2012 Investment Climate Statement - Ukraine
Openness to Foreign Investment
GOVERNMENT'S ATTITUDE TOWARDS FOREIGN INVESTMENT
President Yanukovych has prioritized investment and economic growth in his Economic Reform Plan and has repeated publicly that he wants to make Ukraine more attractive to foreign investors. However, conditions for doing business and the overall investment climate remain very difficult. Complex tax and customs codes, byzantine laws and regulations, poor corporate governance, weak enforcement of contract law by courts which allow and sometimes protect corporate raiding, and official corruption have made Ukraine a difficult place to invest. In fact, although the Government of Ukraine (GOU) has listed improving the investment climate as a top economic policy goal since 2004, the overall investment and business climate remains poor, as evidenced by its low ranking-- 145 out of 183 economies -- in the World Bank's Doing Business Report for 2011 and by anemic figures for Foreign Direct Investment (FDI) in recent years. Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and a high level of corruption in the country, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.
Ukraine will see some economic growth in 2012 as it continues to recover from a 15% GDP contraction after the 2008-2009 global financial and economic crisis. However, economic growth has been modest by emerging market standards– it grew by 4.3% in 2010 and 4.7% in 2011. Ukraine received no disbursements in 2011 from its 2010 Stand-By Agreement with the IMF, due to the GOU’s failure to implement several key requirements, including reducing subsidies for domestic gas prices. The 2010 IMF agreement (which followed a 2008 IMF loan that went off track in late 2009) envisioned $15.2 billion in financing to improve Ukraine’s macroeconomic situation and facilitate structural reforms.
Free Trade Agreement negotiations with the European Union that could move Ukraine toward a more open and transparent trade regime and help improve the investment climate were finalized in 2011. However, formal approval and implementation of the agreement has foundered on broader non-economic criteria. Ukrainian legislation provides for national treatment of foreign investors, in line with its World Trade Organization (WTO) commitments.
Despite the difficult operating environment, some investors are finding opportunities in Ukraine.
For their part, officials at local levels are increasingly looking to attract investment and create jobs in their regions. In many instances, these local officials have become willing partners for investors in need of land or permits, which frequently are controlled below the national levels. While it was anticipated that Ukraine’s preparations to co-host the Euro 2012 Soccer Championship would open opportunities for public-private partnerships and investment in infrastructure, in practice, the process for awarding tenders and contracts has highlighted the problems of corruption and government bureaucracy in Ukraine, and discouraged many international companies from participating.
MAJOR LAWS/RULES AFFECTING FOREIGN INVESTMENT
The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment activity in Ukraine. In addition, the following key laws and regulations pertain to foreign investment:
Law "On the Foreign Investment Regime" (1996), which provides for equal treatment of foreign and Ukrainian-owned business with some restrictions in broadcasting and weapons manufacturing;
Law "On the Protection of Foreign Investment" (1991);
Cabinet of Ministers' Resolution "On the Procedure for the State Registration of Foreign Investment" (1996);
Law of Ukraine “On Production-Sharing Agreements” (the “PSA Law”), which was passed in1999 and amended in 2011.
The Land Code (2001) provided for private ownership of land, facilitating the privatization of land for agricultural purposes, but also established a moratorium on agricultural land sales. Although the moratorium was set to expire in 2012, it has been extended. As a result, agricultural land sales are still not possible. The Land Code also prohibits foreign ownership of farmland. Since 2001 there have been a number of efforts to create the land market. The Government has adopted a Law “On Land Cadastre” (in force from January 1, 2013) and planned to allow the land sale from January 1, 2012. However, the current moratorium has been prolonged until January 1, 2013. Also, according to the legislative initiatives only physical persons who are citizens of Ukraine can own land. The legislation also limits the size of land plots to be owned by one person.
-- National Bank of Ukraine Resolution "On Regulation of Foreign Investing in Ukraine" (2005);
-- Law "On Amending Certain Laws of Ukraine with the Purpose of Overcoming Negative Impacts of the Financial Crisis" (2009);
-- Both a Civil Code and a competing 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 incompatible with market economics, and most experts believe it should be eliminated entirely.
RESTRICTIONS ON FOREIGN INVESTMENT AND REVIEW COMMITTEES
Under Ukrainian law, certain types of business activity may be pursued by state-owned enterprises only. These include some natural monopolies, the rocket industry, the production of bio-ethanol, and the printing of banknotes and blank securities forms.
In addition, 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. Generally, these restrictions limit the maximum permissible percentage of foreign investment into Ukrainian firms in these sectors. For example, the share of foreign investors' participation in Ukrainian publishing houses is limited to 30%. Investments in the energy sector can also be problematic. 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. Although foreigners are prohibited from founding TV or radio stations, they can invest in already established entities in this area. In addition, foreign entities cannot buy agricultural land.
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.
In April 2010, Ukraine canceled the mandatory registration requirement for foreign investment, which had been in force since November 2009.
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. The State Property Fund has a multi-year plan to privatize 90% of all remaining state assets between 2011 and 2014, with estimated revenues of UAH 70 - UAH 80 billion ($8.75-10 billion).
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.
The most prominent privatization of 2011 involved Ukrtelekom (Ukraine's monopoly state telecommunications operator), which was privatized following a non-transparent and controversial tender process. Although an Austrian investment firm won the single-bid tender, the true ownership and motivations of the winning bidder remain a mystery and the future of the company remains in doubt. A number of power sector assets were also privatized in 2011. The government has identified a large chemical producer (Odessa Portside Plant), more energy generation companies, the Kryvorizhskiy Ore Mining and Processing Plant, regional power plants, and a producer of turbines for power plants Turboatom as priorities for future privatization.
CUSTOMS AND DUTIES
Burdensome customs clearance procedures are a disincentive to investment in Ukraine. A new Customs Code was passed by the Rada in late 2011, but vetoed by President Yanukovych in December. Imported goods entering Ukraine often must be "cleared" by a number of state bodies, some of which do not operate 24 hours a day, causing extended delays. Corruption in Customs 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 and value added tax owed -- as a major obstacle to doing business in Ukraine. Companies are sometimes pressured to use specific “facilitators” to clear goods through Customs, often at substantial cost. Individual businesspeople have had instances were Customs officials have confiscated or attempted to confiscate personal belongings, including jewelry, laptops, and smart phones upon entry into Ukraine, ostensibly for failure to declare these goods on arrival.
Ukraine continues to maintain licensing requirements and fees on certain imports. Ukraine imposes several duties and taxes on imported goods: customs/import tariffs, value added tax (VAT), and excise duties. Additionally, imports into Ukraine are subject to customs processing fees, a unified fee on vehicles crossing Ukraine’s borders, and port fees.
Imports from the United States are subject to Ukraine’s MFN simple applied tariff rate, which slightly increased in 2011 to an average of 4.8 percent, up from the 4.6 percent in 2010. According to the Ministry of Economic Development and Trade (MEDT), this is connected with Ukraine’s transition to the new Harmonized Schedule of Goods and Tariffs (2007), from which some goods’ groups were removed or reorganized. For agricultural goods, the average applied tariff rate is now 8.7 percent. For industrial goods the average applied rate is now 3.6 percent. Ukraine applies preferential tariff rates to imports from its 12 free trade agreement partners and certain Commonwealth of Independent States (CIS) countries. Ukraine concluded negotiations for a Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union in 2011. It has not yet come into force, but when implemented the DCFTA should lower tariffs for a wide range of goods from EU members states. Most MFN customs tariffs are levied at ad valorem rates, and only 1.5 percent of tariff lines (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 such as carrots and potatoes.
Although Ukraine's MFN tariff rates are relatively low, the State Customs Service of Ukraine (SCSU) continues to assign higher customs values to U.S. imports, including to food and agricultural products and pharmaceuticals, than is declared in the import documentation. There are concerns on how the SCS is determining and/or calculating these values. For some shipments, it is alleged that the result is a customs valuation 100 percent higher than what was declared in the import documentation. Since customs valuation decisions are not published, this lack of transparency is problematic. Importers who have sought to appeal the assigned customs valuation have been instructed by the SCS to have the government from the country of the product’s origin provide verification. These practices have made importing U.S. meat products, in particular, expensive and have impeded trade in these products. The U.S. Government has raised its concerns about these valuation practices, including at the 2010 Trade and Investment Council meeting.
Import licenses are required for some goods. The list of goods covered by the licensing regime and the license terms are reviewed and amended annually by the Cabinet of Ministers. In 2011, the list included printers’ ink, paper with watermarks, optical media production inputs such as polycarbonate, equipment for CD production, pharmaceuticals, paints and lacquers, dyes, hygiene products, cosmetic products, pedicure and manicure products, shaving aerosols and deodorants, lubricants, waxes, shoe polishes, insecticides, solvents, silicone, fire extinguishers and chemicals that fill extinguishers, refrigerators and freezers, air-conditioners, humidifiers, and other selected industrial chemical products, poultry, meat and meat products (Harmonized Schedule Line 0105), salo, pig and poultry fat, fungicides, insecticides, herbicides, and plant growth adjusters.
Ukraine is not yet a party to the WTO Agreement on Government Procurement (GPA), but became an observer to the WTO Committee on Government Procurement in February 2009. While Ukraine committed to initiating negotiations for GPA membership within two years of its WTO accession, negotiations have not begun. Ukraine is reportedly preparing its initial offer to begin the process of GPA accession.
In July 2010, Ukraine passed a new government procurement law. The U.S. government, coordinating with the World Bank and other international donors, provided technical assistance during the drafting process. The procurement law was amended soon after its passage, and important elements were weakened. Some of these changes were reversed after intervention by the U.S. and other donors in 2011. However, important parts of government procurement, for instance EURO 2012 preparations, remain excluded.
The law, which is now in force, requires that all government procurement of goods and services valued at more than UAH 100,000 (approximately $12,500) and public works valued at more than UAH 300,000 (approximately $38,000) must be procured through competitive tenders. Open international tenders are used where procurement is financed by an entity outside of Ukraine. The Anti-Monopoly Committee of Ukraine has the power to review disputes arising from public procurements related to procurement procedures through its Complaint Board. Courts may also hear government procurement-related cases. Cases must be filed on tight timelines, often within 14 days of the alleged violation.
The MEDT continues to have principal regulatory and supervisory authority in the field of the public procurement.
The main changes introduced by the law include the following:
non-residents of Ukraine will be able to participate in the public procurement procedures on a parity basis with Ukrainian residents;
the Anti-Monopoly Committee of Ukraine (the "AMC") will have the power to review disputes arising out of public procurement procedures (previously the tender participant's appeals would have been addressed to the MEDT or directly to the tender organizer --i.e. the customer.) Courts may still review disputes as well;
the period for consideration of an appeal has been extended from 20 to 30 business days;
tougher qualification requirements of bid participants or for preliminary qualification have been introduced. For instance, under the new rules, the tender participant must submit bank statements confirming details of any indebtedness;
public procurement mechanisms such as "reduction" and "bids with limited participation" have been removed. Other public procurement procedures, such as open bids, two-step bids, and procurement from the sole participant, have also been modified to make these procedures more transparent;
administrative fines imposed for infringement of public procurement laws have been increased to a maximum of UAH 17,000 (US$2,125).
Ukraine's procurement rules generally do not restrict foreign enterprises from participating in government procurement. In practice, however, 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 tenders. Among the problems faced by foreign firms are: (1) the lack of public notice of tender rules and requirements; (2) non-transparent 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.
TI Corruption Index
152 out of 182
Heritage Economic Freedom
164 out of 179
World Bank Doing Business
152 out of 183
MCC Gov’t Effectiveness
MCC Rule of Law
MCC Control of Corruption
MCC Fiscal Policy
MCC Trade Policy
MCC Regulatory Quality
MCC Business Start Up
MCC Land Rights Access
MCC Natural Resource Mgmt
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.
While foreign investors may repatriate earnings, companies must obtain a license from the National Bank of Ukraine (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 generally readily available at market-determined rates. The exchange rate for Ukraine's currency, the hryvnia (UAH) was relatively stable in late 2010 and throughout the first three quarters of 2011, trading at about UAH 8 per one dollar, after a period of high volatility linked to 2008-2009 financial crisis. The imposition of onerous documentary requirements for foreign exchange in 2011 without adequate advance notice, ostensibly to curb money laundering and combat the shadow economy, resulted in widespread confusion and difficulties for foreign exchange purchasers. These requirements were temporarily suspended after a public outcry but may be reintroduced at any time.
A pension fund tax on hard currency purchases was canceled beginning July 1, 2010.
On April 27, 2010 Ukraine’s parliament reversed almost all amendments, introduced in June 2009 to fight the economic crisis, which had complicated investment procedures. The new legislation canceled the requirement to open investment accounts with local banks, mandatory registration of investments, and requirements for investment transactions in hryvnia only. The Law "On The Foreign Investment Regime" envisages voluntary registration of foreign investment with the MEDT. However, only registered foreign investments have the right to guarantees and privileges envisaged by the law.
In late 2008, the NBU issued a series of regulations designed to respond to the financial crisis and limit capital flight. Some of these regulations are still in place as of the end of 2011, and include limiting individual residents' and non-residents' monthly transfers of foreign currency to 15,000 hryvnia ($1900) per day without supporting documentation (e.g., court decision, contract, purchase invoice, etc.) or up to an equivalent of 75,000 hryvnia a month without supporting documentation. Exemptions are allowed for medical expenses abroad or travel related to said expenses; or payments connected with a death in the family abroad; or money transfers made to enforce court or law enforcement decisions; as well as transfers made as part of a permanent departure from Ukraine.
As part of the anti-crisis measures, the GOU banned issuing consumer loans in hard currency beginning November 2011. In September 2010, the NBU reinstated a 20% reserve requirement on short-term currency loans and deposits obtained by banks from foreigners. Previously, the NBU had relaxed the cap on foreign currency loans by foreigners to Ukrainians in an effort to attract foreign lending to Ukraine. However, starting in November 2010, the NBU obliged non-financial companies that issue guarantees on foreign loans to obtain NBU licensing to execute such guarantees. The measure is aimed at limiting currency outflow from Ukraine.
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. Commercial banks must announce their clients' intentions to sell on inter-bank currency market if the transactions exceed $500,000. The Law "On the Circulation of Promissory Notes" provides an opportunity for payments in foreign currency and issuance and circulation of promissory notes, in accordance with the 1930 Geneva Convention "Providing a Uniform Law for Bills of Exchange and Promissory Notes."
At present, there is no developed legal parallel market that investors might use to remit returns on their investment such as convertible instruments or foreign currency denominated bonds. In December 2011, in an attempt to increase the range of instruments available, the Rada adopted legislative amendments to permit issuance of domestic government bonds denominated in hard currency. The GOU launched placement of such bonds in the same month. 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.
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. Nonresident investors who wish to convert dividends or divestment income into foreign currency must provide proof of the initial foreign investment.
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. On November 17, 2009 the Parliament adopted the law on transfer of land plots and property for public needs. The law gives clear definition of public need, defines procedures for such an expropriation, and provides a list of possible reasons for expropriation for public needs.
Expropriation of property is rare, although in 2008, the government abruptly cancelled a Production Sharing Agreement to explore for oil and gas in the Black Sea. Negotiations with the investor are ongoing. In 2010 law enforcement officials forcibly removed a U.S.-invested floating restaurant from its moorage on the Kyiv waterfront without providing documentation or further access to the owners. 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 have the jurisdiction to 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. These investment disputes frequently reflect the key problems in Ukraine’s investment climate such as inadequate rule of law, a lack of fair and impartial dispute resolution mechanisms, official corruption, and poor enforcement of domestic court and international arbitration decisions. Another problem is poor corporate governance (inadequate protection for shareholder rights, insufficient 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. 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.
If a foreign investor is involved in a dispute with the State Tax Administration (STA), the STA will often request that the Ministry of Economic Development and Trade impose sanctions against the foreign company, preventing it from clearing its goods through customs or engaging in financial transactions with entities outside of Ukraine. The State Customs Service has also used the non-tariff barrier of 'quality certification' to impose de-facto bans on exports of selected commodities. Export quotas, awarded in a non-transparent fashion, and export tariffs have also been introduced on short notice, negatively impacting foreign investors’ ability to run their businesses. Such practices are not codified in Ukrainian law, but are part of the government's standard procedures.
DESCRIPTION OF UKRAINE'S LEGAL SYSTEM
In the event of a commercial dispute, a foreign investor may seek recourse through a number of institutions. Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided by international treaties. All other disputes involving a foreign investor must be settled in the Ukrainian courts, in courts of arbitration, including international arbitration courts, or other bodies of dispute resolution chosen by the parties to the dispute.
Ukraine's court system consists of the Constitutional Court and the courts of general jurisdiction. The Constitutional Court has exclusive jurisdiction over interpretation of the Constitution and laws of Ukraine and acts as final arbiter on constitutional issues. Courts of general jurisdiction are organized by territory and specialty and include: (i) local courts; (ii) appellate courts; and (iii) Supreme Courts. Local courts are either courts of general jurisdiction (including military courts) or specialized courts (i.e. commercial and administrative courts). Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in disputes connected with legal relations in the area of state government and municipalities (except military disputes).
Since Ukraine is a civil law country, the exercise of judicial power is based solely on the application of statutes. Court decisions do not constitute binding precedents, although Supreme Court and Supreme Commercial Court decisions are summarized, to introduce uniformity to the interpretation and application of the applicable legislation, and are followed by the lower courts on a quasi-mandatory basis.
Commercial courts of Ukraine accept jurisdiction over disputes between legal entities, including foreign legal entities, Ukrainian legal entities and individual entrepreneurs, arising out of the conclusion, modification, termination, and performance of commercial agreements (including privatization). Commercial courts are also in charge of administering bankruptcy cases and certain cases initiated by the Antimonopoly Committee of Ukraine and the Accounting Chamber.
Administrative courts handle tax, customs, and certain antimonopoly disputes.
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.
The competing Civil Code and 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. On October 16, 2011, amendments to the Bancruptcy Law were enacted to provide greater protection to creditors’ rights in an attempt to address problems faced by the financial sector as a result of the 2008-2009 crisis. Notice provisions, protections for the rights of minority shareholders, and procedures for valuation and the sale of assets to satisfy liabilities remain undeveloped. In April 2011 the Ministry of Justice announced its plans to reform the Bankruptcy law in order to bring it more in line with international standards.
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. A new Joint Stock Company law, which came into effect in April 2009 introduced principles of sound corporate practices that meet international standards. Provisions of the new law supersede that of the law “On Companies” with regard to operations of shareholding companies beginning in May 2011.
Corporate governance in Ukrainian companies is usually based on three-tier system and includes a general meeting of shareholders, a supervisory board, and an executive body (either single or collegial). The executive's body activity and financial performance of a company is controlled by a revision commission.
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 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 current performance requirements or incentives, except for those made as part of privatization agreements. In 2010, the GOU claimed foreign investor Arcelor-Mittal had failed to make required investments in the Kryvy-Rih steel foundry called for in its privatization agreement and subsequently attempted to re-nationalize the facility on that basis. However, Ukrainian courts rejected the GOU's argument, and the matter was settled in Arcelor Mittal's favor.
Ukraine eliminated 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. Currently Ukraine has not notified the WTO of any measures that would be inconsistent with TRIMs requirements or violate TRIMs obligations.
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. There is no current requirement that investors purchase from local sources or export a certain percentage of output, or only have access to foreign exchange in relation to their exports.
There are no official "offset" requirements, whereby major procurements are approved only if the foreign supplier invests in manufacturing, R&D, or service facilities in Ukraine related to the items being procured. With that said, however, the high level of corruption involved in government procurement may result in these sorts of terms being unofficially introduced into investment deals. Regarding government/authority-imposed conditions on permission to invest, there has been a ban, in place since 2003, on foreign investment in sectors considered 'strategic' by the GOU - primary its energy infrastructure and development of its natural energy resources. This ban was partially lifted in late December 2010 with a presidential decree allowing investment in Ukrainian power plants. A ban is also in place on the purchase of agriculturally-zoned land, forcing many investors to use long-term (49-year) leases instead. This ban was originally extended to expire in 2012, but is now expected to remain in place until at least January 1, 2013. However, even if/when the moratorium is lifted, restrictions on foreign ownership of agricultural land may remain in place.
U.S. and other foreign firms are able to participate in government/authority financed and/or subsidized research and development programs on a national treatment basis.
The Tax Code which went into effect on April 1, 2011, established investment incentives in the form of tax deferrals on corporate income tax which can last five or more years. These “tax holidays” apply mainly to businesses in the field of bioenergetics, EURO 2012 infrastructure (hotels, primarily), and agribusiness – all sectors identified as ‘most attractive’ for investments by the GOU. These incentives are available to both foreign and domestic investors. There areno performance requirements linked to these incentives.
VISA/WORK PERMIT REQUIREMENTS
A passport valid for six months beyond the planned date of travel is required for entry. U.S. citizens do not need to have a Ukrainian visa as long as they will be in Ukraine for less than 90 days within a 180-day period. They need a visa for all stays longer than 90 days. As of September 10, 2011, all foreigners who plan to stay in Ukraine for more than 90 days are subject to new visa and residency permit rules. All visas issued prior to September 10, 2011 are no longer valid for entry into Ukraine after September 10.
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.
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 for a ‘D’ type visa at a Ukrainian Embassy or Consulate abroad. ‘D’ visas are single-entry and are valid for 45 days (the validity dates determine when you can enter the country, not how long you can stay). The holder then needs to apply for a temporary residence permit at the local immigration office (officially called VGIRFO but usually referred to by its old acronym, OVIR). The temporary residence permit gives you full legal status in Ukraine and lets you freely travel in and out of Ukraine for as long as it is valid. You will not need to apply for a new visa if you leave Ukraine and you will not need to re-register with OVIR during the permit’s validity period. 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 remains in effect. The Land Code also prohibits foreigners from owning agricultural land directly. The creation of a legal Ukrainian-registered business to purchase (non-agricultural) and manage (all types) 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
Since 2000 Ukraine has 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. In October 2010 the GOU resolved to increase the SMI’s capital to UAH 2.2 billion (about USD 277 million). SMI’s actions, which were intended to bring liquidity to the market, had limited success. A report released in June 2010 by the Audit Chamber of Ukraine accused the SMI of misusing the UAH 3 billion it borrowed from 2007 to 2009 under state guarantee.
Mortgage lending more than doubled in 2007, increased by another 56 percent in the first eleven months of 2008 to reach UAH 78 billion (roughly $10 billion). New lending, however, 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. As a result of the financial crisis, the estimated volume of non-performing loans peaked at 20% of the total loan portfolio. In an attempt to limit currency risk among mortgages, Ukraine banned new mortgage lending to private persons in foreign currency in November of 2009.
In 2011, mortgage lending continued to decline, stabilizing at UAH 72 billion (roughly USD 9 billion) in late 2011. Nearly all mortgage lending is for residential real estate loans. The construction industry posted growth of 12.5% for the first 11 months of 2011, year-oon-year, mostly due to infrastructure projects in preparation to the Football Championship Euro 2012.
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 are being gradually reduced, the GOU still requires enterprises to obtain numerous permits to start/conduct business. In April, 2011 the Parliament of Ukraine passed a Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Simplifying Enterprise Start-up Procedures”#3263-VI, canceling, in particular, the requirement for Minimum Charter Capital in order to register a Minimum Liability Company. Another law, adopted in May, 2011, “On Amendments to Legislative Acts of Ukraine “On Simplification of Voluntary Closing a Business Entity of Exit from Sole Proprietorship” #3383-VI reduced a list of documents from nine to five, required to close a company and introduced the “silence is consent” principle in cases when the tax authorities exceed the allowed time to make tax liability claims. 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. Per the new (2010) law of Ukraine “On Amendments to the Law of Ukraine “On Permits” #1869-VI, the “silence is consent” principle is applied in the process of obtaining a permit to start business, which means permits are automatically approved if there has been no decision made on them after 30 days from the time of submission. While Ukraine has enacted this positive legislation, inadequate implementation considerably undermines their utility. According to international organizations, Ukraine continues to have a poor business environment and investment climate. The World Bank "Doing Business 2012" report on 183 countries rated Ukraine 152nd (deterioration from 149th position in 2011) on the ease of doing business, but improved its ranking for the ease of starting a business, up from 118th in the 2011 report to 112th in 2012 report. "Doing Business 2011" estimates that on average it takes 28 days and 11 procedures to open a business in Ukraine;
Ukraine applies both activity and import licensing regimes. The Law "On Licensing Certain Types of Economic Activities" of June 2000 provides a list of activities subject to licensing. The October 22, 2010 amendments canceled licensing requirements for 22 types of economic activities. Licensing applies to 56 economic activities and is meant for the 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 time consuming, 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. As of December 22, 2010, the list included: printers’ ink, paper with watermarks, optical media production inputs such as polycarbonate, equipment for CD production, pharmaceuticals, paints and lacquers, dyes, hygiene products, cosmetic products, pedicure and manicure products, shaving aerosols and deodorants, lubricants, waxes, shoe polishes, insecticides, solvents, silicone, fire extinguishers and chemicals that fill extinguishers, refrigerators and freezers, air-conditioners, humidifiers, and other selected industrial chemical products, poultry, meat, and meat products (Harmonized Schedule Line 0105), salo, pig and poultry fat, fungicides, insecticides, herbicides, and plant growth adjusters.
While import licenses are granted automatically to applicants, some products require prior approval, which may or may not be automatic, from the relevant administrative agency before receiving the necessary import license from MEDT. In some cases import permits themselves serve as indirect non-automatic import licenses without MEDT participation (such as product of animal origin import permits issued by the State Veterinary and Phytosanitary Service). 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 and fish processing industries report 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 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 and drafts may be posted with little time for review.
Current Ukrainian legislation envisages a mandatory financial inspection of all business entities each year and requires a minimum of 10 days notice. In 2011, some GOU representatives, including Prime Minister Azarov, stated the need to cancel advance notification requirements and renew surprise inspections. Non-financial inspections (i.e. taxes, fire safety, sanitation, etc.) can be burdensome 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). In December 2010, Ukraine passed two laws to bring technical regulation into the compliance with EU directives #765/2008 and 768/2008. The first law, “On State Market Surveillance and Control over Non-Food Products” #2735-VI, removed the requirement for pre-market control of non-food products and introduced state control requirements only when products enter the market. Another law, “On General Safety of Non-Food Products” #2736-VI further improved the regulatory environment. These two laws, together with the May, 2011 law “On Manufacture’s Liability for Damages Caused by Defective Products” #3390-VI, create a market surveillance system according to EU principles. Contrary to accepted international practice, standardization in 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 300 types of goods and services and remains applicable de facto for an even larger number of goods and services (according to State Committee on Consumer Standards (Derzhspozhystandard) Order #28 of February 1, 2005 with amendments). 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. 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 final 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.
On April 6, 2011 by Presidential Decree #370, the standardization and certification body in Ukraine, the State Service of Technical Regulation (created in December, 2010) was eliminated and the State Inspection on Consumer Protection was established. Technical regulation functions and responsibilities were divided between the Ministry of Economic Development and Trade and the State Veterinary and Phytosanitary Service of Ukraine. Before the reorganization, the State Service of Technical Regulation was responsible for developing and approving standards, issuing certificates, conducting inspections of producers, and ensuring market surveillance and protection of consumer rights. This bundling together of commercial certification functions with state supervision functions, combined with the fact that the same organization provided certification services and appointed other certification bodies, meant that there were considerable conflicts of interest and excessive discretionary powers. Appropriate resources, such as modern analytical equipment and reactants, were not available in most State Committee on Consumer Standards (Derzhspozhyvstandard) laboratories. Depending on the type of product, testing, and applicable certification scheme, the certification process could take from 3 days to 1 month. Experts alleged that government officials responsible for issuing licenses often required businesses to provide documents that were not mandatory, deliberately concealed information in order to confuse a potential licensee, or delayed issuing documents in order to induce licensees to offer a bribe. It is too soon to say if the new regime will result in any improvements for investors. During WTO accession negotiations, Ukraine pledged 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. In a positive move, in September 2010 the State Committee on Consumer Standards (Derzhspozhyvstandard) removed almost all items from the food certification list with the exception of baby food, tobacco, and alcoholic beverages. An April 2008 amendment to the law "On Standards, Technical Regulations, and Conformity Assessment Procedures" helped to ensure that Ukraine's authorities would accept the results of alternative methods of conformity assessment, including those performed in the United States. Ukraine's National Accreditation Agency is an affiliated member of the International Laboratory Accreditation Cooperation (ILAC), and in November 2011 it signed an Agreement with European Cooperation for Accreditation (EA) about personnel accreditation. Once it becomes a full 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
The Ukraine food safety system is complicated. Controls are implemented by various state agencies that often have overlapping functions. In late 2010, the Government of Ukraine started a major regulatory system reform to reduce the number of controlling bodies and introduce a clear separation of authorities. To date, the food import system has not been significantly simplified.
Ukraine must comply with the WTO Agreement on the Application of Sanitary and Phytosanitary Measures, the SPS Agreement, since accession in 2008. Currently, certain sanitary measures used in Ukraine may not fully comply with provisions of the WTO agreement and/or with the standards established by international standards setting bodies, as well as with internationally accepted trade practices. Ukraine’s agricultural trade policy remains unpredictable with regards to potential duties and quotas on exports.
For imports, Ukraine maintains some measures that may not comply with its WTO obligations. In addition to high indirect import duties, the GOU uses veterinary and sanitary measures to limit imports. Significant TBTs were introduced after the 2008 WTO accession through informal and technical means. Ukraine agreed to comply with the TBT agreement upon WTO accession and to give priority to international standards over regional and other national ones, but still continues to maintain a cumbersome bureaucratic standardization system inherited from the Soviet Union.
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 176 banks registered in Ukraine, including 54 with foreign equity participation, and 22 that are fully foreign owned. The five largest banks control 37% of the market, representing the lowest market concentration level in all of central and Eastern Europe. Foreign capital represents 41.6% of total capital in the banking sector as of November 1, 2011. 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 $151.6 billion, with total loan assets of $70.09 billion (as of January 2012).
In 2004-2008 Ukraine's banking system expanded rapidly and played an important role in the development and modernization of the economy as a whole, and in providing wider groups of the population with access to credit. However, the reliance of banks on foreign borrowing to fund domestic lending operations made Ukraine's banking system sensitive to international shocks. With the global financial crisis, foreign credit dried up for Ukrainian banks in late 2008 and Ukraine's banking sector came under pressure.
Two IMF stand-by arrangements (November 2008 and July 2010) were intended to help Ukraine's financial system by helping meet external debt commitments and by restructuring the system, though both went off track less than a year after inception. An audit of the banking system conducted under the IMF identified systemically important banks in need of recapitalization. To streamline recapitalizations, the National Bank of Ukraine (NBU) raised the share of subordinated debt which could be counted as capital from 50% to 100%. Banks used the permission extensively, raising the share of subordinated debt to 25% of the banks’ own capital. In 2009, the state recapitalized three banks, raising the number of state-owned banks to five. The NBU also introduced provisional administrations in banks where solvency problems were most acute. Three banks remained under provisional administration by the National Bank of Ukraine and 21 were undergoing liquidation, as of December 2011.
The banking crisis virtually froze corporate and consumer lending. After a virtual stop in 2009-2010, corporate lending recovered slightly in 2011, showing almost 15% growth over the first ten months of 2011. Consumer lending, however, fell by 3% over the same period. Non-performing loans are estimated at about 20% of the banking sector's total loan portfolio, and the problem was still unresolved as of the end of 2011. While the NBU's official estimation of non-performing assets is only 10%, this official estimate takes into account the overdue part of the problematic loan only, not the full outstanding loan amount. Insufficient foreclosure and bankruptcy procedures prevent fast resolution of bad debt and force banks to accumulate large provisioning to cover possible losses, which limits lending opportunities and slows recovery.
In January 2002, the law "On Banks and Banking Activity" eliminated discrimination against foreign-owned banks. It entrusted the NBU with issuing banking licenses and included provisions to prevent money laundering. The NBU sets minimum capital requirements each year to be met by the banks by year-end. In early 2011, the NBU raised the minimum capital requirement for banks from UAH 75 million to UAH 120 million (roughly USD 15 million), and gave 2 years for banks to comply with the new regulation. 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, the Rada approved an amendment to the law "On Banks and Banking Activity" permitting foreign banks to operate via branch offices. Foreign banks have significantly increased their presence in Ukraine's banking sector in recent years, usually through the acquisition of Ukrainian banks.
It is also worth noting that in December 2009, the PFTS Association, which owns the Ukraine's largest stock exchange, increased its authorized capital and sold the additional shares to the Russian exchange MICEX, giving MICEX a 50% ownership in the PFTS Exchange.
Ukraine's anti-money laundering regime (AML) is established by the “Law on Prevention and Counteraction to Legalization (Laundering) of the Proceeds of Crime or Terrorism Financing”, with the primary financial monitoring function assigned to the State Committee for Financial Monitoring. In 2010 Ukraine amended its AML regime to increase compliance with FATF recommendations. In October 2011, the Financial Action Task Force (FATF), the primary worldwide body that oversees AML efforts, removed Ukraine from its list of countries with “strategic deficiencies”. Ukraine continues to work with MONEYVAL (the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism) on strengthening its money laundering regime.
Reacting 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. As the deposit outflow subsided, the NBU canceled the ban on pre-term withdrawal of bank deposits in May 2009. Deposit guarantees were tripled from UAH 50,000 to UAH 150,000 (although doubled in dollar equivalent from USD 10,000 to USD 20,000). The government also took steps to implement the bank resolution plan foreseen in the IMF loan agreement.
With WTO accession in 2008, Ukraine gave foreign companies the right to operate in Ukraine's insurance market. During the five-year transition period foreigners have the right to provide a limited number of insurance services and are required to open representative offices in Ukraine in order to operate in the country. After the transition period end, foreign companies will be able to operate in Ukraine via affiliates or brokers. Respective amendments to the law “On Insurance” were adopted in November 2006 and May 2007.
Ukraine has ten operational privately-owned stock exchanges. The largest trade volumes are conducted at three major exchanges. The PFTS electronic trading system was responsible for 34% of the trade volumes in the first half of 2011, followed by the Perspectiva Exchange (33%) and the Ukrainian Exchange (32%). The exchanges operate largely in compliance with international best practices. There is increasing competition in this sector, with plans underway to incorporate "market-maker" capabilities. In practice, however, significant trading continues to be done off-exchange. The remaining exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises.
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.
Most of these markets are still in a nascent stage. Although the equity market in particular has grown in recent years, it is still very small when compared to stock markets in other emerging markets of Central Europe and does not yet act as an important source of capital for Ukrainian companies or investment destination for domestic savings. The market of derivative securities has seen rapid growth over the last year. The Ukrainian Exchange was the first in the country to open a futures’ section and saw the trade volumes grow from UAH 0.3 billion in the first half of 2010 to UAH 11 billion in the same period of 2011.
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. The Securities and Stock Market State Commission (SSMSC) and Financial Services Regulator (FSR) have insufficient enforcement power and their rulings are not always followed by the courts. The SSMSC and FSR also face problems with budgetary and political independence.
In 2008, the NBU and a group of Ukraine's largest banks founded the All Ukrainian Securities Depository (AUSD). The new entity was designed to end the disputes between the market-owned securities depository MFS and the state-owned National Depository of Ukraine (NDU). Since October 2009, the AUSD was registered as successor of the MFS and owner of 97% of its shares. Depository operations by AUSD are largely in line with G-30 requirements. The AUSD services 90% of new emissions in Ukraine, provides clearing for all Ukraine’s exchanges. The state-owned NDU remains in existence, but had little practical function. Over 200 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.
In 2011, the NBU took a number of steps to gain control of the AUSD and merge it with the state-owned NDU to form a consolidated Central Securities Depository (CSD). Merger negotiations were stalled for most of this year over the question of whether AUSD or the NDU will serve as the basis for the CSD. The AUSD and NDU may be merged in 2012, but the resulting securities depository may be less independent than the AUSD.
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 which facilitated 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 joint stock companies, while also significantly improving legal protections for minority shareholders and filling numerous loopholes 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. Substantial work remains to insure that these laws are properly applied and enforced.
Competition from State-Owned Enterprises (SOEs)
The vast majority of Ukraine's state-sector was privatized in the 1990s and early 2000s, and the state sector is now estimated to comprise less than 10% of Ukraine's economy. Nonetheless, the state sector, according to Ukraine's Ministry Of Economic Development and Trade, is one of the largest in Europe in terms of size and contains more than 5,000 business entities. The sector is inefficient and often loss-making. However, the stated goal of the Yanukovych administration is to divest itself of unprofitable SOEs through aggressive privatization efforts.
The majority of SOEs rely on GOU subsidies to function, and cannot directly compete with private firms. Most of the SOEs capable of making a profit have already been privatized, leaving mainly inefficient firms in government hands. Private firms, however, are barred, under Ukrainian law, from engaging in certain types of business, including in the areas of certain natural monopolies, the rocket industry, and the production of bio-ethanol. The GOU has had to heavily subsidize its state-owned enterprises (especially in the energy sector) to keep them operating. The GOU has resisted raising consumer gas prices to market levels, forcing the state energy monopoly, Naftogaz, to continue to run a massive operating deficit. Prime Minister Azarov has proposed breaking up Naftogaz and privatizing many of its components. In 2010, Ukraine joined the European Energy Community. Under its provisions, Ukraine is also obliged to restructure Naftogaz. Energy transit networks, including the transmission of electricity, have not yet been opened to private competition. The state-owned fixed land telecommunication monopoly, UkrTelecom, was sold for roughly $1.25 billion in early 2011, though the privatization process (involving an auction with only one approved bidder) was criticized as being non-transparent and under-priced.
Regarding their structure, SOE senior management reports directly to the relevant ministry, which has the authority to appoint the firm's management. Ukrainian law specifies that the ministries are not permitted to interfere with the day-to-day economic activities of an SOE, but anecdotal reports indicate that, in practice, this restriction is often ignored. Ministries have the power to decide on the creation, reorganization, and liquidation of SOEs; adopt and enforce SOE charters; conclude and cancel contracts with SOE executives; grant permission to the State Property Fund to create joint ventures with state property; and prepare proposals to divide state property between the national and municipal levels.
Ukraine does not maintain or operate a sovereign wealth fund.
Corporate Social Responsibility (CSR)
Corporate Social Responsibility is still a new concept in Ukraine that has not yet taken hold in the mind of the consumer and is just beginning to gain ground amongst producers in the country. International companies continue to be the strongest proponents of CSR within Ukraine and have made efforts to transfer the idea of CSR over to their Ukrainian affiliates. With help from the American Chamber of Commerce, the East Europe Foundation, the U.N. Global Compact Initiative, and other NGOs, Ukrainian companies have been made aware of the potential long-term benefits of CSR as they relate to positive exposure for a company in relation to its philanthropic projects or programs.
The main obstacle facing the advancement of CSR initiatives is the unwillingness of the Parliament to pass legislation that will offer tax exemptions to companies that participate in CSR activities. On November 1, 2009, the first public hearing was held on CSR by the Parliamentary Committee on Regulating Policy and Entrepreneurship. To date, the only bill that has been passed but not signed is a green bill that will allow companies that display efficient waste management practices the option to sell reprocessed waste products within Ukraine. Apart from this one incentive, any Ukrainian or international company must be willing to undertake CSR projects without tax or legislative assistance. The American Chamber of Commerce remains engaged with Members of Parliament regarding the advancement of CSR through introducing tax-beneficial draft legislation, albeit unsuccessfully to date.
From the perspective of consumers, CSR initiatives are seen as positive outreach by companies but are more viewed as the exception rather than as the rule. Consumers do not expect companies to develop, finance, or complete projects that do not directly affect growth or profit. Aside from a "Go Green" ad campaign led by the U.N. Global Compact Initiative, which asks individual citizens to do their part by conserving water and electricity and which promotes recycling, there is little in the way of social responsibility by consumers.
Foreign firms that work inside of Ukraine do not need to follow CSR principles but generally follow and are judged by NGO's on the following standards: AccountAbility's AA1000 standard, Global Reporting Initiative's Sustainability Reporting Guidelines, Verite's Monitoring Guidelines, Social Accountability International's SA8000 standard, and the ISO 14000 Environmental Management Standard. The Centre for CSR Development Ukraine, which was founded by the East Europe Foundation, has become an active proponent of CSR and holds numerous events throughout the year to promote, advertise, and recognize CSR initiatives and successes. Per reporting by the Global Compact Initiative (GCI), there are 89 companies within Ukraine which are currently members of GCI and of these, 61 companies have submitted their annual CSR reports, making Ukraine competitive in CSR reporting efficiency amongst European countries.
While public protests take place regularly and, at times are met with substantial police presence, Ukraine has been largely free of civil unrest in recent years. Organized anti-American domestic political demonstrations are rare. The Yanukovych Administration has come under criticism for using excessive numbers of police as a way to intimidate protesters. In Kyiv over the past year, an increasing number of protests took place in reaction to unpopular government actions, particularly relating to the trial, conviction and imprisonment of former Prime Minister Yulia Tymoshenko. These and other protests have been sponsored by myriad organizations. While police presence is often heavy, violent clashes between police and protesters have been rare.
Incidents of racially-motivated violence occur; groups of "skinheads" and neo-Nazis continue to target people of color and members of religious minorities, in Kyiv and throughout Ukraine.
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’s ranking worsened in Transparency International's Year 2011 Corruption Perception Index (CPI). The country moved down from 134th place in 2010, to 152th place. In 2011, Transparency International rated Ukraine at 2.3 points on the CPI's 10-point scale.
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. That said, most public opinion polling shows increasing societal frustration and anger with official corruption. 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.
Ukraine's prosecution of corruption is based on the law “On Corruption Prevention and Counteraction”, adopted in April 2011, which replaced the 1995 law "On Combating Corruption." The law was enacted on July 1, 2011 with articles on Financial Controls coming into force in 2012. The new law drew heavily on a package of anti-corruption legislation proposed by then-President Yushchenko in 2009 and annulled by the Parliament in December 2010. The law is rarely enforced, and on the rare occasions it is enforced, it is normally aimed at lower-level state employees or used for retribution in political vendettas. Ukraine has adopted several national strategies aimed at fighting corruption. In January 2006, then-President Yushchenko signed a decree committing 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 directed 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 2011, President Yanukovych announced a National Strategy on Fighting Corruption, which created an advisor body under the President of Ukraine to fight corruption – the National Anti-corruption Committee. Although President Yanukovych declared the importance of creation of a central agency responsible for combating corruption, it has yet to be established.
In 2010 the State Department funded a new Resident Legal Advisor from the United States Department of Justice to follow up on the Millennium Challenge Corporation's project which focused on ethics, asset declaration, and internal investigative units.
Although government action is still limited and uncoordinated, a regulatory and legislative framework to address corruption is slowly being developed. 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. The Third Round Evaluation Report was published in October 2011 and contained recommendations for improvements in the areas of criminalizing corruption offenses and transparency of financing political parties. Ukraine also participates in the OECD Anticorruption Network for Eastern Europe and Central Asia. The OECD recommendations are similar to those of the GRECO reports. 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), Bosnia and Herzegovina (2002) Bulgaria (1994), Brunei (2006), Canada (1994), Chile (1995), China (1992), Cuba (1995), Croatia (1997), the Czech Republic (1994, amended in 2010), Denmark (1992), Equatorial Guinea (2005), Egypt (1992), Estonia (1995), Finland (2005), France (1994), Gambia (2006), Georgia (1995), Germany (1993), Great Britain and Ireland (1993), Greece (1994), India (2001), Indonesia (1996), Iran (1996), Israel (1995), Italy (1995), Jordan (2005), Hungary (1995), Kazakhstan (1994), Congo (2010), Korea (1996), Kuwait (2002), Kyrgyzstan (1993), Latvia (1997), Lebanon (1996), Libya (2001), Lithuania (1994), Macedonia (1998), Morocco (2001), Moldova (1995), Mongolia (1992), Nigeria (2010), the Netherlands (1994), OAE (2003), Oman (2002), Panama (2005), Poland (1993), Portugal (2003), Russia (1998), San-Marino (2006), Saudi Arabia (2009), Singapore (2006), Syria (2002), Slovakia (1994), Slovenia (1999), South Korea (1996), Spain (1998), Sweden (1995), Switzerland (1995), Tajikistan (2001), Turkmenistan (1998), Turkey (1996), UK (1993), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), Yemen (2002).
The United States and Ukraine signed a Trade and Investment Cooperation Agreement (TICA) on April 1, 2008. The TICA established a joint U.S.-Ukraine Council on Trade and Investment, which works to increase commercial and investment opportunities by identifying and removing impediments to bilateral trade and investment flows.
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 resolved a long-standing dispute in December 2009, and restored its programs in Ukraine after an almost ten-year hiatus.
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).
In June 2010 OPIC concluded an agreement enabling the Ukrainian Development Network (UDN) to serve as an originator for a growing alliance with the private sector designed to support small and medium-sized enterprises expanding into emerging markets overseas.
Ukraine has a well-educated and skilled labor force (about 20-25 million people) with nearly a 100% literacy rate. As of October 1, 2011, unemployment (ILO methodology) averaged 8.9 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. The Government of Ukraine, which counts only those officially registered to receive unemployment benefits, claims employment was only 1.5% as of October 1, 2011.
Wages in Ukraine remain low by Western standards. During the first nine months of 2011, the nominal average monthly wage increased by 18.2% year-on-year to UAH 2571 (about $322), while the real average wage increased by 8.0% year-on-year during the same period. The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers. As of November 1, 2011 wage arrears equaled almost UAH 1.17 billion (approx. $ 212 million).
The minimum monthly wage increased to UAH 985 (approximately $123) on October 1, and to UAH 1004 (approximately $126) on December 1. The 2012 state budget envisages 14% minimum wage increase. According to the law, the minimum monthly wage equals the monthly subsistence level.
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. An important step in the pension reform was made by adoption and enactment of the Law “On Pension Reform” in October 2011.
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. The 2011 law provided for gradual increase of the pension age for women and men working as government officials; increased the number of years worked required to earn a pension from 25 to 35 years, and capped pensions to be paid from the “pay as you go” system to new pensioners. Despite major reform, the Pillar I system remains financially unsustainable. At 16 % 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. A significant percentage of workers in the gray economy, particularly in the agrarian sector, do not contribute to the pension fund but have accrued entitlement to these same resources. The result is growing pressure to subsidize basic pensions using revenues from the general government budget. The estimated deficit of the Pension Fund currently exceeds UAH 31 billion (about $3.9 billion).
Pillar II, the Mandatory Accumulation System, is not yet enacted in Ukraine, although the draft legislation passed the first reading in April 2007. The 2011 law envisages introduction of the Pillar II after the sustainability of the first pillar is achieved. 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. When implemented, Pillar II will generate substantial domestic long-term savings to finance economic growth. Depending upon who participates in the system when the scheme starts, contributions could be between $US 60 to 145 million each year.
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. The financial crisis has impacted the industry and some rationalization has occurred with perhaps more in the future. In an economy with over 16 million workers, 50 active funds (out of 97 registered) service over half a million participants and have assets of about $160 million. Moreover, Ukraine's underdeveloped capital markets do not provide private pension funds with sufficient sound, long-term investment opportunities. At the end of June 2011 31.5% of assets were invested in bank deposits, 19.4% in Ukrainian equities, 17.8% was invested in Ukrainian corporate bonds, 13.3% in Ukrainian Government Bonds. The legal framework required to support successful private pension funds is still weak and regulatory oversight is even weaker. The 2011 law included some provisions improving the regulatory framework governing private pension funds, expanding authority of the sector’s state regulator. 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 dates back to 1971 and remains outdated and inappropriate for a market economy. The lack of a modern Labor Code hurts workers, whose rights are not clearly defined and protected, and employers, who face rules that sometimes make it hard for them to conduct business. Drafted in part with ILO and other international experts' guidance, the new Labor Code has been in parliament since 2007; it passed the first reading in 2008 but has yet to pass a second reading
INTELLECTUAL PROPERTY RIGHTS (IPR)
Ukraine was listed on the Watch List in the 2011 Special 301 report. Key concerns cited in the report included weak enforcement, widespread retail piracy, the transshipment of pirated and counterfeit goods, Internet piracy, the continued government use of illegal software, and inefficiencies in the judicial system. The improved protection of intellectual property was a major theme of the U.S.-Ukraine 2010 Trade and Investment Council meeting, during which the two sides agreed to an IPR Action Plan. Among other provisions, the Plan addresses public awareness, strengthened enforcement, needed legislative improvements, and measures to transition government ministries to legal software. The Government of Ukraine agreed to implement the IPR Action Plan beginning in 2011.
Overall, Ukraine has made some progress in protecting IPR in recent years, in part to meet its WTO accession requirements as well as to fulfill expectations as it negotiates a free trade agreement with the European Union. Ukraine's IPR-related legal base is now in compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The Office of the United States Trade Representative (USTR) lowered Ukraine's designation in its Special 301 Report from Priority Watch List to Watch List in 2008, largely as a result of the country’s prevention of large-scale illegal production of pirated and counterfeit goods.
Ukraine has made only very limited progress in implementing the IPR Action Plan. No progress has been made legalizing software used by the Government of Ukraine and Ukraine has decreased, not increased, the number of IPR inspectors. On another important issue – adopting amendments to Ukrainian copyright law (draft law #6523) - Ukraine’s Verkhovna Rada (Parliament) passed the draft in a first reading. It is important that the Rada approve a version of #6523 in the second and final reading that maintains international standards.
If fully implemented, the IPR Action Plan would considerably improve IPR protection and enforcement in the country.
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 largest and was listed on USTR’s most recent Notorious Markets List. Industry representatives estimate piracy levels for music and video at more than 60%, and for computer software at 86%. 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. However, the use of optical media is beginning to decline, as smugglers and retailers begin to switch to Flash memory cards, which are physically smaller and have greater storage capacity than optical discs, and consumers switch to internet piracy.
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). Software company representatives have also complained that Local Area Networks (LAN), some of which cover entire Ukrainian cities, allow for widespread software piracy. On-line mail order sites also distribute pirated material.
Officials from Ukraine’s Ministry of Internal Affairs report some successes in stopping mail order piracy, but admit that file sharing and downloading is much more difficult to combat. Ukrainian government representatives argue 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. The U.S. Government works with the Ministry of Internal Affairs and the State Intellectual Property Service of Ukraine to train law enforcement officers to combat internet piracy. Draft law #6523, if enacted in its current version, will allow the Government of Ukraine to hold ISPs liable for infringing content if they fail to remove it in a timely manner. This step may improve the situation.
Royalty Collecting Societies
Rights holders have complained that some royalty collecting societies collect fees for the 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. Draft law #6523 would help address these concerns. This law also specifically defines cam-cording in cinemas as a violation of the law.
Ukraine has improved its protection of undisclosed test data, such as that from drug trials, from unfair commercial use. Ukrainian grants data exclusivity for five years, which is consistent with international standards. Under a law adopted in 2011, data exclusivity is only given to original products that are registered in Ukraine within two years of their initial registration in other countries. Agricultural chemical products are protected for ten years. Local representatives of large international pharmaceutical companies continue to complain of a lack of transparency by GOU bodies responsible for granting market approval for generic drugs, of discriminatory practices by GOU bodies regarding the quality control of imported drugs, and by unjustified classification changes of drugs by the Ukrainian Customs Service.
The Ukrainian Ministry of Health does not routinely check the validity of patents when it grants pharmaceutical marketing approval in Ukraine.
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. Ukraine and EU also discussed this issue in the framework of FTA negotiations. Negotiations have concluded, but the FTA has not been signed.
Patents and Trademarks
Trademarked and copyrighted goods must be registered for a fee in the Customs Service's rights holder database in order to be guaranteed protection. Counterfeit goods, including products that contain protected trademarks, remain readily available in Ukraine. Counterfeit apparel products are particularly common. Most counterfeit goods are not produced in Ukraine, although industry has reported instances of the production of counterfeit cigarettes. There has also been growth in the amount of counterfeit pesticides on the market, which, according to industry, accounts for about 30% of the market. Ukraine does not have the technical capability to destroy some forms of counterfeit pesticides, complicating enforcement efforts. Government of Ukraine officials recently seized large quantities of counterfeit pesticides, but industry representatives have raised concerns that the pesticides will not be disposed of properly.
Judicial System for IPR Protection
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 and industry also complain that too many IPR cases result in small fines only, which do not serve as deterrents against illegal activity. In some cases, infringing companies have succeeded in winning dubious and nontransparent court decisions that appear to violate the patent and trademark rights of other companies.
Foreign Trade Zones/ Free Ports
Ukraine has in the past maintained special or free economic zones (SEZs-FEZs), but in 2005 the government canceled all tax exemptions (i.e., from land tax, corporate income tax, import duty, and VAT on imports) to investors in SEZs-FEZs to stop the large-scale misuse of these zones for tax evasion and smuggling.
Foreign Direct Investment Statistics
FOREIGN DIRECT INVESTMENT
According to Ukraine's State Statistics Committee, as of October 2011, the total stock of FDI in Ukraine was $48.46 billion or approximately $1061 per capita. This represents an 8.2% increase from January 1, 2011, when the total stock of FDI stood at $44.7 billion (or $978.50 per capita), and an 11.6% increase in FDI from January 1, 2009.
FDI BY COUNTRY
As of October 1, 2011, Ukraine's major investors included: Cyprus (24.9% of total FDI), Germany (15.0%), the Netherlands (10.1%), Russia (7.1%), Austria (7.1%), the United Kingdom (5.2%), France (4.6%), and Sweden (3.6%). Investment from the United States comprised 2.2% of FDI. Cyprus remains a popular offshore destination for Ukrainian and Russian enterprises through which to channel investments due to a very favorable bilateral tax treaty. While the Government of Ukraine announced plans to introduce a 12% tax on the operations of companies registered in offshore countries (in order to increase collections to the Pension Fund), it did not include Cyprus in the designated list of offshore countries.
FDI BY INDUSTRY SECTOR DESTINATION
The largest portion of cumulative investment went to the financial sector – 33.4% and industry – 31%, in particular, the steel industry – 12.5%, food processing and tobacco – 4%, the chemical industry – 2.8%, machine-building – 2.5%; trade and repairs – 10.4%, and real estate and engineering – 11.0%.
FDI FROM UKRAINE
As of October 1, 2010, Ukraine's FDI to other countries equaled $6.86 billion. 95.2% of Ukrainian investment (or $6.5 billion) went to EU countries, the lion’s share of which (99.26%) went to Cyprus. Cyprus is a popular destination for Ukrainian capital due to a lucrative double taxation agreement between Ukraine and Cyprus concluded in 1982. The second largest destination for FDI from Ukraine is Russia, which received 2.7 % of Ukraine's FDI.