management: Ukraine has recognized that it has a significant problem with the operation of illegal or “rogue” collecting societies, i.e., organizations that collect royalties by falsely claiming they are authorized to do so. Such organizations tend to operate without adequate transparency and rarely disburse sufficient funds that they collect to the rights holders entitled to the royalties. The government has not prosecuted anyone – not even societies that the Government of Ukraine determined were collecting money without the necessary authorization. The number of rogue organizations increased in 2014 to 19; however, in 2015 the GoU reported the shutdown of a single rogue CMO and a second one in January 2016. Further, the GoU has reportedly suspended two more CMOs in February 2016 pending investigation. Despite these advancements, 15 rogue CMOs continue to operate in Ukraine, collecting royalties without distributing any of those royalties to legitimate rights holders. Finally, the MPAA estimates that more than 90 percent of Ukraine’s broadcast and public performance market places are unlicensed. GoU officials, however, say that this is because broadcasters do not pay into the current corrupt system of royalty collections.

Software Piracy: The Government of Ukraine acknowledges that a significant percentage of the software used by the government itself is unlicensed. The most recent industry data identify Ukraine as having a higher software piracy rate than almost all other countries on the Special 301 Priority Watch List. Ukraine acknowledges the need for the government to use legal software, and has issued repeated official documents calling for such legalization as far back as 2002. In general, the situation in Ukraine remains challenging with minor progress. GoU officials report an incremental legalization of software among a number of agencies and services in the past year amounting to the legalization of approximately 20,000 systems.

Internet Piracy: The United States has repeatedly raised its strong concerns about the significant and growing piracy of copyrighted content. Online piracy has significant consequences for both the Ukrainian market and for international trade. Ukraine has been working on a draft Internet Piracy Law without progress. There was not a single online piracy-related conviction in Ukraine in 2015 under existing statutes.

Patents and Trademarks: 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 containing protected trademarks, remain readily available. Counterfeit apparel is common. Most counterfeit goods are not produced in Ukraine. The amount of counterfeit pesticides on the market continues to increase, now accounting for a significant percentage of the market, according to industry. Industry has reported that criminal prosecutions for counterfeiting crimes are stalled and ineffective, and that seized goods are not disposed of or released in a timely manner. Additionally, large amounts of counterfeit products and pirated goods are still openly sold in physical markets in Ukraine. Finally, patents for plants have also recently come under threat – specifically, industry representatives have reported alleged breeder rights infringement for illicitly appropriated plant materials found 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 few judges are properly trained in IPR law. Law enforcement officials and industry also complain that too many IPR cases result only in small fines, which do not deter illegal activity. In some cases, infringing companies have won dubious and nontransparent court decisions that appear to violate the patent and trademark rights of other companies.

Resources for Rights Holders:

Contact at Mission:

  • Michelle Hoyt, Economic Officer
  • U.S. Department of State
  • U.S. Embassy Kyiv, Ukraine
  • Tel: +380 (44) 521-5307
  • Email: HoytML@state.gov

For treaty obligations and points of contact at local IP offices, see WIPO’s country profiles: http://www.wipo.int/directory/en/

Country/Economy resources:

7. Transparency of the Regulatory SystemShare    

Ukraine continues to struggle to build a legal system that facilitates easy interaction with the international community. However, as the country is implementing the EU Association Agreement and plans to implement the Deep and Comprehensive Free Trade Area (DCFTA) in 2016, transparency and legal certainty for EU investments in Ukraine should improve. Currently, many issues are not dealt with by a single piece of legislation (Note: the 2011 Tax Code is an exception). Various laws remain ambiguous or contradictory, which further complicates matters. Legislative initiatives and Draft Laws are available for viewing on the Parliament’s website as well as on websites of government agencies granted with legislative initiative authority: The Ministry of Justice, Ministry of Economic Development and Trade, etc., nevertheless not all of the proposed regulations are made public and available for viewing before their enactment.

Draft legislation and proposed regulations are available through public consultation process. NGOs, business associations, international business associations such as American Chamber of Commerce and the European Business Association are able to provide their feedback and amendments proposals to draft legislation and regulations.

Ukraine is moving in the direction of transparent policies and clear rules and enhancing fair competition. Improvements include implementation and utilization of the Prozorro system for government procurement, and the introduction of E-Governance.

Post has no record of discrimination against U.S. investors in comparison with other foreign investors.

Ukraine’s Global Competitiveness index reached 79 of 140 countries according to the World Economic Forum’s 2015/2016 Global Competitiveness Index. Ukraine ranked 87 of 140 in terms of burden of Government regulation and 98 of 140 in terms of Transparency of Government policy making according to the World Economic Forum’s 2015/2016 Global Competitiveness Index. Ukrainian regulatory institutions are still characterized by poor transparency of government policy making, high favoritism in decisions of government officials, poor judicial independence, weak protection of property rights and minority shareholders’ interests, highly irregular payments and bribes, burdensome government regulation, an inefficient legal framework in settling disputes and challenging regulations, poor ethical behavior of firms, and weak auditing and reporting standards.

8. Efficient Capital Markets and Portfolio InvestmentShare    

The Ukrainian banking system consists of the National Bank of Ukraine (NBU, the central bank) and commercial banks. The NBU is responsible for monetary policy, licensing of commercial banks, and oversight of their activities. Foreign capital represents 42.8 percent of total capital in the banking sector as of February 2016. In absolute terms, the banking sector is still fairly small, and highly concentrated: the top 20 Ukrainian banks control 82 percent of assets in the system. Total bank assets in Ukraine are about $54 billion, with total loan assets of $41 billion as of February 2016, declining sharply with the banking crisis and the local currency devaluation. The government has made progress in bank recapitalization based on the stress-testing conducted in 2014-2015 and has set up the schedule of required recapitalizations by banks. The NBU has made progress in taking insolvent banks from the market and improving the regulatory framework with special emphasis on curbing related-party lending. Foreign-licensed banks may carry out all activities conducted by domestic banks, and there is no ceiling on participation in the banking system, including operating via subsidiaries. A foreign company can open a bank account in Ukraine for the purposes of investment operations. Otherwise it needs to register a representative office in Ukraine. A nonresident private person can open a bank account in Ukraine.

The capital market for portfolio investment is slim and lacks sufficient liquidity. The local institutional investment sector, including private pension investment, is fragile. A foreign investor needs to open a bank account in a bank operating in Ukraine or act via a local trader in order to make portfolio investment. With its September 2014 resolution, the NBU temporarily banned the transfer of receipts from the sale of securities of Ukrainian issuers into foreign currency, with the exception of securities traded at stock exchanges. The measure is to expire in June 2016. Ukraine has 10 operational privately-owned stock exchanges, with the largest trade volumes conducted at four major exchanges. These exchanges operate largely in compliance with international best practices, and there is increasing competition in the sector. 87.1 percent of securities trading at Ukraine’s exchanges were transactions with government bonds and 4.6 percent corporate bonds. Other securities are mostly traded “off-exchange.” The remaining exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises. Ukraine has accepted the obligations under Article VIII of the IMF agreement in 1996, and refrains from restrictions on current international transactions.

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

Money and Banking System, Hostile Takeovers

Legislation aimed at protection from hostile takeovers covers both domestic and foreign companies. However, hostile takeovers have been a common problem given the poor rule of law.

9. Competition from State-Owned Enterprises (SOEs)Share    

Ukraine’s state sector is estimated to comprise less than 10 percent of the economy. Nonetheless, according to the Ministry of Economic Development and Trade, the state sector is one of the largest in Europe and contains 3,340 business entities, of which only 1,829 are operating companies. The SOEs, which are defined as companies in which the state owns at least 50 percent +1 share, employ 900,000 people. SOEs are active in areas such as energy, machine-building and infrastructure, with such companies as producer of energy turbines Turboatom, energy generator Centerenergo and energy company Naftogaz, which, along with its subsidiaries - domestic oil producer Ukrnafta and UkrGasVydubuvannia (UGV) - holds substantial shares of their respective markets. Each Ministry publishes the list of SOEs under its management. The sector is inefficient and often unprofitable. The SOEs incurred net losses of about $9 billion in 2014. In 2015, the government identified the largest 100 companies and developed a schedule of independent audits for them. On February 18, 2016 the Parliament approved the “Legislative Amendments to Improve Management of State-owned Entities,” which increases corporate governance standards for SOEs, provides for mandatory independent audit of SOEs, and requires publishing of its results.

SOEs purchase and supply goods and services to private firms, including foreign firms. SOEs’ procurement became more transparent following the April 2014 amendments to the procurement legislation, which obliged SOEs to follow procurement regulations. On March 16, 2016, Ukraine ratified the WTO Government Procurement Agreement. The majority of SOEs rely on government subsidies to function, and cannot directly compete with private firms. Most of the SOEs capable of making a profit have already been privatized, leaving mainly inefficient firms in government hands. The Government of Ukraine has heavily subsidized its state-owned enterprises (especially in the coal mining, rail transportation, gas and communal heating sectors) and has supported debts of many SOEs with sovereign loans guarantees to keep them operating. In 2014 and 2015 the government improved the budget discipline of the SOEs. SOE access to extension of tax payment deadlines remains nontransparent especially in cases when SOEs are directed to sell their products at below-market prices. The Government of Ukraine long resisted raising consumer gas prices to market levels, forcing the state energy monopoly, Naftogaz, to run massive operating deficits However, as a condition of the IMF program, the government raised gas tariffs to 100 percent cost recovery levels on May 1, 2016 and continues to work towards the unbundling of Naftogaz in order to increase transparency of the company and meet the Energy Community’s Third Energy Package requirements. In general, the new government is developing a strategic plan to privatize up to 380 SOE’s.

Research and development are practically non-existent in the energy sector. The state-run nuclear, hydroelectric, and extractive industries operate at a loss, with any potential profits siphoned off through corruption schemes, so little remains to invest in new equipment, let alone R&D.

OECD Guidelines on Corporate Governance of SOEs

SOE governance practices in Ukraine fall below standards set by the OECD Guidelines, especially on transparency. The new government has taken important steps to increase transparency of SOEs and improve their governance. On March 4, 2015, President Poroshenko signed a law requiring SOEs to publicize reports on use of budget funding. As part of the efforts to reform Naftogaz, the Government of Ukraine has conducted an audit of Naftogaz.

In order to increase transparency of SOE management, the Government of Ukraine launched competitive procedures to hire managers for the 60 largest state-owned companies in Ukraine. An interagency commission comprising representatives from five ministries will select such directors. The first such competition was announced in January for the position of director for state railway monopoly Ukrzaliznytsja, though the position has not yet been filled. The selection process has met strong resistance from existing management of SOEs and is yet to be completed. SOE senior managers traditionally report directly to the relevant ministry, which has had the authority to appoint the firm's management. Ukrainian law specifies that the ministries are not permitted to interfere with the daily economic activities of an SOE, but anecdotal reports indicate that this restriction is often ignored. Ministries have the power to decide on the creation, reorganization, and liquidation of SOEs; adopt and enforce SOE charters; conclude and cancel contracts with SOE executives; grant permission to the State Corporate Social Property Fund to create joint ventures with state property; and prepare proposals to divide state property between the national and municipal levels. March 2015 amendments to the Law on Joint-Stock companies enabled owners of 50 percent+1 share in a company to call shareholders meetings. This will allow the state increase managerial control over certain SOEs, where private minority shareholders were able to gain managerial control, most notably at Ukrnafta, the domestic oil producer. Judicial reform is long overdue in Ukraine and an efficient system of protection of investor rights is lacking, including in disputes involving SOEs.

Sovereign Wealth Funds

Ukraine does not maintain or operate a sovereign wealth fund.

10. Responsible Business ConductShare    

Corporate Social Responsibility has not yet taken hold in the mind of the consumer and is just beginning to gain ground among producers in the country. International companies continue to be its strongest proponents within Ukraine and have made efforts to spread ideas of responsible business conduct over to their Ukrainian affiliates. The American Chamber of Commerce, the East Europe Foundation, the U.N. Global Compact Initiative, and other NGOs have educated Ukrainian companies about the potential long-term benefits of CSR as they relate to positive exposure for a company. ACC has cited lack of interest from the business community and a commercial environment in Ukraine beleaguered with other investment difficulties.

The GoU has not begun to develop any national policy on Corporate Social Responsibility (CSR) that would define minimal standards on environment and labor.

OECD Guidelines for Multinational Enterprises

Ukraine does not adhere to generally accepted CSR principles such the OECD Guidelines for Multinational Enterprises.

11. Political ViolenceShare    

Large-scale political protests beginning in 2013 across Ukraine culminated in President Yanukovych abandoning Kyiv and his responsibilities and the elections of a new President and Parliament. Ukraine is on a slow march forward to implement the EU Association Agreement, signed and ratified in 2014, including the implementation of the economic component in January 2016.

The conflict between the Ukrainian government and Russian-backed separatists in Donetsk and Luhansk oblasts continued in 2015. Since the signing of the Minsk II agreement in February 2015, the overall level of violence has diminished. However, ceasefire violations continue, resulting in civilian and military casualties. Individuals in separatist controlled territories are subject to political violence at the hands of so-called authorities. There are also reports of violence at the hands of Ukrainian authorities. Ukraine lacks control over its border in parts of Donetsk and Luhansk, allowing for the free flow of soldiers and weapons from Russia. Russia continues its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol.

There are sporadic acts of violence directed against minorities, including ethnic, religious and LGBTI throughout Ukraine. There have been occasional acts of political violence. On February 22, 2016 a bomb exploded at a march in Kharkiv, killing four persons. In August 2015, a grenade attack at Parliament killed three National Guard soldiers were killed and wounded more than 100.

12. CorruptionShare    

The largest impediment to fighting corruption is a dearth of prosecutions. In October 2014, the Parliament passed a package of anti-corruption bills. These bills included the creation of a National Anti-Corruption Bureau focused on corruption prosecution, entrusted with corruption prevention, approval of a national anti-corruption strategy, a legislative basis for the prevention of money laundering, as well as mandating the disclosure of asset ownership for public officials. The last example extends to family members of government officials as well The National Anti-Corruption Bureau and the Anti-Corruption Prosecutor started operations in 2015. The Anti-Corruption Prosecutor is currently working on more than 40 cases of high level corruption in Ukraine.

GoU formed the National Agency for the Prevention of Corruption (NAPC) in 2015. The main task of the NAPC for 2016 is to implement an electronic property declaration form for civil servants. On March 15, 2016, the Parliament approved the legislative amendments to oblige government officials to file electronic declarations and introduced criminal responsibility for providing false information. As of February 2015, Ukraine also has an e-procurement system that improves transparency in public spending and is intended to reduce corruption by eliminating the human factor from the tender process. In March 2015, the Parliament passed a law to simplify the startup and conduct of entrepreneurial activities and cancel the licensing of activities that have an adequate level of government regulation and oversight, which has potentially significant implications for anti-corruption and improving the investment climate.

The Law on Corruption Prevention adopted by the Parliament in October 2014 provides for corruption prevention measures to be performed by private companies. In particular, the law sets requirements with regard to Anti-Corruption Programs and Codes of Conduct in companies that take part in government procurement tenders or where the government owns more than 50 percent of the shares. The law also requires appointment of compliance officers in such companies.

In 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 concluded its Joint First and Second Rounds of Evaluation of Ukraine and published its report in 2007. A Third Round Evaluation Report was published in 2011. The fourth evaluation was launched in 2012.

In early 2016, the prominent NGO Anti-corruption Action Center has been targeted by the Prosecutor General’s Office, which received a court warrant to search its office and access all banking information under the guise of a criminal case. The new Prosecutor General has been appointed in May of 2016.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Ukraine also participates in the OECD Anticorruption Network for Eastern Europe and Central Asia. Parliament passed laws to ratify the Council of Europe Criminal Law Convention on Corruption, signed in 1999, and the UN Anticorruption Convention, signed in 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.

Resources to Report Corruption

National Anti-Corruption Bureau only just established by law October 2014 will be the appropriate resource for the reporting of corruption.

GoU contact for combating corruption:

  • Mr. Artem Sytnyk, Director
  • National Anti-Corruption Bureau
  • 3, Vasyl Surikov St, Kyiv, Ukraine 03035
  • Hot-line: 0-800-503-200

info@nabu.gov.ua or electronic form for corruption reporting http://nabu.gov.ua/povidomlennya-pro-kryminalne-pravoporushennya

Contact at "watchdog" organization:

  • Mr. Oleksii Khmara
  • Executive Director
  • Transparency International Ukraine
  • 40 Yegorov Str. of.203; Kirovograd, Ukraine 25006
  • +38(044) 360-52-42
  • info@ti-ukraine.org

13. Bilateral Investment AgreementsShare    

Bilateral Taxation Treaties

The Bilateral Investment Treaty between the United States and Ukraine has been in force since1996. 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, amended 2010), 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), Congo (2010), Korea (1996), Kuwait (2002), Kyrgyzstan (1993), Latvia (1997), Lebanon (1996), Libya (2001), Lithuania (1994), Macedonia (1998), Morocco (2001), Moldova (1995), Mongolia (1992), Nigeria (2010), the Netherlands (1994), OAE (2003), Oman (2002), Panama (2005), Poland (1993), Portugal (2003), Russia (1998), San Marino (2006), Saudi Arabia (2009), Singapore (2006), Syria (2002), Slovakia (1994), Slovenia (1999), South Korea (1996), Spain (1998), Sweden (1995), Switzerland (1995), Tajikistan (2001), Turkmenistan (1998), Turkey (1996), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), Yemen (2002), Japan (2015)

14. OPIC and Other Investment Insurance ProgramsShare    

The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in Washington in 1992. OPIC resolved a long-standing dispute in 2009, and restored its programs in Ukraine after an extended hiatus. In 2010 OPIC concluded an agreement enabling the Ukrainian Development Network (UDN) to serve as an originator for a growing alliance with the private sector designed to support small and medium-sized enterprises expanding into emerging markets overseas. OPIC currently provides political risk insurance to several U.S. companies operating in Ukraine and has the capacity to insure other U.S. eligible investors if such coverage was sought. In 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).

The joint stock company “The State Export-Import Bank of Ukraine” (UkrExImBank) provides export-import banking services in Ukraine. The National Bank of Ukraine decided in March 2016 to partially sell shares in state-owned UkrExImBank to the European Bank for Reconstruction and Development or the International Finance Corporation – seen as a move to improve corporate management and governance and allow the bank to support foreign trade transaction. UkrExImBank operates through Retail Banking, Corporate banking, and Inter-Bank and Investments Business segments.

15. LaborShare    

Availability: Ukraine has a well-educated and skilled labor force (about 23 million people) with nearly a 100 percent literacy rate. As of January 2016, unemployment (ILO methodology) averaged 9.5 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. During 2015 unemployment continued increasing in the industrial eastern regions, and many big enterprises faced lay-offs due to severe economic challenges, including the loss of access to Russian and CIS markets. In addition, some enterprises were destroyed, robbed, dismantled and shipped to Russian territory. According to official statistics, which count only those registered to receive unemployment benefits, employment was only 1.9 percent in January-February 2016. In January the unemployment insurance allotted to each worker amounted to UAH 1516 ($63) and in February this dropped slightly to UAH 1,509 ($62.6) due to further hryvnia depreciation.

Wages and Conditions of Work: Wages in Ukraine remain low by Western standards. In December 2015, the nominal average monthly wage increased by 30.4 percent year-on-year to UAH 5239 ($241), while the real average wage decreased by 9.9 percent year-on-year during the same period. As of February 2015, the average monthly wage plunged to UAH 4362 ($181). The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers. As of February 1, 2016, total wage arrears in Ukraine stood at UAH 2,1 billion ($87 million), with about UAH 1 billion worth in the East of Ukraine – the Donetsk and Lugansk oblasts in particular,. The greatest arrears accumulated in industry, transport and construction sectors.

Minimum Wage: As of January 2016 the minimum monthly wage, which by law equals the monthly subsistence level, is UAH 1,378 ($57.20). The 2016 state budget envisages minimum wage increase to UAH 1450 ($60) as of May 1, 2016 and to UAH 1550 ($64) as of December 1, 2016.

Labor/Management Relations: Ukrainian law allows workers to organize, and unions are prevalent in most industries. The law provides most workers with the right to form and join independent unions and to bargain collectively without previous authorization. By law, all labor unions have equal status, and a union’s establishment does not require government permission. Within classic sectors of the economy, sector-specific collective bargaining agreements involve representative employers’ associations (e.g., chemical employers), sector trade unions, and some participation of the government through the Ministry of Social Policy. Such agreements can also take place at the regional level. According to Ukraine’s Statistics Service, 79.8 percent of employees were covered by collective bargaining agreements in 2014.

The independence of unions from government or employer control, however, was disputed. Independent trade unions alleged that the country’s largest trade union confederation, the FPU, enjoyed a cozy relationship with employers and members of some political parties. Unions that were not affiliated with the FPU were further denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions. There were cases of workers, who renounced membership in an FPU-affiliated union and joined a new union, facing loss of pay, undesirable work assignments, and dismissal.

The law sets 16 as the minimum age for most employment. Children who are 15 years of age may perform “light work” with a parent’s consent, but the law does not clearly define the term. The law allows children to do some forms of work beginning at age 14 as part of an apprenticeship in the context of vocational training. The most frequent violations of labor law for minors related to their work in hazardous conditions, long workdays, failure to maintain work records, and delayed salary payments.

During this period, the State Labor Service and its predecessor, the State Labor Inspectorate, was responsible for enforcing labor laws. Inspectors were limited in number and funding. The government imposed a moratorium on surprise inspections from July 2014 through the end of 2015, purportedly to cut the number of required inspections and certifications, deregulate the economy and prevent corruption. The moratorium effectively constrained the government’s ability to enforce labor laws effectively.

The law provides for the right to strike "to defend one's economic and social interests," as long as strikes do not jeopardize national security, public health, or the rights and liberties of others; the government generally respects this right. It does not extend the right to strike to personnel of the Prosecutor General’s Office, the judiciary, armed forces, security services, law enforcement agencies, the transportation sector, or public servants. Workers who strike in prohibited sectors may receive prison terms of up to three years.

The law established the National Mediation and Reconciliation Service (NMRS) to mediate labor disputes. According to official statistics, during the year the Service resolved188 labor disputes: 3 – national, 7 – territorial, 174 – enterprise level, involving 1.3 million employees and 8340 economic entities. 36.2 percent of the disputes were related to wage arrears, 16.4 percent - to the violations of employment and dismissal process, 10.4 percent - to labor safety, etc. In 2015 National Mediation and Reconciliation Service mediated 18 strikes and 63 social protest actions that had mostly economic demands.

16. Foreign Trade Zones/Free Ports/Trade FacilitationShare    

Ukraine has maintained special or free economic zones (SEZs-FEZs), but in 2005 the government canceled tax exemptions (i.e., from land tax, corporate income tax, import duty, and VAT) to stop the misuse of these zones for tax evasion and smuggling. In September 2014 a law of Ukraine “On Free Economic Zone (FEZ) of Crimea” established an FEZ on the Crimean territory occupied by Russia. So far, this Crimea FEZ is largely theoretical, given many provisions of the new law are difficult if not impossible to implement. Finally, in January 2016 the GoU imposed a ban on trade with Crimea making the functioning of a FEZ null and void.

17. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

According to UkrStat official data, as of January 1, 2016, the total stock of FDI in Ukraine was $43.371 billion or approximately $1,072 per capita, representing a 29.6 percent decrease (or $5.246 billion decrease, including $-5.024 billion caused by the devaluation).

FDI by Country

In 2015, Ukraine's major investors that account for 83 percent of investments included: Cyprus (30 percent of FDI), the Netherlands (12.9 percent), Germany (12.5 percent), Russian Federation (7.8 percent), Austria (5.5 percent), the United Kingdom (4.3 percent), the British Virgin Islands (4.1 percent), France (3.5 percent), Switzerland (3.1 percent), and Italy (2.2 percent). U.S. investment comprised 1.6 percent of FDI. Many Ukrainian and Russian enterprises continue to channel investments through Cyprus due to a favorable bilateral tax treaty. In 2012, Ukraine and Cyprus signed a Double Taxation Convention to replace the bilateral agreement dating from 1982. Under the new treaty, which was ratified by the Parliament in July 2013 and entered into force in August 2013, most income earned in Cyprus is taxed between 5 and 15 percent, reducing the tax gap between the two countries. While the Government of Ukraine announced plans to introduce a 12 percent tax on the operations of companies registered in offshore countries (in order to increase collections to the Pension Fund), Cyprus was not included on this list.

FDI by Industry Sector Destination

30.6 percent of FDI in Ukraine goes to industry: 12.2 percent steel industry, 5.6 percent food processing and tobacco industries; 2.9 percent natural resources; 1.7 percent chemical industry; and 1.9 percent machine-building industries. 27.3 percent of FDI is in the financial sector, 13.0 percent in trade and auto repairs, and 8.0 percent in the real estate sector.

FDI from Ukraine

As of January 1, 2015, Ukraine's FDI to other countries equaled almost $6.21 billion. 93.7 percent of Ukrainian investment ($5.817 billion) is reported as moving through Cyprus (the revised OECD Benchmark Definition of FDI is designed to filter out such detours or round-tripping through tax havens; FDI statistics may thus be more informative in future reports). Russia is generally observed to be the chief destination of actual Ukrainian FDI.

Ukraine’s Macroeconomic Indicators:

GDP, 2015, $91.2 billion (-31 percent)

GDP, 2014 $131.8 billion (-28 percent)

GDP, 2013 $182 billion (+3 percent)

GDP per capita 2015 $2,081 (-29 percent)

GDP per capita, 2014 $2,964 (-24 percent)

GDP per capita, 2013 $3,900 (+4 percent)

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country Statistical source*

USG or international statistical source

USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2015

$91.2 bln

2015

$118 bln

http://www.worldbank.org/en/country

Foreign Direct Investment

Host Country Statistical source*

USG or international statistical source

USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2015

$698.9

 

n/a

BEA data available at http://bea.gov/international/direct_investment_multinational_
companies_comprehensive_data.htm

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (U.S. Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

 

$ mln

100%

Total Outward

$, mln

100%

Cyprus

11744.9

27.1%

Cyprus

5817.6

93.7%

Netherlands

5610.7

12.9%

Russia

112.8

2.0%

Germany

5414.3

12.5%

Latvia

69.8

1.1%

Russia

3392.1

7.8 %

Virgin Isl.

51.3

0.8%

Austria

2402.4

5.5%

Poland

50.1

0.7%

"0" reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets, June 2015

Top Five Partners (Millions, U.S. Dollars)

Total

Equity Securities

Total Debt Securities

All Countries

190

100%

All Countries

69

100%

All Countries

121

100%

Cyprus

66

35%

USA

64

94%

Cyprus

66

55%

USA

64

34%

Russia

1

2%

United Kingdom

34

28%

United Kingdom

34

18%

Latvia

0

0%

Netherlands

21

17%

Netherlands

21

11%

           

Latvia

0

0%

           

18. Contact for More InformationShare    

  • Michelle Hoyt, Economic Officer
  • U.S. Department of State
  • U.S. Embassy Kyiv, Ukraine
  • Tel: +380 (44) 521-5307
  • Email: HoytML@state.gov