Major improvements in the business environment in Ukraine since the country gained independence in 1991 have opened up the market for foreign direct investment (FDI).
Like many other former soviet republics, Ukraine is trying to maintain a centrally planned economy – but based on market principles. There is a law on foreign direct investment, an extensive privatization program has been carried out since the mid-nineties, and several new commercial laws now regulate foreign trade, taxation and banking. The legal and regulatory framework for investment and commerce is in place. Moreover, Ukrainian laws are now easier to understand and should encourage FDI.
Most FDI has been invested in banking, retail, food processing, machine building, steel, power generation, transport, communication and chemicals. The cities of Kyiv, Lviv, Odesa, Dnipropetrovsk, Kharkiv, Vinnytsia and Uzhhorod have attracted more than 70% of overall investment and are clearly all geographically strategic for FDI.
The legal framework for FDI has become better over time. The original Law on Foreign Investment provided huge tax holidays of up to 10 years for certain industries and for investments over a certain size. But this failed to attract the expected large inflows of foreign direct investment.
The government’s top policy priority is to attract more FDI and it has set up a National Agency for Reconstruction and Development. NARD is responsible for attracting increased investment and improving the legal environment by streamlining existing rules and regulations. The Ukrainian State Credit and Investment Company is able to finance investment projects and is responsible for the government’s investment program. Although it normally focuses more on domestic investment, to the extent that foreign investment is important to support certain projects, it also works closely with NARD and relevant ministries. There are other government bodies, such as the Cabinet of Ministers, the Ministry of Finance, and the Ministry of Economy that also handle matters related to FDI.
Certain areas of Ukraine’s economy, like banking, insurance, and heavy industry where environmental damage a risk, require special permission for both domestic and foreign investors. This can only be granted by the Cabinet of Ministers or other authorized body. Like other former soviet republics, Ukraine restricts the production of drugs, weapons, ammunition, and explosives to state-owned companies, which means they see no direct foreign investment. Many other restrictions change on a regular basis, which does not promote liberalization.
Ukrainian law protects foreign direct investments in a variety of ways. Some allow for the full repatriation of profits, invested capital and the wages of expatriate employees in hard currency, once taxes and other debts have been paid. If nationalization or expropriation takes place, Ukrainian law guarantees quick hard currency compensation of the full amount that was invested. It also provides a 10-year guarantee against changes in legislation that could damage foreign investors in any way.
Ukraine has made great progress over the past few years in making its economy both stronger and more stable. It is clear the country's leaders are committed to reform.
As soon as the new government came into power in March, 2014, it instantly applied for foreign financial assistance. On March 26th, Ukraine reached a provisional arrangement with the IMF on a $14-18 billion loan for a two years period. On April 30, 2014, the Executive Board of the IMF approved a two-year Stand-By Arrangement for Ukraine, amounting to US$ 17.01 billion. On May 21, 2014, Ukraine has received the first tranche of SDR 2.058 billion of IMF loans (about US$3.19 billion).
Attitude toward Foreign Direct Investment
On March 11, the IMF Executive Board Approved a 4-Year USD 17.5 Billion Extended Fund Facility (EFF) for Ukraine. This program expands and replaces the prior Standby Facility that was established in April 2014. Continued IMF financing as well as bilateral support are critical to restoring economic stability. In a March 2015 press release, the IMF emphasized that the program will support the Government of Ukraine’s efforts to improve the business climate, stating that “addressing deep-rooted structural problems is critical to create an enabling environment for investment and private sector activity.” Tackling weak governance and improving the business climate is critical to increase investment and achieve higher growth. A comprehensive strategy to reform state-owned enterprises is important to enhance efficiency and reduce fiscal risks.” The European Union Association Agreement was signed in 2014. The EU unilaterally reduced tariffs on Ukrainian goods as of April 22, 2014 through December 2015, when Ukraine begins to implement the Deep and Comprehensive Free Trade Area (DCFTA) – the economic component of the Association Agreement.
On the 1st of January 2016, DCFTA has been established by the Association Agreement between the EU and Ukraine.
One of the obvious elements of the agreement is that it establishes a Free Trade Area (FTA) between the EU and Ukraine. This implies that tariff duties paid when trading goods between Ukraine and the EU will, in most cases (99% of present trade value), progressively decrease to zero.
Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company's charter fund. Some restrictions do apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property. There is no current requirement that investors purchase from local sources, export a certain percentage of output, or be limited to foreign exchange in relation to their exports. From January 1, 2013, through January 1, 2018, Ukraine provides a 100% exemption from Corporate Profit Tax (CPT) on income from projects resulting in job creation in qualifying industries, including high-tech, ecofriendly, manufacturing and export-oriented industries. The incentive is granted for new projects as well as reconstruction or upgrades to existing enterprises, under certain conditions concerning the value of the investment, the number of jobs created, and salary levels. Ukraine also offers generous depreciation rates for most fixed assets, including property, plant, and equipment for both foreign and domestic investors.
Foreign firms are able to participate in government/authority financed and/or subsidized research and development programs on a national treatment basis.
The largest impediment to fighting corruption is a dearth of cases being prosecuted by the government. Ukraine’s first anti-corruption trials under new laws are currently in progress. High-level investigations are also on-going, as witnessed by the March 2015 public arrest of the head of the State Emergency Services and his first deputy on suspicion of involvement in corrupt procurement schemes.
In October 2014, the Parliament passed a package of anti-corruption bills, including the creation of a National Anti-Corruption Bureau focused on corruption prosecution; the creation of the National Anti-Corruption Committee entrusted with corruption prevention; approval of a national anti-corruption strategy; and a legislative basis for the prevention of money laundering and for the disclosure of asset ownership by public officials, extending to family members of government officials. Since anti-corruption laws are not retroactive, first results should appear after the tax season of 2015, in spring 2016. Ukraine's President appointed the new Director of the National Anti-Corruption Bureau in April 2015, stating that the Director’s mission is “to build a new institution that would demonstrate Ukraine's determination to battle corruption.”
The National Corruption Prevention Agency has a primary task in 2015 to implement an electronic property declaration form for civil servants. As of February 2015, Ukraine implemented an e-procurement system that improves transparency in public procurement and is intended to reduce corruption by automating the tender process. Another important anticorruption law on business deregulation, passed by the Parliament in March 2015, is expected eliminate many corrupt practices in licensing activity; the law simplifies the startup and conduct of entrepreneurial activities and waives licensing requirements for activities that have an adequate level of government regulation and oversight.
The Law on Corruption Prevention adopted by the Parliament in October 2014 sets requirements with regard to anti-corruption programs, codes of conduct, and appointing compliance officers in companies which take part in government procurement tenders or where the government owns more than 50 percent of the shares.
Ukraine participates in international Anti-Corruption initiatives. 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 concluded its Joint First, Second, and Third Rounds of Evaluation of Ukraine, publishing reports in 2007 and 2011. The fourth evaluation was launched in 2012.
Local NGOs involved in corruption investigations have marked a significant improvement in government protection of their rights, as compared to the Yanukovych’s government where such NGOs were often victims of threats and spurious criminal prosecutions. The government has recently opened to public access the registries of licenses for production of natural resources and of real property owners, and increased transparency of government procurement processes. However, the areas of dispute settlement and competition protection are still seen as highly corrupt.
Ukraine also participates in the OECD Anticorruption Network for Eastern Europe and Central Asia. Parliament passed laws to ratify the Council of Europe Criminal Law Convention on Corruption, signed in 1999, and the UN Anticorruption Convention, signed in 2003.
The National Anti-Corruption Bureau established by law in October 2014 is the appropriate resource for the reporting of corruption.
Bilateral Investment Agreements
Ukraine has signed many bilateral investment treaties with a variety of countries. Projects from treaty countries may sometimes be allowed to import machinery and other equipment tax free or at concessional rates, with the possible exception of restricted sectors like banking, insurance and heavy industry. There are also provisions for international arbitration in the settlement of disputes between foreign investors and the state.
Products manufactured by a company with ties to a foreign company are exempt from export licensing and quotas, although such benefits do not apply to all products. Key among the latter is electricity, which is a disincentive for potential investors in the power sector.
The following countries have signed bilateral investment agreements with Ukraine: Albania (2004), Austria (1996), Argentina (1995), Armenia (1994), Azerbaijan (1997), Belarus (1995), Belgium (2001), Bosnia and Herzegovina (2002) Bulgaria (1994), Brunei (2006), Canada (1994), Chile (1995), China (1992), Cuba (1995), Croatia (1997), the Czech Republic (1994, amended 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), USA (1996), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), Yemen (2002).
Ukraine has a well-educated and skilled labor force (about 23 million people) with nearly a 100 percent literacy rate. As of October 1, 2014, unemployment (ILO methodology) averaged 9.3 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. During 2014 unemployment increased in the industrial eastern regions, too, because of civil unrest; many big enterprises faced lay-offs due to severe economic challenges, including loss of access to Russian and CIS markets. According to official statistics, which count only those registered to receive unemployment benefits, employment was only 2.0 percent in January-February 2015. In January the unemployment insurance allotted to each worker amounted to UAH 1251 (USD 78) and in February this dropped precipitously to UAH 1206 (USD 48) due to sharp hryvnia depreciation.
In December, 2014 the nominal average monthly wage increased by 10.4 percent year-on-year to UAH 4012 (USD 260), while the real average wage increased by 13.6 percent year-on-year during the same period. As of February 2015 the average monthly wage plunged to UAH 3455 (USD 144). The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers. Because of wage arrears in the east of Ukraine that equaled UAH 1,12 billion (USD 70 million) as of January 2015, total wage arrears stood at UAH 2,44 billion (USD 152 million). The greatest arrears accumulated in industry, transport and construction sectors.
As of May 2016 the minimum monthly wage is UAH 1399 (USD 56), which by law equals the monthly subsistence level. The 2016 state budget envisages minimum wage increase as of December 1 to UAH 1,496, adjusting only for inflation. Labor/Management Relations: Ukrainian law allows workers to organize, and unions are prevalent in most industries. The law provides most workers with the right to form and join independent unions and to bargain collectively without previous authorization. By law, trade unions are equal, and a union’s establishment does not require government permission. Within classic sectors of the economy, sector-specific collective bargaining agreements involve representative employers’ associations (e.g., chemical employers), sector trade unions, and some participation of the government through the Ministry of Social Policy. Such agreements can also take place at the regional level.