Transparency of the Regulatory System
Ukraine is struggling to build a transparent and consistent regulatory environment. The current regulatory regime is characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and favoritism in decisions by government officials, weak protection of property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 minority shareholders’ interests, 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 meet EU standards. Continued deregulation is also one of Ukraine’s key commitments under its IMF program.
Information on existing and draft legislation is available on the Verkhovna Rada (parliament) and Cabinet of Ministers websites. Proposed legislation may be published on the corresponding Ministry website for public commentary, but often draft legislative initiatives are not publicly available or they reappear in dramatically different form.
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 potential impact. The ministry or agency receives comments via its website, at public meetings, and through targeted outreach to stakeholders. At the end of the consultation period, the relevant ministry or regulator must publish the results on its website.
In a sign of increased openness, the government in the past few years has consulted with NGOs and business associations such as the American Chamber of Commerce and the European Business Association when drafting business- or finance-related regulations and legislation. These organizations have provided feedback and proposed amendments during the review and approval process.
Public finances and debt obligations are mostly 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. Ukraine’s finances related to state-owned enterprises, its three social insurance funds, and natural resource extraction are not yet fully transparent, however.
International Regulatory Considerations
Ukraine is not a member of the EU, but it is working to harmonize 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 and Trade (MEDT) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade. MEDT typically submits draft text to the WTO for comment, 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.
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. 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 for by international treaties (such as the case of independent arbitration through the investor-State dispute settlement provisions of the U.S.-Ukraine BIT).
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. 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.
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 117 out of 140 countries with regard to judicial independence by the Global Competitiveness Index report 2017-2018 (up twelve spots since the 2016-2017 report).
In general, regulations are appealable, but determining whether a regulation is appealable in the national court system depends on the nature and origin of the regulation.
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, most recently the Law of Ukraine #2058-YIII of May 2017 “On Amendments to Some Laws to Remove Obstacles for Attracting Foreign Investments.” The website of Ukraine’s Investment Promotion Office (https://ukraineinvest.com/) provides relevant laws, rules, procedures, and reporting requirements for potential investors. Potential investors can also receive specific investment support by emailing email@example.com.
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.
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 for voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law” in place due to military operations in eastern Ukraine.
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
While U.S. investors have faced many challenges with the Government of Ukraine over the years that have devolved into disputes, international arbitration under provisions of the Bilateral Investment Treaty between the United States and Ukraine have been rare, with two known arbitral proceedings since 2016. 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 (particularly VAT) 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 current Ukrainian government has made it a stated priority to improve the business environment and attract more foreign investment, but progress has been slow.
International Commercial Arbitration and Foreign Courts
The Law on Arbitration Courts (2004) stipulates that parties can now 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. The Embassy, however, is not aware to what extent arbitration is used by the business community.
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.
The Embassy is not aware of any investment disputes that have involved state-owned enterprises.
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 President signed the bill into law in April 2019. The new Bankruptcy Code enters into force six months after the legislation is published (provisions on electronic auctions will enter into force three month after publication).
The new Bankruptcy Code improves creditors’ rights by allowing them to select the bankruptcy administrator, decide the starting price of debtor assets at auction, and participate in other matters regarding asset sales. The Law on Bankruptcy (1992) does not require approval by creditors for selection or appointment of an insolvency representative, nor does it require approval by creditors for sale of substantial assets of the debtor. The Bankruptcy Code also improves the procedures for selling debtor’s assets by introducing online electronic auctions. Currently, assets are often sold offline in a non-transparent way. In addition, the new Bankruptcy Code does not require prior collection through courts or enforcement services for insolvency proceedings to begin. For creditors this might significantly ease the debt collection process and reduce legal costs and court fees.
Bankruptcy is not criminalized in Ukraine. The Criminal Code of Ukraine, however, criminalizes 1) intentionally making an entity bankrupt; 2) distorting certain financial data in order to conceal insolvency of a financial institution.
In the 2019 World Bank’s Doing Business Report Ukraine ranked 145 (improved from 149th in 2018) in the “resolving insolvency” subcategory. Ukraine’s low ranking is driven by a low recovery rate and the high costs associated with recovering funds from the insolvent firm by creditors.
Parliament passed legislation in February 2018 to create a national credit registry administered by the National Bank of Ukraine. This EU-mandated legislation seeks to reduce lending risks through the publication of credit histories, including bankruptcies.