Ukraine
Executive Summary
Ukraine is striving to build a more modern and dynamic economy while struggling to overcome decades of corruption and government mismanagement. Hard-won reforms have brought macro-economic stability and some improvements in the business environment. In the past year however, partly due to the 2019 presidential and parliamentary election cycle, there has been a decrease in the pace of reforms. It remains to be seen whether the pace will pick up after the October 2019 parliamentary election, though the main political parties profess a commitment to reforms.
Ukraine has significant investment potential given its large consumer market, highly educated and cost-competitive work force, and abundant natural resources. The Ukrainian government actively seeks foreign investment and established investment promotion agencies that have facilitated foreign investments. Ukraine’s Association Agreement with the EU gives Ukraine preferential market access and is accelerating Ukraine’s economic integration with the EU. Ukraine’s economy demonstrated real GDP growth of 3.3 percent in 2018, and the IMF forecasts growth of 2.7 percent in 2019.
U.S. companies have found success in Ukraine, particularly in the agriculture, consumer goods, and technology sectors. Ukraine is an agricultural powerhouse, and is the world’s third-largest grain exporter. Ukraine’s IT service and software R&D sectors show great potential due to the country’s large, skilled workforce. An array of local IT outsourcing companies serve clients worldwide.
Foreign direct investment (FDI) generally remains low with net inflow in 2018 equal to only two percent of GDP. The most significant constraints on FDI remain the business climate and corruption. Foreign investors cite corruption in the judiciary, poor infrastructure, powerful vested interests, and weak protection of property rights as some of the major challenges to doing business. Labor migration abroad, particularly to the EU, is reducing Ukraine’s labor force.
The Ukrainian government recognizes these problems and has implemented reforms to improve the business environment. Notably in June 2018, Ukraine adopted legislation to create the High Anti-Corruption Court of Ukraine, which should be fully established and operational in 2019. Overall, however, the pace of reforms has slowed and a culture of impunity among elites continues. The government has targeted civil society activists and independent journalists for their work in reforming Ukraine. Ukraine has agreed to continue anti-corruption reforms as a key part of its IMF program, which is vital for Ukraine to meet its financial needs and maintain its hard-fought macro-economic stability.
The conflict with Russia also continues to impede greater investment in Ukraine. In the non-government controlled areas in the Donbas region of Ukraine, the conflict with Russia-led forces has wrought significant damage to freight rail, mines, and industrial facilities. Investors should note that the situation in both Crimea (unlawfully occupied by Russia since the spring of 2014) and in occupied areas of Donbas remains dire. U.S. sanctions prohibit U.S. companies from participating in most transactions in Crimea.
Table 1
| Measure | Year | Index/Rank | Website Address | ||
| TI Corruption Perceptions Index | 2018 | 120 of 176 | https://www.transparency.org/news/feature/corruption_perceptions_index_2017 | ||
| World Bank’s Doing Business | 2018 | 71 of 190 | http://doingbusiness.org/rankings | ||
| Global Innovation Index | 2018 | 43 of 128 | http://globalinnovationindex.org/content/page/data-analysis | ||
| U.S. FDI in partner country ($M, stock positions) | 2017 | $398 | https://www.bea.gov/international/factsheet/factsheet.cfm?Area=344 | ||
| World Bank GNI per capita | 2017 | $3,079 | http://www.data.worldbank.org/indicator/NY.GNP.PCAP.CD | ||
10. Political and Security Environment
The military conflict continues in parts of Donetsk and Luhansk oblasts between Ukrainian government troops and forces that Russia leads, arms, and funds. Residents of Russia-controlled areas are subject to political violence at the hands of Russia’s proxy authorities. Civilian casualties occur regularly due to landmines and shelling, as fighting occurs in and around major population centers. Infrastructure for water, gas, and electricity are also frequently damaged by fighting. Ukraine lacks control of over 500 km of its border in Donetsk and Luhansk, allowing Russia to freely supply its proxies with equipment, weapons, and soldiers. Russia continues its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol.
There were several protests and demonstrations during 2018 against the government, mainly evoking populist messaging against economic conditions in the country and perceptions of the government failing to fight corruption. These protests, however, have generally been peaceful with few instances of violence. The 2019 presidential election cycle meant increased competition among political parties, decreasing the pace of work in parliament.
11. Labor Policies and Practices
Ukraine has a well-educated and skilled labor force of about 26 million people with a nearly 100 percent literacy rate. Ukraine’s population was 42.2 million people in December 2017. Ukraine’s official unemployment rate was 9.1 percent in 2018 although unemployment in some regions, particularly in western Ukraine, remained significantly higher. According to the Ministry of Social Policy of Ukraine, there were about 1.7 million unemployed workers in 2018. However, only 21 percent were officially registered with the State Employment Service. Wages in Ukraine remain low by Western standards. In January 2019, the minimum monthly wage increased to 4173 UAH (USD 155) from 3723 UAH (USD 138) in January 2018. The real average monthly wage increased by 14.2 percent year-on-year to 9218 UAH (USD 341). The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers.
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, trade unions are equal, 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. However, the independence of unions from government or employer control has been disputed by certain labor groups. Independent trade unions allege that the country’s largest trade union confederation, the Federation of Trade Unions of Ukraine (FPU), enjoyed a preferential relationship with employers and members of some political parties. Unions not affiliated with the FPU have been denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions. There have also been cases of workers who renounced membership in an FPU-affiliated union and who joined a new union, facing loss of pay, undesirable work assignments, and dismissal.
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.
During 2018, the State Labor Service was responsible for enforcing labor laws. Inspectors were limited in number and funding. Although the Government of Ukraine renewed planned and unplanned labor inspections, the number of completed inspections continued to fall, and experts assessed the number to be inadequate relative to the size of the Ukrainian economy. A new law established the National Mediation and Reconciliation Service (NMRS) to mediate labor disputes. According to official Ukrainian statistics, during 2017 the NMRS resolved 312 labor disputes, which involved 1.5 million employees and 6,835 economic entities.