Ukraine has undergone an historic transformation since 2014, which has laid the foundation for a dramatically improved investment climate in the future. As the 2015 Investment Climate Statement goes to press, Ukraine’s post-Maidan government is moving forward with an ambitious reform agenda to put Ukraine’s weak economy back on solid ground and to create a welcoming business environment. During 2014, the Government of Ukraine made tangible progress moving Ukraine’s government and economy away from the highly centralized, corrupt structures left over from the Yanukovych era and legacy Soviet systems. However, more work remains to be done, and the challenge of implementing a robust reform program during a period of political transition, economic contraction, and military conflict in the East is daunting.
During 2014 the government signed and ratified their Association Agreement with the European Union. Although full implementation of the economic part of the Association Agreement – the Deep and Comprehensive Free Trade Area - is postponed to January 2016, Prime Minister Yatsenyuk and his new cabinet continued engaging positively with European countries. The Parliament has also made important strides; for example, they have stripped parliamentary immunity, made progress on political and economic decentralization, and begun to address judicial reform. The Government of Ukraine has also made headway on anti-corruption efforts, with the passage of amendments to the National Anti-Corruption Board of Ukraine (NABU) law, the appointment of a NABU director, and more decisive action by a new Prosecutor General appointed February 2015.
The government signed a Standby Agreement with the IMF in April 2014 and an Extended Fund Facility in March 2015 demonstrating its commitment to the programs by implementing decisive measures to enable sustainable growth through comprehensive governance and structural reforms, such as: introducing a flexible exchange rate regime, stabilizing the financial system, securing fiscal sustainability, and restructuring the energy sector. Efforts along these lines could well enable Ukraine to turn the page on the past and open its doors more widely to foreign investment while cementing democratic values and adhering to transparent economic principles.
However, the Russian invasion, occupation, and illegal annexation of Crimea in March 2014, Russia’s continued aggression in eastern Ukraine, along with Russia’s trade and economic warfare toward Ukraine, continue to undermine the economy. For example, by the end of 2014, in response to Ukraine’s signing of the Association Agreement with the EU, Russia implemented technical barriers to trade banning the importation of all Ukrainian dairy products and livestock. The Russian-backed conflict in the east decreased industrial production as well. Further damaging Ukraine’s export revenues, Russia has also disrupted transit of some Ukrainian goods across the territory of the Russian Federation. Such actions impact major exporters, including multinational companies, and further undermine investor confidence.
The new government has started implementing wide-ranging reforms to improve the investment climate by increasing transparency in state-owned enterprises, eliminating unnecessary regulations, revamping procurement processes, and simplifying the tax code. However, its immediate focus is stabilizing the weak economy which has necessitated measures like increased import tariffs and administrative currency controls that are not business-friendly. The ministers of the economy and finance have acknowledged that 2015 will be a year of transition and reform and hope to see a stabilization of the situation and increased FDI in 2016. To support this goal these ministers have brought in a new team of reform-minded deputies, many of whom hail from the private sector, to be agents of change in the government. Instability in the East continues to cast a shadow across the Government of Ukraine’s reform efforts as many would-be investors remain on the sidelines waiting for a sustainable resolution to the conflict.
The Deep and Comprehensive Free Trade Agreement between The EU and Ukraine entered into force on 1 January 2016, as part of the broader Association Agreement. In the DCFTA Ukraine has committed itself to harmonising a large number of rules, norms and standards in a number of trade-related areas with those of the EU. These areas include competition, public procurement, trade facilitation, protection of intellectual property rights and trade-related energy aspects, such as investment, transit and transport.Advantages
Investment in Ukraine has many advantages:
- There are many branches of industry that need investments
- Ukraine is one of the largest consumer zones in Europe; a high rise of customers’ goods consumption is expected
- Ukraine is full of natural resources
- Ukrainian employees are well-trained and with a high educational level
- A favorable geographic position of Ukraine between Europe and Asia in the intersection of four European transportation passages
- Tax situation is constantly improving
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 persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country. However, judicial reform is underway.
The President of Ukraine signed the Law “On Ensuring the Right to a Fair Trial” on February 24, 2015. Starting March 28, 2015 the powers of the Supreme Court were enhanced and new rules now apply to the selection and disciplining of judges, in what is the first step in an expected major overhaul of the judicial system in Ukraine, a stated priority of President Petro Poroshenko. Successful judicial reform and strengthening of rule of law, both of which are key demands from the Maidan revolution of dignity, will be essential to eliminate the culture of corruption in the country.Laws/Regulations of Foreign Direct Investment
The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment. In addition, the following laws and regulations pertain to foreign investment: Law "On the Foreign Investment Regime" (1996); Law "On the Protection of Foreign Investment" (1991); Cabinet of Ministers' Resolution, "On the Procedure for the State Registration of Foreign Investment" (1996); Law “On Production-Sharing Agreements,” (1999), amended in 2012 • The Land Code (2001); 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 2012); Amended Customs Code (2012); Law “On Industrial Parks” (2012).
The Ukrainian Government is contemplating e-commerce registration as a mechanism to increase transparency. For example, it has recently implemented an automated VAT-refund system to reduce opportunities for bribery. Electronic Government procurement has also been introduced to combat corruption. Recently elected Members of Parliament have expressed support for the introduction of an interoperability plan and system for government ministries to not only share information but ensure the protection of data.
The World Economic Forum’s 2015/2016 Global Competitiveness Index ranked Ukraine as #79 of 140 countries (76 of 144 in 2014/2015). The Index also ranked Ukraine as #87 of 140 in terms of burden of Government regulation (115 of 144 in 2014/2015) and 98th among 140 countries in terms of Transparency of Government policy-making (104 of 144 in 2014/2015). In particular, the report cited the following factors as the most problematic ones for doing business in Ukraine: corruption, access to financing, inflation, policy instability, tax rates, inefficient government bureaucracy, complexity of tax regulations, foreign currency regulations and government instability.Regulating foreign investment
Ukraine regulates foreign investment activity through two main laws: the Law “On Protecting Foreign Investments in Ukraine” dated September 10, 1999, and the Law “On the Foreign Investment Regime” dated March 19, 1996. The National Bank of Ukraine has also adopted a number of resolutions that regulate currency issues involving foreign investment.
The current law offers a number of guarantees to foreign investors:
- Unencumbered repatriation of profits from investments in Ukraine;
- Protection against nationalization and expropriation, except in the case of natural disasters, emergencies, epidemics, epizootics, where appropriate and effective compensation would be offered, and investors retain the right to reinvest their profits in Ukraine.
- Compensation of losses incurred as a result of unlawful action or inaction on the part of state agencies or government officials.
- Protection against future changes in legislation affecting these guarantees for a period of 10 years;
- Exemption from customs duties on fixed assets imported to Ukraine as contribution to the charter fund of a company.
Foreign investors also enjoy the standard domestic regime for investing and doing business in Ukraine. The law states that foreign investors who implement projects in accordance with state programs for the development of priority branches of the economy and the social sphere may be granted preferential treatment. What is a foreign investor?
As defined by the Foreign Investment Law, a foreign investor may be any legal entity established in accordance with the laws of any country, any individual whose permanent place of residence is outside Ukraine, any foreign state or international organization, or any other foreign subject of investment activity. Foreign investments: What and how
Foreign investment instruments may take any number of forms:
- Convertible currency;
- Ukrainian currency (only for reinvesting);
- Any form of movable and immovable property and any rights attached to it;
- Securities, bonds and corporate rights;
- Monetary claims; intellectual property rights;
- Rights to carry out specific commercial activity, including rights to use subsoil and natural resources.
Foreign investment may be undertaken in a variety of ways:
- participating in a company;
- establishing a subsidiary, an affiliate, or division of the foreign investor or acquiring the assets of an existing Ukrainian legal entity;
- acquiring other property rights;
- engaging in other investment activities;
- engaging in commercial activities based on product distribution agreements.
In addition, these kinds of investment activity, the Foreign Investment Law also allows a foreign investor to enter into a contract with a Ukrainian entity for non-corporate joint activity. Parties to this type of contract are required to maintain separate books, records and reports on operations connected with the joint activity and are entitled to open separate accounts in Ukrainian banks for making payments and settlements connected with this joint activity. Property imported into Ukraine by a foreign investor for joint activity for a period of at least three years is exempt from customs duties. However, if the property is sold prior to the expiration of the three-year period, customs duties must be paid. Registering a foreign investment
A foreign investment does not need to be registered in Ukraine. However, to enjoy guarantees offered to foreign investors by the law, a foreign investment should be registered with the appropriate state authorities within three business days after the investment has been contributed. The official fee for registration of foreign investment is about $40.
On May 11, 2016 the Verkhovna Rada adopted as a basis the draft law №2763 on amendments to some legislative acts on the abolition of mandatory state registration of foreign investments. It suggests the replacement of state registration with submitting statistical reports on the implementation of foreign investment. The draft law is aimed at attracting investments, including foreign, in the economy of Ukraine through the introduction of the declarative principle of governmental accounting of investments, the prevention of corruption in their state registration and introduction of separate codification of changes to the current legislation.Limits on Foreign Control
In general, the regulatory framework for the establishment and operation of business in Ukraine by foreign investors is similar to that for domestic investors (apart from the ownership of agricultural land). Investment permits are not required, but all enterprises must be established according to the form and procedure prescribed by law and registered with the appropriate state authorities. Foreign companies are restricted from owning agricultural land, manufacturing carrier rockets, producing bio-ethanol, and some publishing activities. In addition, Ukrainian law authorizes the government to set limits on foreign participation in strategically important areas. Generally, these restrictions limit the maximum permissible percentage of foreign investment into Ukrainian firms in these sectors.Privatization Program
Ukraine had a privatization program covering the years 2012-2015. However, the Yatsenyuk’s government was looking into substantially expanding the list of companies slated for privatization in order to increase management efficiencies. The first privatization under the Yatsenyuk’s government which tendered licenses to provide nationwide 3G mobile telecommunications services was generally regarded as transparent and drew interest of major players in the local market. In 2014 the government proposed removing 1,250 state-owned enterprises from the list of companies exempt from privatization, but the bill failed to get support of the Parliament.
Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. However, observers note numerous instances of past privatizations adjusted to fit a pre-selected bidder.
Although the government has not made any statements of privatization revisions, numerous court cases have surfaced from companies challenging earlier privatizations. Judicial reform is critical to ensure fair treatment in these cases. There may be more privatizations in the near-term as a means to plug budgetary gaps; the transparency of these efforts will be a good indicator of the government’s approach to business and investment.
On February 16, 2016, the Ukrainian Parliament adopted amendments to the privatization law which was signed by the President on March 4, 2016.
The most important changes to Ukrainian privatization procedures are as follows:
Special investment regimes
- No privatization by “aggressor state”. The law now bans privatization of Ukrainian enterprises by, inter alia, citizens or legal entities of any “aggressor state”. Thus, Russian citizens or legal entities, or their representatives, or controlled by or related to them, may not purchase shares in privatized state-owned enterprises.
- Disclosure of beneficiaries. The law requires potential buyers to disclose information on their beneficiaries in whose interests state-owned enterprises are purchased.
- Obligatory presale cancelled. The obligatory pre-sale on the Ukrainian stock exchange of 5-10% shares of privatized state-owned enterprises prior to the tender is cancelled.
- Arbitration allowed. The law allows privatization authorities to provide arbitration clause in sale and purchase agreements regarding privatization objects.
- External advisors. The law allows involving external advisors to prepare strategic state-owned companies for privatization and sale. Such external advisors will be selected through public tenders.
Ukraine has in the past maintained two forms of special economic zones (SEZs): Free Economic Zones (FEZs) and Territories of Priority Development (TPDs). In April 2005, Ukraine cancelled all tax exemptions (i.e. land tax, corporate income tax, import duty, and VAT on imports) to investors in all SEZs, to stop large scale abuse of such zones for both tax evasion and smuggling. While this step reduced corruption and expanded the tax base, the abrupt dropping of tax breaks and lack of compensatory provisions caused some legitimate investors to suffer losses.
In 2010, the Ukrainian Government announced its intention to renew SEZs and TPDs as they were prior to Apr. 2005. So far, the related Bill has not been submitted by the Cabinet to the Verkhovna Rada, but this is expected soon.
In November 2005, the Parliament adopted legislation to set up technology parks, providing some government financial support, targeted subsidies and tax privileges for a list of 16 techno parks based on existing R&D facilities.Government support
Ukrainian Verkhovna Rada issued and established various agreements to promote and protect investments with more than 70 countries.
On Sept. 29, 2010, the Cabinet of Ministers adopted the Concept for a State Targeted Economic Program on investment activity for 2011-2015. The Program aims to provide the conditions for stimulating investment aimed at modernizing the real economy and sustainable economic development.
The Program lists a number of preferred investment areas: food production, farm product processing, wholesale trade, brokering, financial services, machine building, chemical and oil processing, steel and other metals, and technology development. It also aims to establish a more attractive investment climate and develop the necessary infrastructure for investment activities to insure stable economic growth.
The Government named two sectors of the economy, construction and farming, which it expects to be the engines of economic growth in 2012-2013, as they are oriented on the domestic market and invulnerable to external conditions.
The Cabinet of Ministers of Ukraine has established the State Agency for Investment and National Projects of Ukraine as the Central Executive body responsible for implementing the State policy in the sphere of investment activity and management of the National Projects.
The main mission of the Agency is to attract foreign investment to Ukraine and provide the implementation of strategic projects aimed at upgrading technology and developing the basic branches of the economy of Ukraine.
The Provision of the Agency, approved by the President of Ukraine on May 12, 2011, entrusts the following assignments:
- Implementation of the State policy in the sphere of investment activity;
- National Projects management;
- Improvement of the investment image of Ukraine, support for investment development of the regions of Ukraine.
National Projects are the engines of economic reforms in Ukraine and practical implementation of the Program of Economic Reforms for 2010-2014 years “Prosperous Society, Competitive Economy, Effective State”, that was approved by the Decree of the President of Ukraine of March 12, 2012 No. 187/2012. They are aimed at building modern, stable, open and competitive economy and above all - at the increase of the welfare of Ukrainian citizens.
Within the structure of the State Agency for Investment and National Projects of Ukraine, the Department for Investment Policy and Regional Development has been established.
The main goal of the Department is “activation of investment activity in the regions of Ukraine for the investment volume growth”. The Department continues to work on quality performance of the Agency main tasks, providing a one-stop-shop activity, contributing to the National Projects implementation, as well as revival of the investment activity in the regions of Ukraine.Rating of the Investment Attractiveness of Ukrainian Regions in 2014-2016
The International Finance Corporation (IFC) representatives expressed their willingness to continue supporting Ukraine by financing investment projects and providing advisory services. The IFC is also expected to increase investment in Ukraine. At present, the IFC’s total investment portfolio in Ukraine is over US $1.5 billion, of which 40% is investment in the agricultural sector and infrastructure.
According to a head of Ukrainian office of IFC Elena Voloshina, in 2014 IFC has invested US $470 million, as part of the World Bank’s US $3 billion initiative, in the following priority areas: banking sector, agricultural sector, infrastructure, energy efficiency, and small and medium businesses. Efforts will also be made to promote trade financing through Ukrainian banks.
On April 28, 2014, the State Agency for Investment and National Projects of Ukraine presented results of “Rating of the Investment Attractiveness of Ukrainian Regions – 2014” Research which was headed by Lviv region this year. The second place was given to Ivano-Frankivsk, third to Odesa region. Vinnytsia region took the fourth place and the city of Kyiv got into the Top Five of the Investment Attractiveness leaders.
The Rating allows determining investment prospects of all Ukrainian regions and distinguishing the most favorable ones for doing business. Additionally, specific recommendations are provided.
In order to determine the Investment Attractiveness Rating, three main components have been used during the Research. They have a practical value for investors and influence adoption of such investment decisions as the territory potential, investment risks and opportunities and obstacles of the investment activity.
In 2015 Ukraine occupied 89th spot among 174 countries according to BDO International Business Compass rating of a country’s attractiveness.
The BDO International Business Compass measures the attractiveness of a country as a multi-dimensional concept according to economic, politico-legal and socio-cultural conditions.
Ukraine made a significant breakthrough going up from the 109th place in 2014 to the 89th in 2015, which was the main rise of the year.
According to the World Bank’s Doing Business rating, as of May 2016 Ukraine occupies 83rd rank among 189 economies (compared to the 87th place in 2015). The biggest progress was shown in the Starting Business category (30the rank in 2016 compared to 70th rank in 2015).
On July 13, 2015 the first-annual U.S.-Ukraine Business Forum took place. Participants included high-level government and business leaders from both countries. The Forum aimed to advance Ukrainian economy through a series of high-level discussions focused on including Ukraine in global value chains and further development of its market.
Information from the official web-site of State Agency for Investment and National projects of Ukraine