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Ukraine

3. Legal Regime

Transparency of the Regulatory System

Ukraine is working towards building a transparent, consistent regulatory environment.  Regulatory regimes in Ukraine are characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and favoritism in decisions by government officials, weak protection of property rights, and irregular payments and other bribes.  The country, however, is generally moving in the right direction towards clearer rules and fair competition.  Ukraine’s efforts to implement its EU Association Agreement, including the Deep and Comprehensive Free Trade Area (DCFTA), should help boost overall transparency and legal certainty as Ukraine strives to establish legal and regulatory systems that are consistent with international norms.  Continued deregulation is also one of Ukraine’s key commitments under its IMF program.

The formulation of regulations falls solely under the purview of the Government.  In Ukraine there are no regulatory processes managed by non-governmental organizations or private sector associations.  The relevant ministry or regulatory agency is required by law to publish draft text of proposed regulations on its website for review and comment for at least one month but not more than three months.  Along with the draft text, the governmental body must include a data-based assessment justifying the need for the regulation and analyzing its potential impact.  The ministry or agency receives comments via its website, at public meetings, and through targeted outreach to stakeholders.  The comments received are generally not made public.  At the end of the consultation period, the relevant ministry or regulator may publish the results on its website.  Often, however, final draft legislative initiatives are not publicly available or they reappear in dramatically different form.  The Ministry of Economy announced in November 2019 that Ukraine is working to launch a pilot program to create an electronic platform on which it could publicize all draft regulatory measures, accept public comments, and provide responses to those comments.  Information on existing legislation is available on the Verkhovna Rada (parliament) and Cabinet of Ministers websites.

Public finances and debt obligations are transparent. Budget documents and information on debt obligations are widely and easily accessible to the general public, including online.  Budget documents provide a mostly full picture of the government’s planned expenditures and revenue streams.  Information on debt obligations is publicly available, and is published as part of the budget document on the Parliament’s website. Information on the status of sovereign and guaranteed debt is published and updated on a monthly basis on the Finance Ministry’s website.  Statistics are broken down by type of debt, type of creditor, and type of currency.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to approximate many of its standards to meet EU requirements and facilitate access to EU markets.  As Ukraine drafts laws, it often incorporates or references EU norms and standards.  Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.  The Ministry of Economic Development,   Trade and Agriculture (MEDTA) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade.  Ukraine’s notification of draft text to the WTO for comment has significantly improved in the past few years, but there have been instances where the draft text was submitted relatively late in the legislative process after it had already passed the first reading in the Parliament.  Ukraine has committed to continue improving its process of notifying all proposed regulatory changes to the WTO and its process for reviewing and responding to comments to these notifications

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by the parliamentary body, the Verkhovna Rada.  Contracts related to foreign investments fall within the jurisdiction of a system of specialized commercial courts.  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 for by international treaties.

Courts of general jurisdiction are organized by territory and specialty and include: local courts; appellate courts; specialized high courts for civil and criminal cases; and the Supreme Court.  Commercial and contract law in Ukraine are codified in the Commercial Code and Civil Code. There is a three-tier system of specialized commercial courts with first and appellate instances and the Commercial Cassation Court of the Supreme Court as the highest instance.  Local courts are either courts of general jurisdiction 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 legal disputes connected with state government and municipalities, with the exception of military disputes.  Regulations and enforcement actions are subject to appeal with no exceptions within terms prescribed in procedural codes and are adjudicated in the national (general) court system.

The judicial system is independent of the executive branch; however, extensive corruption in the court system provides an opening for outside influence.  Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of executive and prosecutorial influence on judges.  Ukraine is ranked 105 out of 141 countries with regard to judicial independence by the Global Competitiveness Index report  2018-2019 (up twelve spots from the 2017-2018 report).

Laws and Regulations on Foreign Direct Investment

The Law of Ukraine on Investment Activity (1991) established the general principles for investment and was subsequently followed by additional legislative acts to facilitate foreign investment, most recently the Law “On Amendments to Some Laws to Remove Obstacles for Attracting Foreign Investments” and Law “On Amendments to Certain Legislative Acts of Ukraine on Encouraging Investment Activity in Ukraine.”  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.  The website of Ukraine’s Investment Promotion Office (https://ukraineinvest.com/ ) provides relevant laws, rules, procedures, and reporting requirements for potential investors.

Competition and Anti-Trust Laws

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition.  AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers and acquisitions, considering applications regarding violations of public procurement as an appeal body, monitoring the state aid system, competition advocacy within the government, and formulating competition policy.

Expropriation and Compensation

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfil investment obligations during privatization procedures.  Additionally, the Law “On Legal Regime of Martial Law” and the Law “On Confiscation of Property During Legal Regime of Martial Law”  allow voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law.”

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation.  The full text of the communication is available at: C.N.597.2015.TREATIES-XXII.1 of 20 October 2015 .

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

  • The Law on International Commercial Arbitration (ICAL, 1994).  ICAL is almost a literal translation of the UNCITRAL Model Law.
  • The Code of Civil Procedure of Ukraine (CPC, 2004).  Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that:  recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

Many of Ukraine’s bilateral investment treaties recognize binding international arbitration of investment disputes.  Claims under the Bilateral Investment Treaty (BIT) between the United States and Ukraine by American investors are rare.  The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine.  Such disputes are a significant problem, however, both in fact and in terms of public perception.  As of early 2019, the Embassy was tracking approximately 20 active disputes, some very protracted.  Going back 10 years, the Embassy has tracked almost 100 disputes involving a U.S. business or individual.  The majority of disputes are related to customs and tax issues, or corporate raids.

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.  ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) occur in Ukraine.  The Ukrainian government has made it a stated priority to improve the business environment, end corporate raiding, and attract more foreign investment.  In 2019, the Ukrainian Parliament passed legislation aimed to end corporate raidership: the Law “On Amendments to Certain Legislative Acts of Ukraine on Property Rights Protection,” and the “On Amendments to the Land Code of Ukraine and Other Legislative Acts on Counteracting Raiding.”

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can refer most of their commercial or civil-law disputes to courts of arbitration, which are non-state bodies.  Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court.

Ukraine’s International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law.  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.  Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958.  However, the reliability, consistency, and timeliness of implementation are unknown.

Bankruptcy Regulations

In a turning point for Ukrainian bankruptcy law reform, in October 2018 the Ukrainian parliament adopted the Code of Bankruptcy Proceedings to replace the existing bankruptcy law that had been in force since 1992.  The law took effect in October 2019.  The new law improves creditors’ rights by allowing them to select their bankruptcy administrator, decide the starting prices of debtor assets at auction, and participate in other asset sales maters.  The law also improves the procedures for selling debtors’ assets by introducing online auctions.  In addition, the law removes a requirement for asset collection through courts or enforcement services before insolvency proceedings can begin.  This eases the debt collection process and reduces the cost for lawyers and court fees for creditors.  The new bankruptcy code also provides additional protection of creditors’ interests whose claims are secured by a pledge and determines the conditions for claiming their rights to the pledged collateral.

Bankruptcy is not criminalized in Ukraine.  The Criminal Code of Ukraine, however, does criminalize: 1) intentionally making an entity bankrupt; and, 2) distorting certain financial data in order to conceal the insolvency of a financial institution.  In the 2020 World Bank’s Doing Business Report Ukraine ranked 146 out of 190 in the “resolving insolvency” subcategory, one spot lower than last year’s ranking of 145.  Ukraine’s low ranking is driven by a low recovery rate and the high costs associated with recovering funds from insolvent firms by creditors.

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