Current Investment Trends

Foreign direct investment continue to flow into Ukraine’s economy in 2009.

Figures provided by Derzhkomstat indicate that Ukraine attracted about US $2.87 billion in FDI for the first nine months of 2009, bringing the total to US $38.6bn as of October 1, 2009. While small compared to the amount of foreign direct investment inflows detected in neighboring Central European countries, Ukraine has observed a steady surge of investment inflows since the Orange Revolution of 2004 slapped the country onto the radar screens of Western investors.

The cash inflows continue to stream in from so-called tax-heaven countries, such as Cyprus, the Netherlands and the British Virgin Islands.

The largest FDI inflows to Ukraine as of October 1, 2009 were from Cyprus, with 21.3% of cumulative FDI, Germany with 17.1%, the Netherlands with 9.9%, Austria with 6.6%, the United Kingdom with 6.1%, and Russia with 5.3%.

Direct investment from Ukraine was US $6.2 billion as of 01.10.2009. The largest portion of investments from Ukraine went to Cyprus. Both  inflows  and  outflows  of investment between Ukraine and Cyprus represent  the  capital  transactions  and movements done by the major Ukrainian  industrialists  aiming  at  optimizing  taxation as well as allocating  money for developing the international structures of their own  businesses.  Over more than a decade, Cyprus offshore economy has been playing an important role as a shelter for the evading Ukrainian money. 

The lion’s share of FDI to Ukraine was invested in the financial services sector: US $6.1 billion or 18.6% of total FDI, an increase of 25% in 2008. The real estate business and wholesale and retail trade absorbed 8.9% and 10% of total investment.

Ukraine has been hard hit by the credit crunch and the crisis. As a result, FDI into Ukraine dropped almost two thirds in the first 9 months of 2009, from US $8bn in the first 9 months of 2008, to US $2.97bn in the same period of 2009. At US $1.2bn, the city of Kyiv got most of the FDI. Other top performers included Kharkiv, Luhansk, L’viv and Kyiv Oblast. Divestment was seen in Chernihiv and Poltava Oblasts.

Legal Conditions of Doing Business

Despite more than 70 years of soviet rule, even its final years of “perestroika,” in over 16, years of independent development, Ukraine has moved significantly toward a free market economy. Today, the country is an independent player at the international marketplace. Ukraine radically modified its legal system in order to match modern conditions. As a result, Ukraine has quite a number of new and amended laws.

One of the first new laws, the Law on Ownership, specifically recognizes private ownership and the right of both Ukrainian residents and foreign individuals and legal entities to own property in Ukraine, to use such property for commercial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. In addition, a new Civil Code, a (Commercial) Code, a Land Code, laws on companies, laws on foreign economic activity, on entrepreneurship and more have adopted. These laws effectively establish the basic framework for business activity in Ukraine.

The process of privatization or selling off state commercial and other assets started in 1992. This process is governed by the laws on privatization of state-owned property and a set of regulatory documents. Admittedly, the privatization process was not an easy one and there were undoubtedly a number of irregularities. In 2005, the Tymoshenko Government began to counter such irregularities. This led to the high-profile re-privatization of KryvorizhStal, the country’s largest steel plant and one of the largest in the world. The result was a six-fold increase in the original price and the arrival of a strong international investor, India’s Mittal Steel, in 2005. It sent out a signal to foreign investors that future privatization auctions would be held in a more honest, transparent manner that would not a priori exclude suitable buyers through the manipulation of tender conditions.

In 2008, the State Property Fund transferred UAH 480.81 million to the State Budget. Overall, the Fund brought in only 79.37% of the revenue anticipated in the privatization plan adopted by the Finance Ministry.

The list of enterprises to be privatized in future includes Ukrtelecom, the Odesa Port Plant and six oblenergos (power utilities). The Government decided to sell a 68% share of Ukrtelecom, rather than the 38% stipulated the previous year. This decision should make Ukrtelecom a more attractive acquisition for potential investors.

The business environment improved in 2008 with the adoption of a very important, long-anticipated piece of legislation, the Law on Joint Stock Companies.

This law regulates the establishment of joint stock companies, the rights and obligations of shareholders and management, the payment of dividends, and access to information.

It also states that shareholder meetings can only take place on company premises, to avoid what has come to be known as “raiders’ attacks:” when control of a firm is wrested by a few major shareholders through ad hoc meetings and votes. Such incidents have led to lengthy court cases, much to the frustration of hundreds of shareholders.

The new law removes one of the largest obstacles to the development of an efficient stock market in Ukraine.

Nevertheless business activities in Ukraine are often subject to licensing by different state agencies. Starting up a business usually means registering with the tax and pension authorities, among others, and getting a slew permits and approvals, such as fire safety, labor, sanitary, and so on. In any case before starting a project in Ukraine, an investor should better obtain qualified local advice.

 
Source: Kyiv Post