2013 Investment Climate Statement - Ukraine

2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013

Openness to and Restrictions Upon, Foreign Investment

Ukraine’s President Yanukovych has prioritized investment 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 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 in which 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 country still has a low ranking -- 137 out of 183 economies -- in the Bank's Doing Business Report for 2013. Although this is a 15-position jump from 2012, it does not reflect any fundamental change in the investment climate. Foreign direct investment (FDI) has been anemic in recent years, and a number of foreign financial institutions have pulled out of the market.

2012 GDP growth appears to have been flat, with the economy contracting in the third quarter, reflecting soft global demand for steel. Ukraine received no disbursements in 2011 or 2012 from its 2010 Stand-By Agreement (SBA) with the International Monetary Fund (IMF), due to the GOU’s failure to implement several key requirements, including reducing subsidies for domestic gas prices. The 2010 SBA (which followed a 2008 IMF loan that went off track in 2009) envisioned USD15.2 billion in financing to improve Ukraine’s macroeconomic situation and facilitate structural reforms, but lapsed in 2012. Talks about potential future engagement with the IMF are scheduled for early 2013.

Negotiations with the European Union (EU) on the Deep and Comprehensive Free Trade Agreement (DCFTA) that could move Ukraine toward a more open and transparent trade regime and improve the investment climate were finalized in 2011, and the broader EU Association Agreement was initialed in March 2012. However, formal signature, ratification, 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. 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. 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 highlighted the problems of corruption and government red tape in Ukraine, and discouraged many international companies from participating.

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.

Global Indicators of Ukraine’s Investment Climate




Transparency International Corruption Index


144 out of 176

Heritage Economic Freedom Index


161 out of 177

World Bank Doing Business Index


137 out of 185

MCC Gov’t Effectiveness


-.38 (16%)

MCC Rule of Law


-.40 (25%)

MCC Control of Corruption


-.44 (9%)

MCC Fiscal Policy


-4.9 (30%)

MCC Trade Policy


84.4 (90%)

MCC Regulatory Quality


-.22 (41%)

MCC Business Start Up


.982 (88%)

MCC Land Rights Access



MCC Natural Resource Mgmt


20.2 (34%)

MCC Access to Credit

FY 2013

47 (81%)

MCC Inflation

FY 2013

8.0 (21%)

Ukraine continues to have a poor business environment and investment climate, despite having risen fifteen places on the World Bank’s "Doing Business 2013" report, up from “152” last year. Ukraine has improved its ranking in ease of starting a business, from 112th (2012) to 50th: on an average it takes 22 days and seven procedures to open a business in Ukraine, a notable improvement in efficiency. Other factors helped to improve Ukraine’s score, including taxation (165, up from 183), and property registration (149, up from 168). Construction permitting was Ukraine’s worst factor, ranking 183rd of 185.

Laws and Regulations Affecting Foreign Investment

The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment 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 in 1999 and amended in 2012 to add an important stability clause;
  • The Land Code (2001) provides 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 through 2015. 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 a land market. The Government has adopted a Law “On Land Cadastre” (in force from January 1, 2013) and planned to allow land sales from that date. However, the current moratorium has been prolonged until January 1, 2016. Also, according to the legislation initiatives only physical persons who are citizens of Ukraine can own land. The legislation also limits the size of land plots 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);
  • Updated Tax Code (2010);
  • Law “On Public-Private Partnerships” (2010);
  • Law “On Preparation and Implementation of Investment Projects Based on the Principle of the Single Registration Window,” (enacted January 1, 2012), streamlined the administrative procedures required for investment;
  • Amendments to the Customs Code (June 2012), which streamlined customs clearance procedures and improved customs valuation problems;
  • 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 to be 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 the law is 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 into 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 establishing TV or radio stations, they can invest into 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.

Ukraine canceled the mandatory registration requirement for foreign investment in April 2010, which had been in force since November 2009.

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 a Ukrainian visa as long as they will be in Ukraine for less than 90 days within a 180-day period, but a visa is required for all stays longer than 90 days. As of September 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.

GOU does not issue visas at its borders or ports of entry. Those requiring visas must obtain them in advance. U.S. citizens may apply for all types of visas through the Ukrainian Embassy or Consulates in the United States (located in New York, Chicago, and San Francisco), or 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/ua.

Extensions for stays exceeding 180 days are completed through the Ukrainian Ministry of Internal Affairs' Department for Citizenship, Immigration, and Registration of Private Persons (GIRFO), which is commonly referred to by its old acronym, OVIR. Most cities have several GIRFO 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.

Work Permits: 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 must apply for a temporary residence permit at the local GIRFO office. The temporary residence permit provides full legal status in Ukraine and allows free travel in and out of Ukraine for as long as it is valid. The holder need not apply for a new visa after leaving Ukraine and does not need to re-register with OVIR during the permit’s validity period.

To work in Ukraine, a foreigner must obtain a “D” visa from a Ukrainian Embassy or Consulate abroad issued on the basis of a previously approved work permit obtained by the foreigner’s prospective employer from the Ministry of Labor. Within 45 days of arrival to Ukraine, the foreigner must register his D visa with the Department of Citizenship, Immigration, and Registration to receive a residency permit for the duration of his contract.

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.

Customs and Duties

Burdensome customs clearance procedures have historically discouraged investment in Ukraine, but 2012 saw some improvement: broad amendments to the Customs Code entered into force. According to exporters, the amended Customs Code streamlined customs clearance procedures. In particular, it improved the situation with customs valuation, which is now determined by transaction value in nearly 90% of cases. The average time for import customs clearance is now less than two hours – nearly half of the previous wait time. In addition, complaints concerning refusal of customs clearance are supposed to be considered within 24 hours, and the list of document for customs clearance was significantly reduced. One delivery company reported that while a year ago, less than ten percent of its shipments were cleared in under four hours, that figure is now over 80%.

Before the enactment of the new Customs Code, corruption in Customs was a serious problem, and businesses reported that Customs officials frequently demanded bribes or special "fees" to expedite clearance. Companies also reported improper customs valuation procedures – such as 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. According to U.S. exporters, the situation with customs valuation has improved, too, and now it is determined by actual transaction value in nearly 90% of cases.

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 most-favored-nation (MFN) simple applied tariff rate. For agricultural goods, the average applied tariff rate is now 9.5 percent. For industrial goods the average applied rate is now 3.7 percent. Ukraine applies preferential tariff rates to imports from its twelve 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 EU in 2011. Although the document was initialed in March 2012, it remains unsigned and unimplemented as the EU and Ukraine work to resolve broader political issues in their relationship. Some officials are optimistic that the DCFTA, under the broader EU Association Agreement, will be signed in 2013. When implemented, the DCFTA should lower tariffs for a wide range of goods from EU member states. Most MFN customs tariffs are levied at ad valorem rates, and only 0.9 percent of tariff lines (down from 5.97 percent prior to WTO accession) will be subject to specific rates of duty. These specific rates apply primarily to politically sensitive 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 some U.S. imports, including to food and agricultural products and pharmaceuticals, than is declared in the import documentation. There are concerns on how the SCSU 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 SCSU to have the government from the country of the product’s origin provide verification. These practices have made importing some items expensive, such as U.S. meat products, and have impeded trade in these products. The U.S. Government has raised its concerns about these valuation practices, including at the 2012 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 2012, the list included printers’ ink, paper with watermarks, optical media production inputs such as polycarbonate, equipment for the production of CDs, 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 the chemicals that fill extinguishers, refrigerators and freezers, air-conditioners, humidifiers, poultry meat and related products, pig and poultry fat, fungicides, insecticides, herbicides, plant growth enhancers/regulators, and other selected industrial chemical products.


Ukraine is not yet a party to the WTO Agreement on Government Procurement (GPA), but it commenced negotiations to accede to the GPA in February 2011, in accordance with its commitment when it became a WTO Member. The Ministry of Economic Development and Trade (MEDT) of Ukraine continues to have principal regulatory and supervisory authority in the field of the public procurement.

In 2010, Ukraine adopted a new law on state procurement, outlining major requirements for governmental procurement and tender procedures largely in line with international standards. However, on August 1, 2012, President Yanukovych signed controversial amendments to this law, expanding the range of government procurements excluded from public tender requirements. The amendments limited the requirement to use open tender procedures by state-owned enterprises only to procurement using state budgetary funds; however, the law does not provide a mechanism to track funds within such companies.

The law now in force requires that all government procurement of goods and services valued at more than UAH 100,000 (approximately USD 12,500) and public works valued at more than UAH 300,000 (approximately USD 38,000) must be procured through competitive tenders, with the wide exceptions noted above. 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 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 single-bid procurement, 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 (USD 2,125);
  • State-owned enterprises which used government funding are subject to procurement procedures.

Ukraine's procurement rules generally do not restrict foreign enterprises from participating in government procurement. In practice, however, foreign companies claim 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.

Currency Conversion and Capital Transfer Policies

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. However, in November 2012, the National Bank of Ukraine (NBU) implemented a number of administrative restrictions on currency conversion. Under authorities granted hastily by the legislative body (Rada), the NBU now requires exporters to sell 50% of foreign earnings in the interbank market. It has shortened the window in which export proceeds must be returned to Ukraine to 90 days from the existing 180-day deadline. The NBU also requires the sale within three days of foreign remittances greater than UAH 150,000 (USD18,700) per month. Lastly, the NBU created a committee whose mission is to “prevent unjustified demand for hard currency, eliminate conditions which invite speculation of hard currency, and conduct public outreach,” suggesting the potential for further measures on the horizon. A pension fund tax on hard currency purchases was canceled beginning July 1, 2010, but the Rada may consider a renewed tax of 15% on currency exchanges in early 2013.

Additionally, under regulations previously in place, 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 USD 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.

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 2012 and include limiting individual residents' and non-residents' monthly transfers of foreign currency to UAH 15,000 (USD 1900) per day without supporting documentation (e.g., court decision, contract, purchase invoice, etc.) or up to an equivalent of UAH 75,000 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.

GOU banned the issuance of consumer loans in hard currency beginning November 2011. In 2010, the NBU reinstated a 20% reserve requirement on short-term currency loans and deposits obtained by banks from foreigners, and in October 2012, the NBU banned a number of banks from the currency market, including reputable European banks, for failing to meet “hryvnia reserve” requirements.

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 which 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 USD 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

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, though the investor was anticipating the issue would be concluded through engagement with the Stockholm Arbitration Court at the end of 2012. 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.

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. In 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.

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.

Dispute Settlement

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.

The U.S. 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.

Ukraine's Legal System

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, with the exception of 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. 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.

Commercial Law: 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 inconsistent with 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, gaps in regulation exist in both codes. The existence of these two codes creates uncertainty in planning and structuring transactions, and often fails to answer questions surrounding transactions. Problems arising from these two codes also surface in dispute resolution, as courts are not able to resolve the conflicting provisions of the codes, or are unable to fill in the gaps in regulation that arise as a result of the missing provisions. Finally, other commercial laws have not been harmonized with these codes.

Bankruptcy: 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 Bankruptcy 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.

Binding International Arbitration: Ukraine enacted an international commercial arbitration law in 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; such procedures are regulated by a number of statutes and regulations, including Section 8 of the Civil Procedural Code and a law "On Enforcement Proceedings." In 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) recognizes arbitration of investment disputes before the ICSID. One major investment dispute involving a U.S. company was resolved in 2006 through a combination of direct consultations with GOU and international arbitration by ICSID.

Performance Requirements

Ukraine imposes no performance requirements or incentives, except for those made as part of privatization agreements. While negotiating its WTO accession, Ukraine eliminated measures that conflict with the WTO Agreement on Trade-Related Investment Measures (TRIMs) in the automobile industry and other sectors. While not yet implemented, several automobile industry specific import taxes are pending which would prove TRIMs-noncompliant.

Ukraine has no 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, a ban has been in place since 2003 on foreign investment in sectors considered 'strategic' by the GOU - primarily its energy infrastructure and development of its natural energy resources. This ban was partially lifted in late 2010 with a presidential decree allowing investment in Ukrainian power plants. The purchase of agriculturally-zoned land is also banned, 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, 2016. However, even if/when the moratorium is lifted, restrictions on foreign ownership of agricultural land may continue.

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.

Investment Incentives

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 are no performance requirements linked to these incentives.

Ukraine modified its foreign investment law of 1996 to provide 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.

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.

Right to Private Ownership and Establishment

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 property owners, 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.

Real Estate: The Constitution of Ukraine guarantees the right to private ownership, including the right to own land. A Land Code consistent with the Constitution was adopted in 2001. The Land Code provides for foreign ownership of non-agricultural land and clarifies the rights of foreign investors. It expressly prohibits foreigners from directly owning agricultural land. 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.

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.

Licensing: Ukraine applies both activity and import licensing regimes. The 2000 Law "On Licensing Certain Types of Economic Activities" provides a list of activities subject to licensing; October 2010 amendments canceled licensing requirement for 22 types of economic activities. Licensing now applies to 57 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. The business community continues to cite burdensome activity licensing requirements as an impediment to commerce in Ukraine: fees are high and compliance time consuming.

While most 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 the Ministry of Economic Development and Trade (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 two to three years and avoids the burden of certifying each shipment and mandatory laboratory testing upon arrival in Ukraine.

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. The newly revised list for 2013 includes: printer ink, paper with watermarks, optical media production inputs such as polycarbonate, equipment for CD production, ozone depleting substances, 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, air humidifiers and dryers, aerosol ammunition (for individual defense), and other selected industrial chemical products, poultry, meat, and meat products (Harmonized Schedule Line 0105), pig and poultry fat, fungicides, insecticides, herbicides, and plant growth adjusters.

Protection of Property Rights

Intellectual Property Rights: In 2012, Ukraine was moved from the Special 301 “Watch List” to the “Priority Watch List” in response to the continued deterioration of its IPR protections. Also in 2012, additional Ukrainian websites were added to the Special 301 report’s “Notorious Markets” list. Key concerns cited in the report included weak enforcement, continuing use of pirated software within the Ukrainian government, widespread retail piracy, the transshipment of pirated and counterfeit goods, Internet piracy, the lack of an authorized music royalty collecting society representing rights holders, and inefficiencies in the judicial system. The improved protection of intellectual property was a major theme of the U.S.-Ukraine 2010 and 2012 Trade and Investment Council meetings, during which the two sides agreed to IPR Action Plans. Among other provisions, these Plans address public awareness, strengthened enforcement, needed legislative improvements, and measures to transition government ministries to legal software. To date, GOU has not made significant progress in implementing these plans.

While GOU allocated UAH 100 million in its 2013 budget for legalizing software which it uses, implementation talks with rights holders are still in the preliminary phase. While some progress towards the passage of a new Ukrainian copyright law (bill #6523) has been reported, the lack of a public version of the bill including recent amendments has caused local and international rights holders to withdraw support for the legislation, pending review of its current form.

Optical Media: 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 included on USTR’s 2012 “Notorious Markets” list. 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 in decline, as consumers and piraters switch to internet piracy.

Internet Piracy: Internet piracy is the primary distribution method for pirated materials 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. In early 2012, within days of Ukrainian police taking down one of the country's largest infringment website, “EX.UA”, authorities allowed the site to re-open. This year, EX.UA was included on USTR’s “Notorious Markets” list. 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.

Royalty Collecting Societies: Ukraine’s flawed royalty collection process worsened further in 2012. In May, SIPSU revoked the accreditation of the Ukrainian Music Rights League (UMRL), the country’s only legitimate collecting society, to collect royalties for non-broadcast public performance of audio recordings. Local and international rights holders lost their chance to collect public performance royalties and cafes, bars, restaurants lost their ability to legitimately pay royalties. Rights holders have continued to complain that some royalty collecting societies, especially with the loss of UMRL, 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.

Data Protection: Ukraine has improved its protection of undisclosed test data, such as that from drug trials, from unauthorized commercial use. Ukraine 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.

Geographical Indications: 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, which have been 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. GOU 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 due to 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.

Transparency of the Regulatory System

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, GOU still requires enterprises to obtain numerous permits to start and conduct business. The 2011 Law “On Amendments to Certain Legislative Acts of Ukraine on Simplifying Enterprise Start-up Procedures”#3263-VI, cancels, in particular, the requirement for Minimum Charter Capital in order to register a Minimum Liability Company. Another 2011 Law “On Amendments to Legislative Acts of Ukraine “On Simplification of Voluntary Closing a Business Entity of Exit from Sole Proprietorship” (#3383-VI) reduced the number of documents required to close a company from nine to five, and introduced the “silence is consent” principle in cases when the tax authorities exceed the allowed time to make tax liability claims. GOU also tried to expand "One-stop Registration Shops" that allow new businesses to be registered within two to three days, vice the past average of a month. Per the 2010 Law “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. The utility of this legislation has been considerably undermined by inadequate implementation.

Rulemaking: 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.

Inspections: 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. However, a 2012 attempt by the Cabinet of Ministers to amend the legislation failed in the Rada. 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 2010, Ukraine passed two laws to bring technical regulation into compliance with EU directives #765/2008 and 768/2008. The first law, “On State Market Surveillance and Control over Non-Food Products” (#2735-VI), which entered into force in 2011, removed the requirement for pre-market control of non-food products and introduced state control requirements only when products enter the market. It set up a system of market surveillance, which significantly reduced state intervention in the manufacturing stage, and placed a higher burden on the manufacturer for ensuring compliance with production standards and technical regulations. The law also distributed the functions of standardization, compliance monitoring, and market surveillance among different administrative entities. Another law, “On General Safety of Non-Food Products,” (#2736-VI), further improved the regulatory environment. These two laws, together with the 2011 law “On Manufacturer’s Liability for Damages Caused by Defective Products,”( #3390-VI), create a market surveillance system according to EU principles.

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. 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 applies 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, forcing manufacturers to duplicate certification procedures or to submit proof of conformity assessment for each batch of products.

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.

Mutual Recognition: 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 legitimate objectives could be met in a less trade-restrictive manner. In a positive move, in 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 2008 amendment to the law "On Standards, Technical Regulations, and Conformity Assessment Procedures" helped to ensure that GOU authorities would accept the results of alternative methods of conformity assessment, including those performed in the United States. Ukraine's National Accreditation Agency (UNAA) 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) on personnel accreditation, allowing it to become an EA Associate member. 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: Ukraine’s food safety system is complicated. Controls are implemented by various state agencies that often have overlapping functions. In late 2010, GOU 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 has been required to 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 SPS Agreement provisions 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 regard 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, GOU uses veterinary and sanitary measures to limit imports. Significant technical barriers to trade (TBT) 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. However, in practice, Ukraine continues to maintain a cumbersome bureaucratic standardization system that applies conflicting government and proprietary regulations via unclear lines of authority.

Efficient Capital Markets and Portfolio Investment

Banking: The Ukrainian banking system consists of the National Bank of Ukraine (NBU, the central bank) 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 39% of total capital in the banking sector as of November 1, 2012. 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 are about $139 billion, with total loan assets of $70.25 billion.

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 2011, the NBU set the minimum capital requirement for banks at UAH 120 million (roughly USD 15 million). 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 2006, the Rada approved an amendment to the law "On Banks and Banking Activity," permitting foreign banks to operate via branch offices. Foreign banks had significantly increased their presence in Ukraine's banking sector in recent years, usually through the acquisition of Ukrainian banks, but after the 2009 financial crisis, European banks’ presence declined.

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 it 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. One of the banks recapitalized by the state, Rodovid, will absorb non-performing loans (NPL) from state-owned banks and state-intervened banks.

The banking crisis virtually froze corporate and consumer lending. A large portfolio of non-performing loans and the NBU’s tight monetary policy from 2011 through early 2012 resulted in a very slow lending recovery. Banks’ loan portfolios grew by only 2.9% between January-November 2012, and consumer lending fell by 5.9%. Non-performing loans constitute about 15% of the total loan portfolio based on the NBU definition, and 39% under the broader definition of NPLs. 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.

Reacting to the sharp drop in bank deposits in late 2008, the NBU tripled deposit guarantees from UAH 50,000 to UAH 150,000 (although the dollar equivalent only doubled from USD 10,000 to USD 20,000 due to the devaluation of the hryvnia). GOU also took steps to implement the bank resolution plan foreseen in the IMF loan agreement. In order to strengthen the bank resolution framework the Deposit Guarantee Fund assumed responsibility for bank resolution from the National Bank.

Money Laundering: 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.

Mortgages: Since 2000 Ukraine has laid the legislative and administrative groundwork for a functioning mortgage market. Adoption of the Laws "On Withholding Land Shares in Kind" in 2002 and "On Mortgages" in 2003 was particularly important. GOU created the State Mortgage Institution (SMI) in 2004 with authorized capital of UAH 50 million (USD 6.6 million) as a liquidity facility largely aimed at putting downward pressure on lending rates by allocating capital efficiently. SMI began issuing corporate securities during the first quarter of 2007. In 2010 GOU resolved to increase 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.

Mortgage lending more than doubled in 2007, increased by another 56 percent in 2008 to reach UAH 78 billion (roughly USD 10 billion). New lending, however, has stalled since 2008, as the real estate market experienced a severe correction amidst the financial crisis and the local currency faced a sharp devaluation against the U.S. dollar. In an attempt to limit currency risk among mortgages, Ukraine banned new mortgage lending to private persons in foreign currency in November of 2009. This ban, together with the NBU’s tight monetary policy, led to mortgage lending coming to a virtual standstill, with mortgage rates averaging 25-28% as of December 2012, according to a local NGO. Additionally, the construction industry declined by 2.1% for the first 11 months of 2012, year-on-year.

Insurance: With WTO accession in 2008, Ukraine gave foreign companies the right to operate in Ukraine's insurance market. During the five-year transition period foreign companies 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. When the transition period ends, foreign companies will be able to operate in Ukraine via affiliates or brokers. Amendments to the law “On Insurance” were adopted in 2006 and 2007.

Capital Markets: Ukraine has ten operational privately-owned stock exchanges. The largest trade volumes are conducted at three major exchanges: the Perspektyva Exchange was responsible for 45% of trade volumes in the first ten months of 2012, followed by PFTS electronic trading system (42%), and the Ukrainian Exchange (11%). 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 conducted off-exchange. The remaining exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises. It is also worth noting that in 2009, the PFTS Association, which owns one of Ukraine's largest stock exchanges, increased its authorized capital and sold the additional shares to the Russian exchange MICEX, giving MICEX a 50% ownership in the PFTS Exchange.

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 an investment destination for domestic savings. The market of derivative securities has seen rapid growth over the last year. The Ukrainian Exchange and the Perspektyva Exchange operate futures sections; the trade volumes in futures accounted for 10% of the total securities trading in the first 10 months of 2012.

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, using a variety of credit instruments. However, the market lacks transparency, enforcement of key laws and regulations remains weak, and investors, both domestic and foreign, continue to face significant uncertainty. This includes low market confidence, 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 National Securities and Stock Market Commission (NSMSC) and Financial Services Regulator (FSR) have insufficient enforcement power and their rulings are not always followed by the courts. The NSMSC 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 disputes between the market-owned securities depository MFS and the state-owned National Depository of Ukraine (NDU). Since 2009, the AUSD was registered as successor of the MFS and owner of 97% of its shares. Depository operations by AUSD have been largely in line with G-30 requirements. The AUSD services 90% of new emissions in Ukraine, and provides clearing for all Ukraine’s exchanges. The state-owned NDU remains in existence, but has 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.

The AUSD is a majority privately-owned depository that, by all objective accounts, has been managed efficiently and transparently. In 2012, however, the NBU succeeded in gaining control of the AUSD, with the passage of legislation authorizing the merger of the AUSD with the state-owned NDU to form a consolidated Central Securities Depository (CSD). Although negotiations were stalled for most of the past year, the merger was formalized in legislation passed in October 2012. The ultimate effects of the merger are yet unclear, but the resulting CSD will likely 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 by the law "On Securities and the Stock Market" (2006);
  • the law "On Business Associations" (1991);
  • the 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);
  • the law "On Financial Services" (2001); and
  • the law "On Joint Stock Companies" (2008).

The law "On Joint Stock Companies" (2008) represents a major improvement over the law "On Business Associations" which was vaguely written and did not support basic shareholders rights; as a result it 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 2011 and 2012 amendments permitted issuance of foreign-currency denominated government bonds to be sold to companies as well residents of Ukraine.

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.

State-Owned Enterprises

The vast majority of Ukraine's state-owned enterprises (SOEs) were 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 and contains more than 5,000 SOEs. The sector is inefficient and often unprofitable. 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 (especially in the energy sector), 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.

GOU has resisted raising consumer gas prices to market levels, forcing the state energy monopoly, Naftogaz, to run massive operating deficits. 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 USD 1.25 billion in early 2011, though the privatization process (involving an auction with only one approved bidder) was criticized as non-transparent and under-priced.

Privatization: Ukraine’s State Property Fund oversees the privatization process. 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 (USD 8.75-10 billion).

With several exceptions, few new major privatizations have been conducted since the privatization rush of 2004. The most prominent recent privatization involved Ukrtelekom (Ukraine's monopoly state telecommunications operator), which was privatized following a non-transparent and controversial single-bid tender process. In 2012, most regional gas distribution companies were privatized, and the State Property Fund launched the privatization of heating plants with the sale of a heating plant in Kharkiv, in eastern Ukraine, in November. Both privatizations were conducted at what some analysts considered below market prices. GOU also announced the possibility of privatizing state energy monopoly Naftogaz and its subsidiaries, as well as spirit distilleries. However, this initiative has not moved forward.

GOU has announced its intention to privatize all 112 state-owned coal mines by 2014. In a September 2012 resolution, Ukraine’s Cabinet of Ministers began the process of transforming the mines into joint stock companies to prepare them for privatization. The Cabinet of Ministers also permitted the majority of state-owned mines to transfer their assets into concessions. Some industry analysts believe the majority of the state-owned mines are no longer economically productive and would need to be bundled with other assets to attract investor interest.

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. 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 Corporate Social Property Fund to create joint ventures with state property; and prepare proposals to divide state property between the national and municipal levels.

Other 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 2009 Joint Stock Company law introduced principles of sound corporate practices that meet international standards. As of May 2011 provisions of the new law superseded the law “On Companies” with regard to operations of shareholding companies.

Sovereign Wealth Funds: Ukraine does not maintain or operate a sovereign wealth fund.

Corporate Social Responsibility

Corporate Social Responsibility has not yet taken hold in the mind of the consumer and is just beginning to gain ground amongst producers in Ukraine. International companies continue to be the strongest proponents of CSR and have made efforts to transfer the idea of CSR to their Ukrainian affiliates. With past help from the American Chamber of Commerce (ACC), 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. However, ACC has ceased to focus on CSR issues, citing lack of interest from the business community and a commercial environment in Ukraine beleaguered with other investment difficulties.

One 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. In November 2009, a first public hearing on CSR was held by the Parliamentary Committee on Regulating Policy and Entrepreneurship. To date, a bill that has been passed but not signed is a green measure that would allow companies that display efficient waste management practices the option to sell reprocessed waste products within Ukraine.

CSR initiatives are seen by consumers as positive outreach by companies but are more the exception rather than the rule. Consumers do not expect companies to develop, finance, or complete projects that do not directly affect their profitability or growth. 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 operating in the Ukraine generally follow on a voluntary basis and are judged by NGOs on the following standards: OECD Guidelines for Multinational Enterprises, Account Ability'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, 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. According to the Global Compact Initiative (GCI), 89 companies within Ukraine are current members; of these, 61 companies have submitted annual CSR reports which are competitive with CSR reporting efficiency among European countries.

Political Violence

While public protests occur 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, a moderate number of protests took place in reaction to unpopular government actions, particularly relating to the conduct of the October 2012 parliamentary elections, as well as the continued imprisonment of former Prime Minister Yulia Tymoshenko. While police presence is often heavy, violent clashes between police and protesters have been rare.

Incidents of racially-motivated violence occasionally occur; groups of "skinheads" and neo-Nazis continue to target people of color, members of religious minorities, and people perceived as lesbian, gay, bisexual, or transgender (LGBT) 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 2012 Corruption Perception Index (CPI), from “27” to “26” on the 100-point scale, and is ranked 144 of 176 countries.

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 polls show 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 and 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, and articles on Financial Controls came 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 2010. The law is rarely enforced, and on these few occasions 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 2006, then-President Yushchenko signed a decree committing Ukraine to honor its obligations to the Council of Europe, which include several anti-corruption provisions. Later that year, the President signed a separate decree adopting a national anti-corruption strategy that directed all branches of government to support these efforts, and GOU followed up by adopting an Action Plan to implement this strategy. In 2011, President Yanukovych announced a National Strategy on Fighting Corruption, which created an advisory entity to fight corruption, the National Anti-corruption Committee, reporting to the President of Ukraine. Although President Yanukovych declared the importance of creating a central agency responsible for combating corruption, it has yet to be established.

In 2010 the U.S. Department of State funded a Resident Legal Advisor from the U.S. Department of Justice to facilitate implementation of 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 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 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 1999, and the UN Anticorruption Convention, signed in 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

Ukraine and the United States have shared a bilateral investment treaty (BIT) since 1996. Ukraine also has BITs with: 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), 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 have shared a tax treaty since 2001. Under these sorts of treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

In November 2012, Ukraine signed a Double Taxation Convention with Cyprus to replace the current bilateral agreement dating from 1982. Under the new treaty, if it is ratified, most income earned in Cyprus will be taxed at levels between 5% and 15%, reducing the tax gap between the two countries. While GOU 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.

The United States and Ukraine signed a Trade and Investment Cooperation Agreement (TICA) in 2008, which, through a joint U.S.-Ukraine Council on Trade and Investment, identifies and removes impediments to trade and investment flows. The Council last met in July 2012.

OPIC and Other Investment Insurance Programs

The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in 1992. OPIC resolved a long-standing dispute in 2009, and restored its programs in Ukraine after an almost ten-year hiatus. In 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.

In 2002, the Board of the U.S. Export-Import bank opened facilities for short and medium-term (up to seven years) lending for commercial and sub-sovereign projects. Ukraine is a member of the Multilateral Investment Guarantee Agency (MIGA).


Ukraine has a well-educated and skilled labor force (about 20-25 million people) with nearly a 100 percent literacy rate. As of July 2012, unemployment (ILO methodology) averaged 8.0 percent, although unemployment in western and central regions was significantly higher. GOU, which counts only those officially registered to receive unemployment benefits, claims unemployment was only 1.6% as of December 2012.

Wages: Wages in Ukraine remain low by Western standards. During the first ten months of 2012, the nominal average monthly wage increased by 15.5% year-on-year to UAH 2988 (about USD 373), while the real average wage increased by 14.8% 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, 2012 wage arrears equaled almost UAH 897 million (approx. USD 112 million).

Minimum Wage: The minimum monthly wage increased to UAH 1134 (approximately USD 142) in December 2012. The 2013 state budget envisages approximately 1% minimum wage increase as of April 1, 2013, and approximately 6% increase as of December 1, 2013. According to the law, the minimum monthly wage equals the monthly subsistence level.

Pensions: An important step in the pension reform was made by adoption and enactment of the Law “On Pension Reform” in October 2011. In 2003 Ukraine began a comprehensive pension reform program based on international standards, which envisaged a three-pillar system: Pillar I, a solidarity system, Pillar II, a mandatory accumulation system, and Pillar III, a voluntary private pension system. For Pillar I, retirement payouts are determined on the basis of the individual's labor records and contributions. The system follows "pay as you go" principles, meaning the contributions of today's workers fund today's pensioners. Some 14 million workers contribute to the system to support 13.7 million pensioners. The 2011 law provided for gradual increase of the pension age for women from age 55 to 60 and men from age 60 to 62 working as government officials; increased the number of years worked required to earn a pension from 25 to 35 years for men and from 20 to 30 years for women; 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 pension contributions at 33.2% of wages and employee contributions of 2% exacerbate shortfalls in financing by encouraging substantial underreporting of income to evade high pension contributions. When combined with all other social insurances, the employers’ contribution averages 40.5%. At least 40% of workers are employed in the gray economy, particularly in the agrarian sector, not contributing to the pension fund but having 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 15 billion (USD 1.9 billion), and for 2013 the deficit is estimated at UAH 21.8 billion (USD 2.7 billion).

Pillar II, the Mandatory Accumulation System, is not yet enacted in Ukraine, although the parameters for its launch were outlined in legislation adopted in September 2011. Once the PFU deficit stands at zero, Pillar II can commence, mandating that all Ukrainian workers up to age 35 contribute to a stock market-based individual retirement account, beginning with an initial rate of 2% of wages and rising by 1% each year to a maximum of 7%. Pillar II is designed to pre-fund a part of the public pension to relieve pressure on the current "pay as you go" system. The success of Pillar II depends on significant reductions in the budget deficit, establishing the operational systems required to administer Pillar II and establishing a transparent capital market regulated broadly in accordance with international standards. When implemented, Pillar II may generate substantial domestic long-term savings to finance economic growth, starting with about USD 0.4 billion in the first year and rising to USD 9 billion within five years. Introduction of Pillar II is now expected in 2013-2014.

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, 67 active funds (out of 97 registered) service over half a million participants and have assets of about USD 190 million, but over half of these assets are in the National Bank of Ukraine’s fund. High administrative charges, averaging 4.4% of assets, and poor returns, averaging 5%, does not make it an attractive investment when compared with banks offering deposits at rates averaging 20%.

Moreover, Ukraine's underdeveloped capital markets do not provide private pension funds with sufficient sound, long-term investment opportunities. At the end of June 2012, 27.2% of assets were invested in bank deposits, 17.1% in Ukrainian equities, 30.5% was invested in Ukrainian corporate bonds, 12.1% 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 and 2012 amendments 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 GOU’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.

Despite the steps taken to help redress financial imbalances in the pension system, additional measures are needed to restore sustainability to the system and strengthen incentives to contribute by safeguarding the security of future pensioners. Beyond fiscal sustainability, pension reform is essential for business competitiveness and is a social matter of intergenerational fairness.

Labor/Management Relations: Ukrainian workers are generally accustomed to "top-down" management practices. A younger, more independent-minded generation is slowly moving into the workforce, and it is becoming easier to find professional personnel who function independently and demonstrate initiative.

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

Foreign Trade Zones/ Free Trade Zones

Ukraine has in the past maintained special or free economic zones (SEZs-FEZs), but in 2005 GOU canceled all tax exemptions (i.e., from land tax, corporate income tax, import duty, and VAT on imports) to stop the large-scale misuse of these zones for tax evasion and smuggling.

Foreign Direct Investment Statistics

According to Ukraine's State Statistics Committee, as of October 2012, the total stock of FDI in Ukraine was USD 52.67 billion or approximately USD 1155 per capita. This represents a 5.2% increase from January 1, 2012, when the total stock of FDI stood at USD 49.4 billion (or USD 1082 per capita), and an 17.8% increase in FDI from January 1, 2011.

FDI by Country: As of October 1, 2012, Ukraine's major investors included: Cyprus (28.6% of total FDI), Germany (14.1%), the Netherlands (9.6%), Russia (7.0%), Austria (6.3%), the United Kingdom (4.5%), and the British Virgin Islands (3.4%). Investment from the United States comprised 2.0% of FDI. Cyprus remains a popular offshore destination for Ukrainian and Russian enterprises through which to channel investments due historically to a very favorable bilateral tax treaty (see Bilateral Investment Agreements).

FDI by Industry Sector Destination: The largest portion of cumulative investment went to industry – 32%; in particular, the steel industry – 11.7%, food processing and tobacco – 5.7%, production of natural resources – 2.7%, chemical industry – 2.5%, machine-building – 2.5%; the financial sector – 29.8% real estate and engineering – 16.2%, and trade and repairs – 10.4%.

FDI From Ukraine: As of October 1, 2012, Ukraine's FDI to other countries equaled USD 6.43 billion. 90% of Ukrainian investment (or USD 5.8 billion) 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 (see above). The second largest destination for FDI from Ukraine is Russia, which received 4.0 % of Ukraine's FDI.