2009 Investment Climate Statement - Ukraine
Government's Attitude Towards Foreign Investment:
Since the 2004 Orange Revolution, President Viktor Yushchenko and successive Prime Ministers have listed improving the investment climate as a top economic policy goal. Although there have been some improvements, the overall investment and business climate remains poor. Ukraine's economy is still shackled by corruption, poorly developed rule of law, over-regulation, and excessive government interference in what should be private business decisions. That said, Ukraine made an important step forward by becoming the 152nd member of the World Trade Organization (WTO) on May 16, 2008. WTO accession will push Ukraine toward a more open and transparent trade regime and help improve the investment climate. Accession to the WTO followed several other positive steps for U.S.-Ukraine trade and investment relations in recent years. Both the United States and the European Union granted Ukraine market economy status, in February 2006 and December 2005, respectively. In March 2006 the United States terminated the application of the Jackson-Vanik amendment to the Trade Act of 1974 to Ukraine, providing Ukraine permanent normal trade relations status. The United States and Ukraine signed a new Trade and Investment Cooperation Agreement (TICA) on April 1, 2008. The TICA established a joint U.S.-Ukraine Council on Trade and Investment, which will help to increase commercial and investment opportunities by identifying and working to remove impediments to bilateral trade and investment flows. The Council met for the first time on October 2, 2008.
After a major economic collapse following independence, the Ukrainian economy grew steadily from 1999 to 2008; real GDP growth for January-August 2008 was 7.1%. The global financial crisis at the end of 2008 has hit Ukraine hard, however, and has ended this period of significant growth. Experts predict that the country will experience negative growth in 2009. After about seven years of currency stability, the national currency, the hryvnia (UAH), which had been successfully pegged at about five-to-one against the U.S. dollar, has returned to instability. The hryvnia first appreciated to about 4.5-to-1 against the dollar during the summer of 2008, then sharply depreciated to over nine-to-one at the end of 2008 and beginning of 2009. Inflation also poses a serious threat to macroeconomic stability; the inflation rate was 22.3% in 2008.
Foreign investors continued to express little confidence in the Ukrainian court system. In a noticeable number of cases, predatory minority shareholders have been able to procure dubious court decisions in an effort to wrest control of companies away from the majority investors. Researchers claim that thousands of Ukrainian enterprises have suffered so-called corporate hijacking attempts in the last several years, and foreign investors have been among those targeted. Ukrainian courts have a long record of striking down or ignoring contractual provisions that assign legal responsibility for dispute resolution to a foreign court or arbitrator. In September 2008, however, Parliament adopted a new law "On Joint Stock Companies," considered by most experts as a major step forward in improving corporate governance and stopping corporate hijacking.
Many investor complaints over the years have involved the State Tax Administration's (STA) selective enforcement of tax policy. Businesses have claimed that STA local and regional branches use investigative authority to advance favored political or business interests. Arrears in the payment of VAT refunds to exporters have also been a problem, particularly for agricultural exporters, who tend to run up especially large VAT arrears. In the spring of 2008, the Ukrainian government temporarily increased the pace of VAT refunds, but later in the year arrears again became a serious problem, and by the end of 2008 VAT refunds to exporters had come to a virtual standstill. Some exporters reported that the Ukrainian tax authorities cited a cash shortage resulting from the economic crisis when justifying their inability to refund VAT in a timely manner. Ukraine's VAT regime is poorly managed and plagued by non-transparency and corruption. In late 2008 the government announced plans to issue bonds in lieu of cash refunds, but announced no further steps by the time of this writing. The government also intends to introduce a comprehensive electronic system to ensure speedy refunds continue in the future. In the meantime, Ukraine's VAT regime remains poorly managed, non-transparent and subject to corruption, while delays in reimbursement have become an important cost factor for many foreign companies. Improvements to the system would have an important, positive impact on the investment climate.
Major Laws/Rules Affecting Foreign Investment:
Ukraine's Law "On the Foreign Investment Regime" (1996) provides for equal treatment of foreign and Ukrainian-owned business with some restrictions in broadcasting and weapons manufacturing.
Both a new Civil Code and a competing new Commercial Code went into effect on January 1, 2004. Lawyers and judges continue to grapple with how to implement the two laws, whose approaches to the regulation of business activities are contradictory. The Commercial Code has a number of provisions considered to be incompatible with market economics, and most experts believe it should be eliminated entirely.
In October 2001, the Ukrainian Parliament passed a Land Code. It provides for private ownership of land, facilitating the privatization of land for agricultural purposes, but also provided for a moratorium on agricultural land sales. This moratorium finally lapsed on January 1, 2009, although it is not clear if the necessary procedures are in place to allow for sales of land in practice. It is also possible that Parliament will seek to reestablish the moratorium. The Land Code continues to prohibit foreign ownership of farmland.
Burdensome customs clearance procedures are a disincentive to investment in Ukraine. Imported goods entering Ukraine often still must be "cleared" by a number of state bodies, some of which do not operate 24 hours a day, causing extended delays. Corruption also remains a serious problem, and businesses report that Customs officials frequently demand bribes or special "fees" to expedite clearance. Companies have identified improper customs valuation procedures -- i.e. Customs officers valuing goods well above their true value, thereby raising the customs duties owed -- as a major obstacle to doing business in Ukraine.
Import duties are calculated in accordance with the law "On the Customs Tariff of Ukraine." Upon becoming a WTO Member, Ukraine applied new, lower MFN rates to goods originating from WTO Members, in accordance with Article I of the GATT 1994. On December 17, 2008, Parliament belatedly adopted an amendment to the law "On the Customs Tariff of Ukraine" to institutionalize the new, lower MFN rates. Some companies suffered from market uncertainty without this law in place. Preferential rates are applied to imports from twelve countries with which Ukraine has a Free Trade Agreement (FTA) or other preferential trade agreement, mostly from the CIS. Imports from the United States are subject to the MFN rate.
The customs tariff schedule comprises more than 11,000 tariff lines. Most customs tariffs are levied at ad valorem rates, and only 1.5 percent of tariff line items (down from 5.97 percent prior to WTO accession) are subject to specific or combined rates of duty. These specific and combined rates apply primarily to agricultural goods that are produced in Ukraine, such as grains, poultry products, sugar, and vegetables like carrots and potatoes. The average applied tariff rate fell to 4.95 percent after WTO accession. For agricultural goods, the average applied tariff rate is now 9.11 percent (down from 13.8 percent before WTO accession). For industrial goods the average applied rate is now 3.71 percent (down from 4.4 percent before WTO accession).
Ukraine's Anti-Monopoly Committee implements anti-monopoly, competition, and consumer protection legislation under the March 2002 Law "On Protection of Economic Competition." New companies and mergers/acquisitions face strict controls. Most investments, joint ventures with multiple partners, and share acquisitions require the Committee's approval. Those violating fair competition rules may be fined up to 10% of the prior year's turnover. If unfairly gained profit exceeds 10% of income, up to three times the normal penalty can be collected. The applicant, defendant, or a third party may appeal a Committee decision, but the appeal must be filed within two months after the decision is taken.
Privatization And Foreign Participation:
The State Property Fund oversees the privatization process in Ukraine. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers claim, however, that a common abuse of privatization laws is the adjustment of the terms of a privatization contest to fit the characteristics of a certain, pre-selected bidder. Few major, new privatizations have been conducted since the privatization rush of 2004. In 2005, Ukraine revoked the privatization of the Krivorizhstal steel factory, which had been sold to a group of domestic investors for $800 million, and subsequently sold it in a fair tender to Mittal Steel for $4.8 billion, in what is generally viewed as Ukraine's most transparent major privatization to date. Since then, Ukraine has taken no further steps to reverse previous privatizations.
No major privatizations took place in 2008, largely due to constant political wrangling over the privatization process. The government has identified the large chemical producer Odesa Portside Plant, the state telecommunications company Ukrtelekom, the Kryvorizhskyy Ore Mining and Processing Plant, and producer of turbines for power plants Turboatom as priorities for privatization, but none have moved forward. Other attempts at privatization in recent years were often marked by controversy. The government has also announced its intention to privatize approximately 120 of the 140 coal mines still owned by the government. There are concerns that a few Ukrainian and Russian firms are trying to acquire these mines without going through a fair, transparent privatization process.
Ukrainian law authorizes the government to set limits on foreign participation in "strategically important areas," although the wording is vague and rarely used in practice. Some strategically important companies, including natural monopolies, producers of military equipment, and some fuel and energy companies, are barred from privatization and foreign ownership. A company's "strategic status" can be lifted by Parliament, on the recommendation of the Cabinet of Ministers, and foreign entities would then be allowed to participate in its privatization. Foreign shares of TV and radio broadcasting and publishing companies are restricted, and can generally not exceed 30%. In January, 2006, Parliament adopted a new law "On Television and Radio Broadcasting" that eliminated restrictions on the share of foreign capital in the charter funds of television and radio broadcasting companies. Foreigners are prohibited from founding TV or radio stations, however.
Ukraine is not yet a signatory to the WTO Agreement on Government Procurement (GPA), but committed to initiate negotiations for GPA membership within two years of WTO accession. Ukraine has requested to become an observer to the GPA and is actively preparing its initial offer to begin the process of GPA accession.
Ukraine's procurement system had, until this year, operated based on the 2000 law "On Procurement of Goods, Works, and Services Using State Funds." Although this procurement law was originally largely in line with international practice, amendments made in 2004-2006 opened the system to widespread corruption and moved it away from international norms. Authority to carry out central oversight and policy development for the government procurement system was stripped from the Ministry of Economy, and those policy and oversight functions were dispersed across several bodies, weakening oversight and policy making, and creating various conflicts of interest and overlapping functions. The amendments also granted the Tender Chamber of Ukraine, purportedly a nongovernmental organization, the authority to monitor the procurement process and to undertake key operational functions that were inherently governmental. The Tender Chamber soon became the center of the procurement system's corruption and lack of transparency.
Parliament, responding to widespread complaints of the corruption and dysfunctional nature of the system, repealed the law on government procurement, including all amendments, on March 20, 2008. In place of the law, the Cabinet of Ministers issued a decree establishing temporary provisions for government procurement based largely on the procurement law as it existed in 2004, before the troublesome amendments. Under those temporary provisions, the Tender Chamber was eliminated, and the Ministry of Economy resumed its role as the central oversight and policy body for the procurement system and began to institute real reform. The Constitutional Court subsequently ruled the temporary provisions unconstitutional on technical grounds, however, leaving Ukraine without a functioning government procurement system. The Cabinet of Ministers quickly issued a new decree on October 17 closely tracking the previous temporary provisions. The constitutionality of the October 17 decree is not yet clear, although it was meant to meet the constitutional issue raised by the Court. A new draft procurement law was passed in the first reading on May 20, 2008 but is working its way slowly through the legislative process.
The Cabinet of Ministers decree currently in force requires that all government procurement of goods and services valued at more than UAH 100,000 (approximately $12,000) and public works valued at more than UAH 300,000 (approximately $35,000) must be procured through competitive tenders. Open international tenders are used when procurement is financed by any entity outside of Ukraine.
Ukraine's procurement rules generally do not restrict foreign enterprises from participating in government procurement, but in practice foreign companies claim that they are rarely able to compete on an equal footing with domestic companies. Foreign companies generally win only a tiny fraction of the total tenders. Among the problems faced by foreign firms are: (1) the lack of public notice of tender rules and requirements; (2) covert preferences in tender awards; (3) the imposition of conditions that were not part of the original tender requirements; and (4) ineffective grievance and dispute resolution mechanisms, which often allow a losing bidder to block the tender after the contract has been awarded.
Conversion and Transfer Policies
Restrictions On Converting/Transferring Funds:
The 1996 Law "On Foreign Investment" guarantees the "unhindered transfer" of profits, revenues, and other proceeds in foreign currency after taxes and other mandatory payments. By intervening in exchange markets, the National Bank of Ukraine (NBU) maintains a de facto peg of Ukraine's currency, the hryvnia, to the dollar. In 2008, the global financial crisis led to an extremely volatile currency market, with the NBU's hryvnia trading against the dollar at levels ranging from 5.05 to 7.88 (with the inter-bank market reaching even higher rates).
While foreign investors may repatriate earnings, companies must obtain a license from the NBU for some operations. For repatriation of hard currency, each transaction over $50,000 must be approved by the NBU. The NBU also charges a fee to review the transaction. Foreign exchange is readily available at market-determined rates, but in the last year these rates have proven to be highly volatile, presenting additional challenges to investors. In February 2005, the NBU lifted the 2% limitation on deviation of bank exchange rates from the official exchange rate, which had been in effect since October 2004. A pension fund tax is levied on transactions to purchase hard currency. The Law on the 2008 Budget lowered the tax from 1.0% to 0.5%.
Foreign investors have complained of cumbersome NBU regulations (2005 Resolutions 280 and 281) requiring them to open local accounts in Ukrainian banks and to use the services of Ukrainian brokers in order to make investments in Ukraine. Past direct investors seeking to liquidate and repatriate their investments face stringent documentary requirements, though the NBU has stated its willingness to waive requirements if documents from the original transactions are no longer available. On December 4, 2007, the NBU issued a new regulation requiring nonresident investors who wish to convert dividends or divestment income into foreign currency to provide proof of the initial foreign investment, making such operations more difficult.
In late 2008, the NBU issued a further series of regulations designed to respond to the financial crisis and devaluation of the hryvnia, which in practice have made repatriating funds and investment returns a more lengthy and cumbersome process. This includes limiting individual residents and non-residents ability to make monthly transfers of foreign currency to hryvnia 15,000/month without supporting documentation (e.g., court decision, contract, purchase invoice, etc.) or up to an equivalent of hryvnia 75,000/month with supporting documentation. Exemptions are allowed for medical expenses abroad or travel related to said expenses; payments connected with a death in the family abroad; money transfers made to enforce court or law enforcement decisions; and, transfers made as part of a permanent departure from Ukraine. Overall, while repatriating of funds is still permissible, it has become a much more lengthy process as the Government seeks to address capital flight and the global financial crisis.
As of November 2008, short term foreign currency loans (6 months) by foreigners to Ukrainians are subject to new restrictions. Loans to Ukrainian borrowers can no longer be paid directly to a foreign counterparty without transfer through the borrowers' bank account, which must be in a Ukrainian based bank (foreign or domestic), absent a special license from the NBU. In addition, interest rates which can be applied to each tranche of a loan to a Ukrainian borrower under a single facility are now capped based on the NBU's rates for loan agreements of similar terms. Previously, the NBU had relaxed the cap on foreign currency loans by foreigners to Ukrainians in an effort to attract foreign lending to Ukraine. This regulation removed the cap on loans in major currencies, except for those repayable within a year, which are still capped at 11% per annum regardless of whether the loan has fixed or floating rates and including all fees, penalties, default interest or other payments which might be part of the loan agreement. The NBU also simplified the documentary requirements for long term loans as part of this process.
Investors convert their earnings into foreign currency through commercial banks, which purchase foreign currency on the electronic inter-bank currency market. Commercial banks may trade foreign currency in electronic form with other banks through participation in electronic inter-bank currency market, regulated and operated by the NBU. To purchase hard currency, companies must provide their banks with a copy of their foreign trade contracts. In an attempt to expedite purchases of hard currency, in March, 2005, the NBU cancelled the requirement that companies obtain State Tax Administration permission to purchase hard currency. Commercial banks must announce their clients' intentions to sell on inter-bank currency market if the transactions exceeded $500,000. The Law "On the Circulation of Promissory Notes" provides an opportunity for payments in foreign currency and issuance and circulation of promissory notes, in accordance with the 1930 Geneva Convention "Providing a Uniform Law for Bills of Exchange and Promissory Notes."
At present, there is no legal parallel market that investors might use to remit returns on their investment such as convertible instruments or foreign currency denominated bonds, although this is an item that the Ministry of Finance and NBU are evaluating. There is no legal limit on the inflow or outflow of funds for profits, debt service, capital gains, returns on intellectual property, or export/imports; although again, this process has become significantly more complicated and time consuming due to recently passed and planned NBU regulations seeking to control currency flows.
Expropriation and Compensation
Under the 1996 Law "On the Regime of Foreign Investment," a qualified foreign investor is provided guarantees against nationalization, except in cases of national emergencies, accidents, or epidemics. Expropriation of property is rare, although in May 2008, the government abruptly cancelled a Production Sharing Agreement with a U.S. company to explore for oil and gas in the Black Sea. International institutions have recommended that definitions of expropriation and nationalization in the foreign investment law and bilateral treaties be expanded to include indirect and creeping expropriation. Courts can determine whether owners of privatized enterprises failed to pay for an enterprise or to implement investment commitments in a privatization sale. Failure to pay or invest allows the GOU, with court permission, to revoke ownership and resell the property.
Extent And Nature Of Investment Disputes:
The Embassy continues to provide advocacy on behalf of U.S. investors. For many years, investment disputes frequently have involved key problems with the investment climate such as the lack of adequate rule of law, fair and impartial dispute resolution mechanisms, and enforcement of domestic court and international arbitration decisions. Another problem is poor corporate governance (inadequate protection for shareholder rights, inadequate disclosure, asset-stripping, and voting fraud). Currently, there is no single point of contact in the Ukrainian government tasked to help resolve business and investment disputes involving foreign companies, although the Ukrainian Center for Foreign Investment Promotion, a state body commonly known as InvestUkraine (http://www.investukraine.org), has tried to take on this role but lacks the necessary clout within the government. Most U.S. businesses have little confidence in Ukrainian courts. Commercial contracts may permit the parties to use international arbitration or specified foreign courts to settle disputes. Though Ukrainian legislation recognizes international arbitration decisions, in practice such decisions can be very difficult to enforce in Ukraine.
Corruption continues to lie at the heart of many investor disputes. Laws and regulations are vague, with considerable room for interpretation, providing officials at every bureaucratic layer ample opportunities for rent seeking.
Description Of Ukraine's Legal System:
Ukraine has a civil law system relying on codes and separate legislative acts. The court system comprises the Constitutional Court, which interprets the Constitution and laws of Ukraine, and a system of courts of general jurisdiction. The courts of general jurisdiction are further divided into general courts, which handle civil, criminal, and administrative matters, and specialized commercial courts, which review business disputes, bankruptcy, and anti-monopoly cases. Both the general and commercial court systems feature a hierarchy of local and/or regional courts and appeals courts. The Supreme Court of Ukraine is the highest court in the system of courts of general jurisdiction.
The Law "On the Judiciary," in force as of June 2002, creates four levels of courts -- local courts, courts of appeal, courts of cassation (higher specialized courts), and the Supreme Court. This law also establishes an independent judicial department, the State Judicial Administration, to manage the court system, with the exception of the Supreme Court, which is self-administered. There is also a separate system of Administrative courts, and the Supreme Administrative Court started its work in 2005. The Administrative Procedural Code, which entered into force on September 1, 2005, governs the organization and work of the administrative courts.
Enforcement Of Rights:
Investors criticize Ukraine's legal system for its inefficiency, burdensome procedures, unpredictability, corruption, and susceptibility to political interference. Even when they obtain favorable decisions, investors claim the decisions are sometimes not enforced. The enforcement responsibilities fall under the State Enforcement Service, which reports to the Ministry of Justice.
The procedure for recognizing and enforcing foreign court decisions is regulated by Section 8 of the Code of Civil Court Procedures of Ukraine. In accordance with the Code, a foreign court decision is recognized and enforced in Ukraine if such recognition and enforcement is provided for in international treaties, the mandatory nature of which has been endorsed by the parliament, or based on a mutual ad-hoc agreement with a foreign state whose court has rendered a decision that is to be enforced in Ukraine.
The State Enforcement Service implements decisions rendered by foreign courts and arbitration tribunals in accordance with the Law "On Enforcement Proceedings." The Law "On Implementing Decisions and Applying Practices of the European Court of Human Rights" entered into force on March 30, 2006. Along with a subsequent Cabinet of Ministers implementing Resolution, the law obligates the Ministry of Justice to ensure implementation of the Court's decisions.
A new Civil Code and a competing Commercial Code both went into effect on January 1, 2004. Lawyers and judges have since grappled with how to implement the two conflicting laws. Despite heavy criticism of the Commercial Code by businessmen and GOU officials, Parliament has not yet taken action to amend or annul it. The Civil Code ensures protection of the rights of private property, of engaging in contracts, and of entrepreneurial activity. It provides a unified framework for economic regulations.
The Civil Code is generally market-oriented and modern, but the Commercial Code is often contrary to market economy principles and directly contradicts provisions of the Civil Code in numerous instances. The Commercial Code aims to preserve a privileged position for the public sector of the economy and allows for governmental interference in private commercial relations. Further, in both codes gaps in regulation exist. The existence of these two codes creates uncertainty in planning and structuring transactions, and leaves questions surrounding transactions unanswered. Problems arising from these two codes also surface in the resolution of disputes, as courts are not able to resolve the conflicting provisions of the codes, or are not able to fill in the gaps in regulation that arise as a result of the missing provisions in the codes. Finally, other commercial laws have not been harmonized with these codes.
A 1999 bankruptcy law provides for debtor-led reorganization, a meaningful moratorium on payment and collection of pre-existing debt, and a tax forgiveness provision. Creditors protect their rights under the law by electing a creditors' committee, which is actively involved in the bankruptcy proceedings. Most observers believe the bankruptcy laws should be amended to provide more protection for creditors. Notice provisions, protections for the rights of minority shareholders, and procedures for valuation and the sale of assets to satisfy liabilities are undeveloped.
Problems with corporate governance in Ukraine involve corporate ownership, shareholder rights, transparency, and disclosure. The Law "On Companies" offers scant protection for minority shareholders against insider dealing, asset stripping, profit skimming, and share dilution. Corporate finance is restricted. Some examples of shareholder rights abuses include limited disclosure, capital restructuring without shareholders' consent, and shareholder voting fraud. Nevertheless, a Company Register that was established in 2004 improved transparency. In September 2008, Parliament adopted a new Joint Stock Company law, drafted in consultation with international experts, meant to improve the current law by introducing sound corporate practices that meet international standards. The President signed the bill into law in October 2008, and most of the law's provisions will take effect from April 2009.
Binding International Arbitration:
Ukraine enacted an international commercial arbitration law in February 1994, which parallels commercial arbitration laws set forth by the United Nations Commission on International Trade Law. Ukraine is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitration Awards. Some investors have problems enforcing foreign arbitration awards in Ukraine. Foreign arbitral award enforcement procedures in Ukraine are regulated by a number of statutes and regulations, including the Section 8 of the Civil Procedural Code and a law "On Enforcement Proceedings." In early 2000 Ukraine ratified the Washington Convention, providing for use of the International Center for Settlement of Investment Disputes (ICSID), an internationally recognized mechanism for resolving investment disputes between investors and the GOU. The U.S.-Ukraine Bilateral Investment Treaty (BIT), signed in November 1996, recognizes arbitration of investment disputes before the ICSID. One major investment dispute involving a U.S. company was resolved in May 2006 through a combination of direct consultations with the Ukrainian government and international arbitration by ICSID.
There are no known cases of performance requirements imposed on foreign investors other than those clearly spelled out in privatizations conducted via open tender. Ukraine pledged to eliminate measures that conflict with the WTO Agreement on Trade-Related Investment Measures (TRIMs) in the automobile industry and other sectors in the context of its accession efforts.
Ukraine modified its foreign investment law of 1996 to provide foreign investors a number of state guarantees, the most important being the unhindered and immediate repatriation of profits and stable regulations for the time of the investment. Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company's charter fund. Some restrictions apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property.
Visa/Work Permit Requirements:
A passport valid for six months beyond the planned date of travel is required for entry. U.S. citizens are exempt from the requirement to have a Ukrainian visa as long as the duration of their stay in Ukraine does not exceed 180 days and the purpose of their travel is tourism, private travel, or business. U.S. citizens whose planned stay in Ukraine exceeds 180 days must have visas authorizing their entry into Ukraine. If the purpose of their visit is other than tourism, private travel, or business, an appropriate visa must be obtained regardless of the length of stay. The Government of Ukraine does not issue visas at its borders or ports of entry. Visas must be obtained in advance by those who need them.
U.S. citizens may apply for all types of visas through Ukrainian Embassies and Consulates overseas. Contact details for Ukrainian Embassies and Consulates are available on the Ministry of Foreign Affairs web site at http://www.mfa.gov.ua/mfa/en/305.htm or http://www.mfa.gov.ua/mfa/en/403.htm. Visas may be obtained from the Consular Office of the Embassy of Ukraine in Washington, D.C., or from Ukrainian Consulates General in New York, Chicago, or San Francisco.
Mandatory registration for short-term visits of up to 180 days is completed at the border by border control offices and is valid for a period of 180 days in one year. In other words, a traveler may come to Ukraine as a tourist for a cumulative period of 180 days within a consecutive period of 360 days without a visa. The calculation of the 180-day period begins from the date of the first entry into Ukraine. This regulation applies to all American citizens irrespective of the date of their entry into Ukraine.
Future extensions for stays exceeding 180 days are completed through the Ukrainian Ministry of Internal Affairs' Office of Citizenship, Immigration and Registration (OVIR). Most cities have several OVIR offices. Extensions are not automatic, however, and are valid only for continued presence in the country. It is not possible to depart Ukraine and return on the extension, nor can an adjustment to visa status be made from within Ukraine. Applications for extension of registration should be submitted at least three days before the current registration expires.
All foreigners -- except those with permanent residency status -- are required to have a work permit to work in Ukraine. The Laws of Ukraine "On Population Employment" and "On the Legal Status of Foreigners" define the procedures for obtaining a permit at the State Employment Service. Cabinet of Ministers Resolution #917 from July 11, 2007 introduced some changes to the rules surrounding work permits, although implementation of this new regulation has been unclear and inconsistent.
Resolution #917 states that, if a foreigner intends to travel to Ukraine for employment, the employer in Ukraine must obtain a work permit from the Ministry of Labor. The foreigner should then apply at a Ukrainian Consulate for an IM-1 visa. After the applicant enters Ukraine, he/she should submit his/her passport with the IM-1 visa and work permit to the local Department of Citizenship, Immigration, and Registration, which will provide a passport stamp allowing the person to leave and re-enter Ukraine. For stays longer than one year, the employer must apply to the Ministry of Labor for an extension of the work permit. If a foreigner enters Ukraine without a visa, the employer must apply to the Ministry of Labor for a work permit, and, upon approval, the employee must register with the Department of Citizenship, Immigration, and Registration. Spouses/family members of IM-1 visa holders are not automatically entitled to IM-1 status. However, if they intend to stay in Ukraine for more than 90 days, they must have a visa - most likely a P-1 (private) visa. When the IM-1 visa holder registers his/her work permit at the Department of Citizenship, Immigration, and Registration, he/she should request the same status for family members. Family members will receive a different stamp (most likely a permit for temporary residence) to allow them to stay in Ukraine and travel in/out of the country just like the IM-1 visa holder.
Cabinet of Ministers Instruction No. 892, dated September 12, 2005, extended work permits from one year to the tenure of employment for foreign citizens working in managerial or specialized positions in Ukraine and individuals providing services without their commercial presence in Ukraine. Employers must notify employment centers, police, and the State Committee for Border Protection three days before revoking contracts with foreign nationals.
Right to Private Ownership and Establishment
The Constitution of Ukraine guarantees the right to private ownership, including the right to own land. A new Land Code consistent with the Constitution was adopted on October 25, 2001. The Land Code provides for foreign ownership of non-agricultural land and clarifies the rights of foreign investors.
The major provisions of the Land Code address the right of individuals to own, buy, and sell land. It classifies land into seven categories, based on potential use including agricultural, industrial, and natural reserve lands. The mix of state control and ownership rights varies with each type of land. It is easier to own, buy, sell, and mortgage industrial land than agricultural land. A longstanding moratorium on the sale of agricultural land lapsed as of January 1, 2009. Although the sale of agricultural land is therefore now legal, it is not clear if the necessary procedures are in place to allow for sales in practice. It is also possible that Parliament will seek to reestablish the moratorium. The Land Code continues to restrict agricultural land purchases by any one legal entity to no more than 100 hectares until 2015. The Land Code also prohibits foreigners from owning agricultural land directly. The creation of a legal Ukrainian-registered business to purchase and manage land in Ukraine is not prohibited. The Land Code codifies the state's right to oversee private land transactions via registration, the court system, and dispute mediation, as well as broad government/state rights to "influence" the land market.
Ukraine's Law "On Ownership" recognizes private ownership and includes Ukrainian residents, foreign individuals, and foreign legal entities among those entities able to own property in Ukraine. It permits owners of property (including foreign investors and joint ventures) to use property for commercial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. The Law "On Ownership" is not comprehensive and mechanisms for the transfer of ownership rights are weak. Some difficulties have arisen when foreigners acquire majority control of enterprises, with the government or the current management in some cases continuing to exercise effective control of company decisions.
Protection of Property Rights
During the last few years, Ukraine's policymakers have launched several initiatives to develop a mortgage market, which have resulted in a strong increase in the number of mortgages and laid the legislative and administrative groundwork for a functioning mortgage market. Adoption of the Law "On Withholding Land Shares in Kind" in 2002 and the Law "On Mortgages" in 2003 was particularly important. The GOU created the State Mortgage Institution (SMI) in October 2004 with authorized capital of UAH 50 million ($6.6 million) as a liquidity facility largely aimed at putting downward pressure on lending rates by allocating capital efficiently. The SMI began issuing corporate securities during the first quarter of 2007. USAID helped create a pledge registry, the first of its kind in the former Soviet Union, which applies to individuals' obligations with regard to movable property and tax liens. Though rudimentary, the registry is nationwide, providing a more transparent lending market for personal property. The use of mortgages in Ukraine to secure ownership in property is growing rapidly -- apartments, houses, office buildings, other types of buildings, and summer house (dacha) plots have secured mortgages. Mortgage lending more than doubled in 2007, and increased by another 56 percent in the first eleven months of 2008 to reach UAH 78 billion (roughly $10 billion). Nearly all mortgage lending is for residential real estate loans, and the vast bulk of all mortgages -- about 88 percent -- is denominated or otherwise linked to a foreign currency, mostly U.S. dollars. New lending came to a virtual halt in late 2008 as a result of the ongoing financial crisis, as the real estate market experienced a severe correction and the local currency faced a sharp devaluation against the U.S. dollar.
Intellectual Property Rights (IPR):
The GOU has substantially improved its enforcement of IPR in recent years, in part to meet the requirements for WTO accession. Ukraine's IPR-related legal base is now almost fully in compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international norms. Law enforcement bodies have also stepped up efforts to seize IPR-infringing goods and to prosecute those involved in their trade. Perhaps most importantly, illegal production of pirated and counterfeit goods has been halted almost completely. On April 24, 2008, the Office of the United States Trade Representative lowered Ukraine's designation in its Special 301 Report from Priority Watch List to Watch List. The GOU still faces serious IPR enforcement problems, however, including widespread retail piracy, the transshipment of pirated and counterfeit goods, internet piracy, and government use of illegal software. The Ukrainian government meets regularly with U.S. Government officials and with U.S. and domestic industry representatives to monitor the progress of enforcement efforts through the U.S.-Ukraine IPR Enforcement Cooperation Group. Ukraine also meets biannually with European Commission officials as part of an EU-Ukraine IP Dialogue.
Despite the significant reduction of illegal production of optical discs, pirated discs remain widely available, particularly in large open-air markets throughout the country's larger cities; the Petrivka market in Kyiv is the most notorious. Industry reps estimate piracy levels for music and video at 60%, and for computer software at 84%. The transshipment of pirated and counterfeit goods, particularly optical discs produced in Russia, remains a serious problem, as does government procurement and use of unlicensed software.
Internet piracy is a nascent and growing problem in Ukraine. Many Ukraine-based websites offer pirated material for download with the full knowledge of their Internet Service Providers (ISPs). Industry groups estimate that out of the roughly 400 ISPs in Ukraine, 150 of them support websites offering pirated material. Microsoft has also complained that Local Area Networks (LAN), some of which cover entire Ukrainian cities, allow for widespread software piracy. Another common type of Internet piracy is on-line mail order sites.
Ministry of Internal Affairs officials have pointed to some successes in stopping the mail order piracy, but admit that file sharing/downloading is much more difficult. GOU representatives have argued that Ukrainian law does not give law enforcement officials clear authority to shut down websites, although sometimes ISPs can be persuaded to do so voluntarily. Because they are most often shut down without going through the courts, however, these sites can easily reappear on a new ISP or in a modified format.
Royalty Collecting Societies:
Rights holders have complained that some royalty collecting societies collect fees for public use of copyrighted material without authorization and do not properly return royalty payments to rights holders, and that the overall level of royalty payments in Ukraine remains low. An initial draft amendment to the Copyright Law failed to address industry concerns, and the draft is now being reworked.
Ukraine has improved its protection of undisclosed test data, such as that from drug trials, from unfair commercial use (TRIPS Article 39.3). In 2006, Parliament passed amendments to the law "On Medicinal Drugs," introducing a five-year period for the protection of undisclosed information in the course of registration of medical drugs, and to the law "On Pesticides and Agrochemicals," introducing a ten-year protection period for agricultural chemical products. Local representatives of large international pharmaceutical companies are generally satisfied with the new law but continue to complain of a lack of transparency by GOU bodies responsible for granting market approval for generic drugs.
Parliament passed a legal amendment in April 2008 to bring Ukraine's treatment of geographical indications (GIs) in line with WTO rules (TRIPS Articles 16, 17, 22, 24), and to meet certain requests made by the European Union.
Patent and Trademark:
Trademarked and copyrighted goods must be registered for a fee in the Customs Service's rights holder database in order to be guaranteed protection. Counterfeit goods, including products that contain protected trademarks, remain readily available in Ukraine. Counterfeit apparel products are particularly common. Most counterfeit goods are not produced in Ukraine, but are imported, although industry has reported instances of production of counterfeit cigarettes. There has also been growth in the amount of counterfeit pesticides on the market, and Ukraine does not have the technical capability to destroy some forms of counterfeit pesticides, complicating enforcement efforts.
The Ukrainian Ministry of Health does not routinely check the validity of patents when it grants marketing approval in Ukraine.
Civil IPR lawsuits remain rare because of a general lack of confidence in Ukraine's legal system, and because there are few judges properly trained in IPR law. Law enforcement officials also complain that too many IPR cases result only in small fines, ranging from 1700-3400 UAH (200-400 USD) for criminal cases and averaging only 250 UAH (30 USD) for administrative cases. The U.S. Government has worked closely with the Government of Ukraine to provide specialized IPR training to judges.
Transparency of the Regulatory System
Bureaucratic Regulatory Procedures:
The number of regulations, required certificates, and inspection regimes in Ukraine imposes a significant regulatory burden on private enterprise. While the time and costs related to business registration have been reduced, the GOU still requires enterprises to obtain numerous permits to conduct business. The Law "On Permits System in Economic Activity," which entered into force in January 2006, canceled more than half of the required permits and increased the number of locations for obtaining permits six fold. The government also tried to expand "One-stop Registration Shops" that allow new businesses to be registered within two to three days, instead of a month, as in the past. The World Bank "Doing Business 2009" report on 181 countries rated Ukraine 128th for ease in starting a business, down from 113th in the 2008 report. "Doing Business 2009" estimates that on average it takes 27 days and approximately $135 (5.5% of GNI per capita) to open a business in Ukraine; OECD averages are 13.4 days and 4.9% of GNI per capita.
Ukraine applies both activity and import licensing regimes. The Law "On Licensing Certain Types of Economic Activities" of June 2000 (and amended on January 17, 2002) provides a list of activities subject to licensing. Licensing applies to nearly 60 economic activities and is meant for protection of human, animal or plant health, the environment, public morals, and national security, or for prudential regulation of the financial sector. Businesspeople continue to cite burdensome activity licensing requirements as an impediment to commerce in Ukraine. Fees are described as high and compliance burdensome, particularly for telecommunications equipment.
Import licenses are required for some goods. The list of goods covered by the licensing regime and the license terms are decided annually by the Cabinet of Ministers. In 2008, the list included pesticides, alcohol products, sugar and sugar syrup, prepared food products containing cocoa, optical media production inputs, some industrial chemical products and equipment containing them, official foreign postage stamps, excise marks, officially stamped/headed paper, checks and securities, some goods that contain sensitive encryption technologies, and ozone-depleting substances. In 2008, the following goods were removed from the list requiring import licensing: beef, pork, cattle, pigs, poultry meat, and some other meat by-products.
While the licenses themselves are granted automatically to applicants, some products require a prior approval, which may or may not be automatic, from the relevant administrative agency before receiving the necessary import license from the Ministry of Economy. In 2008, the Ministry of Environment significantly tightened procedures for obtaining its approval to import goods that are potentially ozone-depleting. The stricter procedures delayed shipments and significantly increased business costs for importers of a wide range of goods, including aerosols, refrigerators, mascara, lipstick, toothpaste, and coffee makers. Throughout the WTO accession negotiations, the United States sought assurances from Ukraine that it would not impose restrictive import licensing requirements without adequate WTO justification, (e.g., on imports of mass-market, commercially-traded goods containing encryption that are covered by the Information Technology Agreement).
For some goods, product certification is a prerequisite for an import license. Importers can request that a foreign facility be certified as in compliance with Ukraine's technical regulations that apply to imports. The U.S. distilled spirits industry reports that this option usually involves a burdensome and costly inspection visit by Ukrainian government officials. If approved, the supplier receives a certificate of conformity valid for 2 years to 3 years and avoids the burden of certifying each shipment and mandatory laboratory testing upon arrival in Ukraine.
Proposed draft laws and regulations are available for public review on the official website of Parliament and executive government agencies, but there is no formal procedure for submitting comments.
Current Ukrainian legislation envisages a mandatory financial inspection of a business entity per year and requires a minimum of 10 days notice. Non-financial inspections (i.e. taxes, fire safety, sanitation, etc.) can be burdensome and impediments to doing business in Ukraine.
Technical Regulations - Standards, Testing, And Certification:
U.S. and other foreign companies have long regarded Ukraine's system of technical regulations as a significant obstacle to trade and investment. Ukraine has passed several new laws and governmental decrees in recent years aimed at bringing Ukrainian practices in this area into line with the WTO Agreement on Technical Barriers to Trade (TBT), but significant problems remain. Based on the old Soviet system, the Ukrainian technical regulations system is characterized by burdensome, ex ante control and widespread compulsory standards, and it differs markedly from systems in Europe and OECD countries.
Contrary to accepted international practice, standardizationin Ukraine is not a voluntary procedure through which manufacturers can ensure specific properties of a process or product, but rather a part of the state regulatory system. Standards are compulsory for virtually all goods, and many services. Mandatory certification is required in Ukraine for over 400 types of goods and services and remains applicable de facto for an even larger number of goods and services. Mandatory certification is often required without regard to the products' actual level of risk to the public, or to other types of regulation already applicable -- for example, for food products, which are already regulated by the Sanitary and Veterinary Services. Mandatory certification in Ukraine is applicable both to domestic products and to imported goods in most cases, generally irrespective of whether they already have proof of conformity with applicable international technical regulations. In addition, mandatory certification applies to produced goods rather than to the production process, thus forcing manufacturers to complete certification procedures repeatedly or to submit proof of conformity assessment for each batch of products.
Most current standards were created under the Soviet Union, do not correspond to international standards, and are typically far more restrictive and prescriptive than necessary. The International Finance Corporation estimates that over 12,000 of Ukraine's standards still need to be harmonized with international standards.
The State Committee for Technical Regulation and Consumer Policy (DerzhSpozhyvStandard), the standardization and certification body in Ukraine, is responsible simultaneously for development and approval of standards, issuing certificates, conducting inspections of producers, and ensuring market surveillance and protection of consumer rights. This confusion of functions, including the bundling together in DerzhSpozhyvStandardof functions of a commercial nature (certification) with state supervision functions, combined with the fact that the same organization provides certification services and appoints other certification bodies, means that there are considerable sources of conflicts of interest and of excessively discretionary powers. Moreover, many of these functions overlap in some areas with other government authorities, such as the Sanitary and Epidemiological Service and the State Committee for Veterinary Medicine. This reduces the effectiveness of supervision by creating confusion and conflicting requirements, is inefficient from the perspective of allocation of scarce state resources, and creates an undue burden on businesses. Appropriate resources, such as modern analytical equipment and reactants, are not available in most DerzhSpozhyvStandard laboratories. Depending on the type of product, testing, and applicable certification scheme, the certification process can take from 3 days to 1 month. Experts allege that government officials responsible for issuing licenses often require businesses to provide documents that are not mandatory, deliberately conceal information in order to confuse a potential licensee, or delay issuing documents in order to induce licensees to offer a bribe.
Ukraine pledged during WTO accession negotiations to continually review the list of products subject to mandatory certification and to reduce the number of products on this list if the legitimate objectives could be met in a less trade-restrictive manner. DerzhSpozhyvStandard issued two decrees in 2007 to reduce the number of products subject to mandatory certification but has made no additional progress in 2008. An April 2008 amendment to the law "On Standards, Technical Regulations, and Conformity Assessment Procedures" helped to ensure that Ukraine's authorities will accept the results of alternative methods of conformity assessment, including those performed in the United States. Ukraine's National Accreditation Agency is taking steps to become a member of the International Laboratory Accreditation Cooperation (ILAC), anticipated in 2009. Once an ILAC member, Ukraine should significantly increase the acceptance of test results of laboratories accredited with, and notified by, ILAC member bodies.
Sanitary And Phytosanitary (SPS) Measures:
Ukraine applies a range of SPS measures that restrict imports of a number of U.S. agricultural products, among them, pork, beef, and poultry. Industry has repeatedly complained that Ukraine's certification and approval process is lengthy, duplicative, and expensive. Over the past several years, Ukraine has passed amendments to several laws and regulations, most importantly to the law "On Veterinary Medicine" and the law "Quality and Safety of Food Products and Food Raw Materials," to bring its legislative and regulatory framework into compliance with requirements of the WTO SPS Agreement.
The following SPS issues may be of particular importance to companies doing business in Ukraine:
Overlapping State Authorities:Ukraine has maintained a complex and nontransparent oversight system for human and animal health measures that involves overlapping authority by the Veterinary Service, Sanitary Service, and DerzhSpozhyvStandard. Several legislative amendments passed as part of the WTO accession process made progress but did not solve entirely the problem of overlapping authority.
Beef, Beef Products, and Pork: A U.S.-Ukraine bilateral agreement reached during WTO negotiations addresses the terms of U.S. exports of beef, beef products, and pork to Ukraine. Although Ukraine has allowed the entry of certified U.S. beef and pork that meets veterinary certificate requirements, the lack of a functioning protocol on pork or on live swine for breeding continues to limit U.S. exports. Ukrainian veterinary authorities conducted a system audit of the U.S. system in 2007 but call for further audits, and in the meantime insist on individual plant inspections of U.S. producers.
Biotechnology:Ukraine has not established an approval process for agricultural biotechnology products. The absence of an approval process has resulted in unpredictable sales conditions for corn products, soybeans, and meal. The United States is working with Ukraine to establish procedures governing biotechnology that are supported by science-based risk assessment principles and guidelines, including those of the WTO SPS and TBT Agreements, the Codex Alimentarius, and the International Plant Protection Convention (IPPC). Although Parliament passed a law in 2007 establishing the framework for the creation, testing, and use of products of biotechnology, the necessary implementing regulations to open the market are still under development.
Efficient Capital Markets and Portfolio Investment
The Ukrainian banking system consists of the National Bank of Ukraine (NBU) and commercial banks. The NBU is responsible for monetary policy, licensing of commercial banks, and oversight of their activities. There are 197 banks registered in Ukraine, including 50 with foreign equity participation. The five largest banks control 30% of the market, representing the lowest market concentration level in all of central and eastern Europe. Foreign capital represents almost 40% of total capital in the banking sector as of October 1, 2008. Ukraine's banking system has grown rapidly in recent years, mostly on the back of strong foreign borrowing. The banking system has also modernized very rapidly. It is playing a growing role in the development and modernization of the economy as a whole, and is providing wider groups of the population with access to credit. Ukraine remains a cash economy, but the use of credit cards and ATM machines is on the rise. In absolute terms, however, the banking sector is still fairly small. Total bank assets in Ukraine are about UAH 510 billion, with total loan assets of UAH 370 billion (as of October 2007). Consumer lending had boomed and bank deposits grew to almost 40% of GDP.
The volume of consumer lending grew by 95% in 2007 and another 62% in January-November 2008. Non-performing loans were roughly 3.5% of total lending in late 2008. Foreign currency borrowing by Ukrainian banks has increased rapidly in recent years, and was about 31% of total bank deposits in late 2008. Loans denominated in foreign currency, however, were over 51% in late 2008. Greater reliance of banks on foreign borrowing to fund domestic lending operations raised concerns about the sensitivity of Ukraine's banking sector to international shocks. Foreign borrowing became more difficult in 2008, and in the final months of the year it dried up completely. As the Ukrainian hryvnia weakened in September and October of 2008, Ukrainian households withdrew significant amounts of bank deposits for conversion into hard currency. In October and November 2008, banks lost 13.3% of their household deposits. The lack of foreign funding, the drain on local deposits, and the rapidly worsening condition of banks' loan portfolios in the final months of 2008 pushed the banking sector into a crisis. In November 2008, the Government announced it had agreed to an IMF stand-by loan of $16.4 billion and an overall economic stabilization program. In addition to helping Ukraine meet its external debt commitments in 2008 - 2010, the loan was to be used to recapitalize the banking system. In late 2008 the IMF and international donors began working with the NBU and Ministry of Finance to establish a procedure to identify systemic banks in need of recapitalization or resolution. It is expected that the process will lead to a significant consolidation of the banking sector. At the same time, growth in the banking sector came to a standstill in late 2008. The IMF loan and the need for recapitalization is an indication that the Ukrainian banking sector will face serious challenges in 2009.
In January 2002, the Law "On Banks and Banking Activity" eliminated discrimination against foreign banks. It entrusted the NBU with issuing banking licenses and includes provisions to prevent money laundering. The NBU sets minimum capital requirements each year to be met by the banks by the year-end. Current minimum capital requirements range from UAH 20.04 million ($2.4 million) to UAH 133.3 million ($15.7 million). Foreign licensed banks may carry out all the same activities as domestic banks and there is no ceiling on their participation in the banking system. Foreign banks can operate via subsidiaries in Ukraine. Foreign licensed banks may carry out all activities that domestic banks do and there is no ceiling on their participation in the banking system, including operating via subsidiaries in Ukraine. In November 2006, Parliament approved an amendment to the law "On Banks and Banking Activity" permitting foreign banks to operate via branch offices. The law anticipates a transition period of five years and sets requirements for branches of foreign banks, including cooperation with the Financial Action Task Force and UAH 68.8 million ($8.1 million or EUR 6.2 million) minimum capital of the branch. Foreign banks have significantly increased their presence in Ukraine's banking sector in recent years, usually through the acquisition of Ukrainian banks. Foreign banks now account for approximately 31% of bank capital in Ukraine.
As a reaction to the sharp drop in bank deposits in late 2008, the NBU moved to impose restrictions on early withdrawal of deposits and ordered banks to review their existing deposit base and better classify accounts. The NBU also increased its monitoring of external private debt and increased reporting requirements for commercial banks. Deposit guarantees were doubled to $20,000 and further increases were being contemplated in late 2008. The government also took steps to implement the bank reconstruction and resolution plan foreseen in the IMF loan agreement. It is anticipated that if the exchange rate stabilizes and the outflow of deposits slows in the near future, the NBU may lift the ban on withdrawal of early deposits.
Currently, based on the 1996 Law "On Insurance," only insurance companies registered in Ukraine may carry out insurance operations. There is a lower minimum capital requirement for domestic insurance companies than insurance companies with foreign shareholders. Foreign insurance companies can invest in local companies, but to operate locally they are required to open branch offices. Parliament adopted amendments to the Law "On Insurance" in November 2006 and May 2007, however, that give foreign companies the right to operate in Ukraine through affiliates five years after Ukraine accedes to the WTO.
Ukraine has nine registered, privately-owned stock exchanges, with over 90% of trading in the official market done through PFTS, a broker/dealer SRO and electronic trading system which operates largely in compliance with international best practices. There is increasing competition in this sector, with plans underway to incorporate "market-maker" capabilities, while the Ukrainian Interbank Currency Exchange (UICE) has begun cooperating with NASDAQ-OMX to bring new technologies into the local market. In practice, however, significant trading continues to be done off-exchange, with some estimates placing this number at 90% of all securities market trading. The remaining seven exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises. The Government continues to try to consolidate this industry, but the process was slow in 2008 given the political and market environment.
Ukrainian law allows for the following types of securities:
- share securities (shares, investment certificates);
- debt securities (bonds of enterprises, state bonds of Ukraine, bonds of local loans, treasury obligations of Ukraine, savings (depository) certificates, bills of exchange);
- mortgage securities (mortgage bonds, mortgage certificates, mortgages, certificates of funds of operations with real estate);
- privatization securities;
- derivative securities;
- title securities
There are no legal restrictions on the free flow of financial resources needed to support growth in the product/factor markets. Credit is largely allocated on market terms and foreign investors are able to get credit on the local market, utilizing a variety of credit instruments. However, the market environment lacks transparency, enforcement of key laws and regulations remains weak, and investors (domestic and foreign) continue to face significant uncertainty. This includes low market confidence (hurt further by the 2008 global financial crisis), transitional accounting standards, a lack of accurate company information, inadequate protection of minority shareholders' rights, and a macroeconomic environment that, despite marked growth and economic modernization in recent years, remains volatile. Rulings of the Securities and Stock Market State Commission (SSMSC) and Financial Services Regulator (FSR) have insufficient enforcement power and are not always followed by the courts, while these institutions continue to face issues of budgetary/political independence which they are actively seeking to reform, in addition to challenges to their authority to properly regulate the markets.
Ukraine lacks a single central securities depository, but the market-owned MFS Depository is considered to be largely in line with G-30 requirements. The state-owned National Depository of Ukraine (NDU) remains in existence, but has little practical function. Recently, a significant decision was made by the Government and market participants to merge MFS into a single All Ukrainian Securities Depository (AUSD), established early this year by the National Bank and a group of Ukraine's largest banks. Over 300 licensed registrars continue to operate in Ukraine. Many are seen as "pocket registrars" and have been used in the past to disguise or eliminate ownership records.
Principal laws, decrees, and regulations governing Ukraine's capital markets include: the Law "On Securities and Stock Exchanges" (1991), replaced in May 2006 by the Law "On Securities and the Stock Market" (2006), the Law "On Business Associations" (1991), Law "On Joint Stock Companies" (2008), a Presidential Decree "On Investment Funds and Investment Companies" (1994), the Law "On State Regulation of Securities Markets" (1996), the Law "On the National Depository System" (1997), the Law "On Accounting and Financial Reporting" (1999), the Law "On Bankruptcy" (1992), the Law "On Collective Investment Institutions" (2001), and the Law "On Financial Services" (2001).
The new Law "On Joint Stock Companies" (2008) represents a major improvement over the Law "On Business Associations" which was vague and did not support basic shareholders rights and facilitates a large number of corporate governance abuses (including share dilution, asset stripping, and dubious transfer pricing). The new law aims to define critical conditions and standards for establishing, governing and closing of joint stock companies, while also significantly improving legal protections for minority shareholders and filling numerous loopholes/gaps in the legal framework. It is largely in compliance with EU Directives on corporate governance and incorporates OECD Principles for Corporate Governance.
The Law "On Securities and Stock Market" (2006) represents a major improvement over the prior Law "On Securities and Stock Exchanges" (1991), especially regarding internationally compliant disclosure requirements for listed companies, issues of transparency of ownership, and the new rules for insider information and insider trading.
The Law "On Collective Investment Institutions" encourages the creation of mutual funds, introduces the idea of a licensed asset manager, regulates the establishment and operation of subjects of mutual investment, provides guarantees of ownership rights to securities, and protects rights of exchange market participants. The Law "On the Circulation of Promissory Notes" (2001) provides a framework for the circulation of promissory notes in accordance with the Geneva Convention of 1930. The legal framework and regulatory system for portfolio investment does therefore exist, although substantial work remains to insure it is properly applied and enforced.
Ukraine is largely free of significant civil unrest or any organized anti-American domestic political movements. Occasionally, mass demonstrations occur in larger cities, such as Kyiv, and are usually sponsored by individual political organizations. There has been an upsurge in the number of anti-NATO protests; these protests are likely to increase in size and frequency as Ukraine pursues closer ties to the alliance. While the majority of these protests are small and peaceful, they can still result in violence.
There also have been increasing incidents of racially-motivated violence; groups of "skinheads" and neo-Nazis target people of Asian, African, or other non-European descent, as well as religious minorities, in Kyiv and throughout Ukraine.
Viktor Yanukovych, the leader of the opposition Party of Regions, announced that his party would take its opposition to the economic policies of the Tymoshenko government to the streets in March 2009. Nonetheless, the likelihood of future widespread, politically inspired violence that would affect foreign property interests remains relatively low.
Corruption, which pervades all levels of society and government and all spheres of economic activity in Ukraine, is a major obstacle to foreign investment. Ukraine worsened in Transparency International's Year 2008 Corruption Perception Index (CPI), which was published in September 2008. The country moved down to 134th place in 2008 on the list of 180 countries, from 105th place in 2007. In 2008, Transparency International rated Ukraine at 2.5 points on the CPI's 10-point scale, a decline from the 2007 rating of 2.7 points.
Corruption stems from a number of factors, such as a lack of institutional traditions of transparent decision-making and low societal understanding of the importance of corporate governance and transparency. Low public sector salaries fuel corruption in local administrative bodies such as the highway police, the health system, the tax administration, and the education system. Corruption within the Customs Service often makes it more difficult and more costly for businesses to import/export goods. High-level corruption ranges from misuse of government resources and tax evasion to non-transparent privatization and procurement procedures. In short, corruption impacts the daily lives of Ukraine's citizens and important decisions taken at the state level.
Ukraine's prosecution of corruption is based on the Law "On Combating Corruption," which was passed in October 1995. The law is rarely enforced, and on the rare occasions it is enforced, it is normally aimed at lower-level state employees or used retributively in political vendettas. In January 2006, the President Yushchenko signed a decree requiring Ukraine to honor its obligations to the Council of Europe, which include several anti-corruption provisions. In September 2006, the President signed a separate decree adopting a national anti-corruption strategy that directs all branches of government to support these efforts, and the Government of Ukraine followed up by adopting an Action Plan to implement this strategy. In October 2006, the President submitted to parliament a package of draft laws on anti-corruption and ratification instruments for the Council of Europe Criminal Law Convention on Corruption and the UN Convention against Corruption. In August 2007 the President announced a list of several "anti-corruption initiatives" including the setting up of a single anti-corruption agency that would develop a comprehensive anti-corruption policy and implement various anti-corruption measures.
In 2006 the U.S. Millennium Challenge Corporation funded Ukraine's proposal for a Threshold Country Program aimed at reducing corruption. This two-year program is providing about $45 million in assistance to reform the judiciary, streamline regulatory procedures, institute internal assets declaration and inspector generals, enhance civil society and media monitoring of corruption, and reduce corruption in higher education admissions through standardized testing.
Although government action is still limited and uncoordinated, fundamental changes have taken place in the GOU's attitude towards corruption. Gone are the days when GOU officials refused to admit that corruption existed in Ukraine. Government and parliamentary officials now openly discuss the problem of corruption with USG contacts and with the press and public at large. In March 2005, Ukraine ratified the Council of Europe Civil Law Convention on Corruption and became a member of the Council of Europe's Group of States Against Corruption (GRECO). GRECO has concluded its Joint First and Second Rounds of Evaluation of Ukraine and published its report in October 2007. Parliament has passed laws to ratify the Council of Europe Criminal Law Convention on Corruption, signed in January 1999, and the UN Anticorruption Convention, signed in December 2003. However, ratification of these Conventions will come into effect only when additional implementing legislation is adopted. Ukraine is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Bilateral Investment Agreements
Bilateral Investment Agreements:
The Bilateral Investment Treaty between the United States and Ukraine came into force on November 16, 1996. The following countries have also signed bilateral investment agreements with Ukraine: Albania (2004), Austria (1996), Argentina (1995), Armenia (1994), Azerbaijan (1997), Belarus (1995), Belgium (2001), Bulgaria (1994), Brunei (2006), Canada (1994), Chile (1995), China (1992), Cuba (1995), Croatia (1997), the Czech Republic (1994), Denmark (1992), Egypt (1992), Estonia (1995), Finland (1992), France (1994), Gambia (2006), Georgia (1995), Germany (1993), Greece (1994), Indonesia (1996), Iran (1996), Israel (1995), Italy (1993), Hungary (1995), Kazakhstan (1994), Korea (1996), Kyrgyzstan (1993), Latvia (1997), Lebanon (1996), Lithuania (1994), Macedonia (1998), Moldova (1995), Mongolia (1992), the Netherlands (1994), Panama (2005), Poland (1993), Portugal (2003), Russia (1998), Saudi Arabia (2003), Slovakia (1994), Slovenia (1999), South Korea (1996), Spain (1998), Sweden (1995), Switzerland (1995), Turkmenistan (1998), Turkey (1996), UK (1993), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), Yemen (2002).
OPIC and Other Investment Insurance Programs
The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in Washington on May 6, 1992. OPIC halted support for projects in Ukraine in 1999, however, after the government of Ukraine failed to reimburse OPIC for OPIC's payment of a claim by a U.S. business whose investment had been expropriated. The government is now working to find a resolution to this dispute. Negotiations aimed at settling the outstanding claim were making progress in 2008, but late in the year the Government of Ukraine imposed additional requirements on a proposed solution, likely delaying OPIC's return for an indefinite period of time.
In July 2002, the Board of the U.S. Export-Import bank opened facilities for short and medium-term (up to seven years) lending for commercial, and sub-sovereign projects. Ukraine is a member of the Multilateral Investment Guarantee Agency (MIGA).
Ukraine has a well-educated and skilled labor force with nearly a 100 percent literacy rate. As of June 2008, unemployment (ILO methodology) stood at 6.8 percent, although unemployment in some regions, particularly in western Ukraine, was significantly higher. Reports indicate that unemployment nationwide is already on the rise, and Ukraine is expected to experience a pronounced recession in 2009 that will drive unemployment up significantly.
Wages in Ukraine remain low by Western standards. As of November 2008, the nominal average monthly wage in Ukraine was UAH 1823 ($214), up 22.8% from UAH 1485 in November 2007. Real wages grew 7.2% between January and November 2008, compared to the same period in 2007. The highest wages are in the financial and aviation sectors while the lowest wages are paid to agricultural and public health workers.
The minimum monthly wage as of December 1, 2008 was UAH 605 (approximately $75). The government regularly increases the minimum wage.
In 2004 Ukraine began a comprehensive pension reform program, based on international standards, which envisaged a three-pillar system: Pillar I, a solidarity system, Pillar II, a mandatory accumulation system, and Pillar III, a voluntary private pension system.
For Pillar I, retirement payouts are determined on the basis of the individual's labor records and contributions. The system follows "pay as you go" principles, meaning the contributions of today's workers fund today's pensioners. Despite major reform, the Pillar I system remains financially unsustainable. At 17% of GDP, Ukraine spends the highest amount on pensions in the region, and with a declining and rapidly aging population, costs continue to rise rapidly. Employer contributions at 33.2% of wages exacerbate shortfalls in financing by encouraging substantial underreporting of income to evade high pension contributions. The result is growing pressure to subsidize basic pensions using revenues from the general government budget.
Pillar II, the Mandatory Accumulation System, is not yet enacted in Ukraine, although the draft legislation passed the first reading in April 2007. Once enacted, the law will mandate that each Ukrainian worker contribute to an individual retirement account. The law is designed to pre-fund a part of the public pension to relieve pressure on the current "pay as you go" system. The success of Pillar II will depend on achieving long-run fiscal sustainability of the first pillar and establishing the necessary operational systems. When implemented, Pillar II will generate substantial domestic long-term savings to finance economic growth. Introduction of Pillar II is not expected before 2011.
Pillar III, voluntary private pension funds, began operations at the end of 2004. These funds are the only effective, tax-favored method workers have to supplement their retirement income through voluntary savings. Since 2004 the number of private pension funds has grown rapidly, but they still remain a minor financial actor. In an economy with over 16 million workers, the 50 active funds service only 400,000 participants and have assets of under $100 million. Moreover, Ukraine's underdeveloped capital markets do not provide private pension funds with sufficient sound, long-term investment opportunities. As a result, 36% of assets are invested in bank deposits (average return 13.4% in 2007). An additional 41% are invested incorporate bonds (average return 14.3% in 2007). The legal framework required to support successful private pension funds is still weak and regulatory oversight is even weaker. Various international donor initiatives are supporting the Ukrainian government's efforts to strengthen the legal framework and effectiveness of regulatory oversight. Due to weaknesses in market structure, non-transparency, lack of public trust, and low income, however, private pension funds are not likely to be a major source of investment funds in the near future.
Ukrainian workers are generally accustomed to "top-down" management practices and therefore tend not to demonstrate initiative. A younger, more independent-minded generation is slowly moving into the workforce, and it is becoming easier to find professional personnel who function independently.
Although investors may encounter government resistance to trimming the work force to an efficient level, across-the-board demands to maintain employment levels are disappearing. Ukrainian enterprises often still maintain much of the social infrastructure of their immediate community (schools for local children, cafeterias, and medical facilities). While many local officials are willing to work with businesses to identify social services that an enterprise must support, such arrangements should be clearly spelled out before investments are started.
Ukraine's Labor Code remains outdated and inappropriate for a market economy. The government has drafted a new, more modern Labor Code with assistance from the International Labor Organization, but Parliament is still considering the draft legislation.
Foreign Trade Zones/ Free Ports
Ukraine has in the past maintained special economic zones (SEZs), but in 2005 canceled all tax exemptions (i.e., from land tax, corporate income tax, import duty, and VAT on imports) to investors in all SEZs to stop large-scale misuse of these zones for tax evasion and smuggling. While some officials argue for restoring the SEZs, there has been no movement in recent years.
Foreign Direct Investment Statistics
Foreign Direct Investment:
According to Ukraine's State Statistics Committee, as of October 2008 the total stock of FDI in Ukraine was $37.6 billion, or $813 per capita. This was a 39.8% increase from October 2007, when the total stock of FDI stood at $26.9 billion, or $576 per capita.
FDI By Country:
As of October 1, 2008 Ukraine's major investors included: Cyprus (22.7% of total FDI), Germany (18.1%), the Netherlands (8.6%), Austria (6.8%), the United Kingdom (6.2%), Russia (5.6%), and the United States (4.0%). Cyprus remains a popular offshore destination for Ukrainian and Russian enterprises through which to channel investments.
FDI By Industry Sector Destination:
Over the first 9 months of 2008, 29.0% of new FDI went to the financial sector, 13.8% -- to real estate, 11.7% -- to heavy industry, 9.3% -- to domestic trade, and 5.8% -- to construction.