Investment Climate 2017

Policies toward Foreign Direct Investment

The Government of Ukraine continues to move forward with a reform agenda to improve the investment and business environment. Ukraine rose in the World Bank’s “Doing Business” rankings (see Table 1) to 80 out of 190 countries measured – a three-place improvement since 2015. In the framework of EU-Ukraine Association Agreement, the Government of Ukraine reformed its public procurement to open it to foreign and domestic economic operators on equal terms. The Ministry of Economic Development and Trade runs a special web-portal (www.tender.me.gov.ua) that provides information about upcoming public procurement. Electronic public procurement became mandatory as of August 1, 2016. The Government of Ukraine continued deregulation efforts, implementing important corporate governance reforms that allowed it to protect minority shareholders’ rights. Exports of 53 groups of dual use goods were exempted from excessive control procedures. Authorities abolished unlawful restriction of the validity term of construction licenses and reduced by three times the length of the procedure for issuing such licenses. In 2017, the Government of Ukraine cancelled 360 outdated regulations, normative acts, instructions, and orders that will allow it to simplify state property leasing procedures, to automate the land evaluation process, and to abolish the cost of some notary services.

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.

Weighing heavily over Ukraine’s FDI climate is the lack of progress in reforming Ukraine’s judiciary. The judicial system in Ukraine has never been an independent branch of power. The courts have often been used as an instrument for confrontation between the President and Parliament. The lack of rule of law was one of the driving reasons for the 2014 Revolution of Dignity. Ukrainian civil society continues to demand punishment of judges deliberately involved in illegal decision-making, the guaranteed independence of the judiciary system, and an end to corrupt practices in the system. Judicial reform is an ongoing process; the passage of constitutional amendments on the judiciary in June 2016 was a major step forward, and the competitive selection of justices for the Supreme Court is currently ongoing. The complete overhaul of the judiciary, however, will likely take several more years. Political analysts and media describe the current Rada (Parliament) as pro-European and pro-reform, having made significant strides on urgently needed reforms, including a law strengthening local government and civil service, proposed reforms to public funding of political parties, and numerous pieces of legislation to meet IMF requirements. Additionally, the Rada has passed laws to reduce burdensome business regulations, encourage public-private partnerships, require media ownership transparency, and improve agricultural land policies.

Limits on Foreign Control and Right to Private Ownership and Establishment

Aside from ownership of agricultural land, the regulatory framework for the establishment and operation of business in Ukraine by foreign investors is generally similar to that for domestic investors. However, accreditation of representative offices of foreign companies and their branches significantly lags behind the simplified registration procedures for Ukrainian business. Accreditation by MEDT takes 60 days and typically costs USD2,000. In the case of starting a business (a legal economic entity or private entrepreneur business) non-Ukrainian citizens are also required to receive a Ukrainian registration through the Office of Immigration in the Ministry of Foreign Affairs and to receive a taxpayer identification number through the State Fiscal Service, based on the Cabinet of Ministers of Ukraine Order #779 dated Dec. 10, 2013. Registering a foreign investment is governed by “The Law on Foreign Investments” No139 dated March 06, 2013. Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity. 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," but 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 the defense and energy sectors.

Other Investment Policy Reviews

The United Nations Conference on Trade and Development (UNCTAD) so far has not conducted formal reviews of Ukraine’s investment policy. The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) conducted formal reviews in 2016. Ukraine's first trade policy review as a WTO member was conducted in April 2016 and can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm

http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm

Business Facilitation

In 2016, Ukraine’s Central Bank lifted the requirement that three-quarters of all capital coming into the country as foreign investment be converted into the local currency, the hryvnia. On June 22, 2016, the President signed into law a bill that abolishes mandatory state registration of foreign investment. On October 6, 2016, the Parliament adopted a law that mandates notary certification of signatures on documents that introduce changes to documents that are subject to state registration (e.g. a decision of the General Shareholders Meeting) and permits, irrespective of the registered address of legal entities and individual entrepreneurs. The law entered into force on November 2, 2016. In 2016, the government also reduced the time required for VAT registration and eliminated business registration fees. In March 2017, the Parliament adopted legislative amendments abolishing the requirement for legal economic entities and physical economic entities (entrepreneurs) to use official seals, and made progress on promoting minority investor protections by requiring that related-party transactions undergo external review; by introducing remedies in cases where related-party transactions are harmful to the company; and also clarifying ownership and control structures. It also strengthened contract enforcement by introducing a system that allows companies to pay court fees electronically. Meanwhile commercial disputes involving foreign companies in courts still tend to be based on fiscal authorities questioning the legitimacy of contracts and counteragents of foreign companies conducting business in Ukraine. A website for registration of private entrepreneurs and legal entities is available https://poslugy.gov.ua/ and https://online.minjust.gov.ua/dokumenty/choise/.

Companies are able to submit documents online while the Registrar further shares the data with the State Committee of Statistics of Ukraine, the State Pension Fund, State Fiscal Service, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance.

In the World Bank’s Doing Business rankings Ukraine placed 80^th in terms of ease of doing business, and 20^th for ease of starting a business.

Outward Investment

As of October 1, 2016 Ukraine’s investments to foreign countries equaled almost USD 6.2 billion.

Ukraine has signed 70 bilateral investment treaties. The Bilateral Investment Treaty between the United States and Ukraine has been in force since1996. The following countries have also signed bilateral investment agreements with Ukraine: Albania (2004), Austria (1996), Argentina (1995), Armenia (1994), Azerbaijan (1997), Belarus (1995), Belgium (2001), Bosnia and Herzegovina (2002), Bulgaria (1994), Brunei (2006), Canada (1994), Chile (1995), China (1992), Cuba (1995), Croatia (1997), the Czech Republic (1994, amended 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), Japan (2015), 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), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), and Yemen (2002). In 2016 Ukraine signed a FTA with Canada that is expected to be enacted in summer 2017. It is now negotiating FTAs with Turkey and Israel.

Transparency of the Regulatory System

Ukraine continues to struggle to build a legal system that facilitates easy interaction with the international community. However, Ukraine’s efforts to implement the EU Association Agreement including the Deep and Comprehensive Free Trade Area (DCFTA) which came into effect in January 2016 should help to boost overall transparency and legal certainty as the Government of Ukraine strives to meet EU standards. Post is not aware of any informal regulatory processes managed by nongovernmental organizations or private sector associations Currently, many issues are not dealt with by a single piece of legislation (Note: the 2011 Tax Code is an exception). Various laws remain ambiguous or contradictory, which further complicates matters. Information on existing and draft legislation is available on the Verkhovna Rada and Cabinet of Ministers websites. Often legislative initiatives and draft action plans are published on the corresponding Ministry websites for public commentary, but not all draft legislative initiatives are publicly available.

NGOs, business associations, and international business associations such as American Chamber of Commerce and the European Business Association are able to provide their feedback and to propose amendments to draft legislation and regulations. The legislative branch has some oversight mechanisms to ensure the government follows administrative processes; however, these are often not enforced.

Ukraine is moving in the direction of transparent policies, clear rules, and enhancing fair competition. Improvements include implementation and utilization of the ProZorro system for government procurement, and the introduction of E-Governance. On August, 23, 2016, the Cabinet of Ministers approved an Action Plan for the Deregulation of Business Activities in Ukraine for 2016-2017. The Plan is a strategic road map aimed at making national regulations compliant with European Union standards and global best practices. The Plan contains 112 measures to improve the business environment in different sectors, including agriculture, telecommunication, infrastructure, construction, tax, as well as reforms to state customs procedures, sanitary and veterinary controls.

Among the major expected simplifications the following are the most significant:

Investment Incentives

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. From January 1, 2013, through January 1, 2018, Ukraine provides a zero percent Corporate Profit Tax (CPT) on income from projects resulting in job creation in qualifying industries, including high-tech, eco-friendly, and manufacturing and export-oriented industries. The incentive is granted for new projects as well as reconstruction or upgrades to existing enterprises, under certain conditions related to 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 Trade Zones/Free Ports/Trade Facilitation

Ukraine does not maintain special or free economic zones (SEZs-FEZs).

Performance and Data Localization Requirements

Ukraine has no forced localization policies or requirements for foreign IT providers to turn over any source code or provide backdoors into hardware or software applications. Ukraine’s overall regulation of IT infrastructure and Internet Service Providers is largely free and unregulated. Unfortunately internet piracy is rampant and the use of unlicensed software is widespread even within the government.

The regulatory framework in Ukraine is generally aligned with Convention for the Protection of Individuals with regard to Automated Processing of Personal Data of 1981 adopted by the Council of Europe. In 2011 Ukraine adopted a law on protection of personal data. The law is based on the framework EU Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data, but provides a more detailed legislative base for data protection in Ukraine. The fundamental principle applicable to personal data processing under the law is that all steps in data collection, storage and processing must have the consent of the data subject. Personal data may also be transferred to foreign personal data processors on the condition that their countries have a sufficient level of data protection, presumably comparable to Directive 95/46/EC; the relevant permit; and the recipient uses the personal data for the same purposes for which it was collected.

The law also prohibits processing of personal data relevant to (i) race, ethnic origin and nationality; (ii) political, philosophical and religious beliefs; (iii) membership in political parties and other organizations; (iii) health; (iv) sexual life; (v) biometrical data; (vi) genetic data. Those categories of personal data are sometimes identified as “sensitive data”. The Law provides, however, for a number of cases when processing of sensitive data is allowed, including cases when (i) individual provides its explicit consent to processing of its sensitive data; and (ii) processing of sensitive data is required within the framework of labor relations; and (iii) sensitive data was made public by the individual. Additional legislation on protection of personal data consists of the Constitution of Ukraine, the laws of Ukraine “On Information”, “On Protection of Information in Informational and Telecommunication Systems”, other laws and normative and legal acts.

Government Agencies involved in personal data protection are:

Real Property

Ukraine has a regulatory framework protecting property interests, as well as mortgages and liens. The record system is generally reliable and maintained by the Ministry of Justice. Still, judicial reform is needed to ensure efficient enforcement of property rights. The Land Cadaster Law of July 2012 provided for a single land registry; its 2013 launch marked an improvement in land ownership protection. According to the Ministry of Agrarian Policy, the Land Cadaster is only 20 percent utilized and the Ministry has started a comprehensive land audit. Ukrainian media estimate that five percent of land in Ukraine does not have clear title. Ukraine decreased in its rating in registering property in the World Bank Ease of Doing Business ratings from #62 in 2016 to #63 in 2017.

Intellectual Property Rights

Ukraine was designated a Priority Foreign Country in 2013 in the United States Trade Representative’s (USTR) Special 301 Report due to the lack of progress in the issues outlined below. USTR changed Ukraine’s designation in the 2014-2016 Special 301 report to the Priority Watch List – an improvement. While the Government of Ukraine has demonstrated some limited progress in IPR reforms to date, Ukraine continues to have serious IPR challenges. For example, Ukraine is host to some of the largest internet pirate sites in the world. Further, a number of rogue collecting societies continue to freely operate in Ukraine, collecting royalties but not distributing those royalties to any legitimate rights holders. Industry representatives estimate that the majority of broadcast and public performance market places are unlicensed. In addition to digital piracy, Ukraine’s many open-air markets continue to sell illegally copied music, films, and entertainment software. In the area of software piracy, the Government of Ukraine has begun limited efforts to license the business software it uses, but admits that 40 to 80 percent of the software used in government ministries and enterprises remains unlicensed.

Collection Management: Ukraine has recognized that it has a significant problem with the operation of illegal or “rogue” collecting societies, i.e. organizations that collect royalties by falsely claiming they are authorized to do so. Such organizations tend to operate without adequate transparency and rarely disburse sufficient funds that they collect to the rights holders entitled to the royalties. The government has not prosecuted anyone – not even societies that the Government of Ukraine determined were collecting money without the necessary authorization. Despite some government efforts to shut them down, 15 rogue CMOs continue to operate in Ukraine, collecting royalties without distributing any of those royalties to legitimate rights holders. The MPAA estimates that more than 90 percent of Ukraine’s broadcast and public performance market places are unlicensed. Governments of Ukraine officials, however, say that this is because broadcasters do not pay into the current corrupt system of royalty collections. New legislation, which is expected to bring a new face to collection management in Ukraine and comply with Ukraine’s international obligations, is currently being redrafted by the World Intellectual Property Organization (WIPO) in cooperation with the MEDT. MEDT expects this draft to be ready for review by the international community in 2017. Until this draft is passed, the existing CMO legislation will remain in place.

Software Piracy: The Government of Ukraine acknowledges that a significant percentage of the software used by the government itself is unlicensed. The most recent industry data identify Ukraine as having a higher software piracy rate than almost all other countries on the Special 301 Priority Watch List. Ukraine acknowledges the need for the government to use legal software, and has issued repeated official documents calling for such legalization as far back as 2002. In general, the situation in Ukraine remains challenging, with minor progress. Government of Ukraine officials report an incremental legalization of software among a number of agencies and services in the past year amounting to the legalization of approximately 20,000 systems.

Internet Piracy: The United States has repeatedly raised its strong concerns about the significant and growing piracy of copyrighted content. Online piracy has significant consequences for both the Ukrainian market and for international trade. There was not a single online piracy-related conviction in Ukraine in 2016 under existing statutes. In March 2017, the Parliament passed a law “On State Support to Cinematography” that provides for Internet Service Provider (ISP) liability and a system of notice and take down. Pending signature by the President, it would be a great improvement over the current chaotic, unregulated online environment in Ukraine.

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 containing protected trademarks, remain readily available. Counterfeit apparel is common. Most counterfeit goods are not produced in Ukraine. The amount of counterfeit pesticides on the market continues to increase, now accounting for a significant percentage of the market, according to industry. Industry has reported that criminal prosecution for counterfeiting crimes are stalled and ineffective, and that seized goods are not disposed of or released in a timely manner. Additionally, large amounts of counterfeit products and pirated goods are still openly sold in physical markets in Ukraine. Finally, patents for plants have also recently come under threat – specifically, industry have reported alleged breeder rights infringement for illicitly appropriated plant materials found in Ukraine.

Judicial System for IPR Protection: Civil IPR lawsuits remain rare because of a general lack of confidence in Ukraine's legal system, and because few judges are properly trained in IPR law. Law enforcement officials and industry also complain that too many IPR cases result only in small fines, which do not deter illegal activity. In some cases, infringing companies have won dubious and nontransparent court decisions that appear to violate the patent and trademark rights of other companies.

Capital Markets and Portfolio Investment

The capital market for portfolio investment is small and lacks liquidity. The local institutional investment sector, including private pension investment, is weak. A foreign investor needs to open an account in a bank operating in Ukraine or act via a local trader in order to make a portfolio investment. With its September 2014 resolution, the NBU temporarily banned the transfer of receipts from the sale of securities of Ukrainian issuers into foreign currency, with the exception of securities traded at stock exchanges. The measure was supposed to expire in June 2016, but still remains in place as of April 1 2017.

Ukraine has nine operational privately-owned stock exchanges (down from 10 in 2015), with the largest trade volumes conducted at four major exchanges. These exchanges operate largely in compliance with international best practices, and there is increasing competition in the sector. 89.16 percent of securities trading at Ukraine’s exchanges were transactions with government bonds. The remaining transactions were with NBU depository certificates, corporate bonds, shares, derivatives, or investment certificates. However, the total amount of trade in shares in 2016 did not even reach one percent of GDP. The remaining exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises.

There are no legal restrictions on the free flow of financial resources needed to support growth in the product/factor markets. Credit is largely allocated on market terms and foreign investors are able to get credit on the local market, utilizing a variety of credit instruments. However, the market environment has long lacked transparency; enforcement of key laws and regulations has been weak; and investors, both domestic and foreign, continue to face significant uncertainty.

Money and Banking System

In the wake of a post-Maidan banking sector crisis, the NBU implemented a significant banking sector clean-up, shuttering more than 80 banks for insolvency or for money laundering activities. The NBU continued efforts to clean up the sector through 2016 culminating with the successful nationalization of systemically vital PrivatBank –Ukraine’s largest lender and deposit holder. The December 2016 nationalization was an important step to safeguard Ukraine’s financial stability. As of the end of 2016, 96 active banks remained in the system, down from 163 in 2014. The NBU estimates the total assets of Ukraine’s banking sector at USD52.8 billion. The top 20 banks account for 88 percent of the sector’s assets (around USD46 billion). After the nationalization of PrivatBank, Ukraine’s four state-owned banks control 59.4 percent of individual deposits, 46.3 percent of legal entities funds, 52.5 percent of total banking assets, 48.1 percent of credits issued to legal entities, 29.2 percent of credits issues to individuals, 76.7 percent of Government bonds, 74 percent of all payments cards, and 60 percent of state banks’ branch networks (see the Chart 1 below).

In 2016 Ukrainian banks recorded losses of UAH 160 billion (USD6 billion) which stifled the availability of credit to Ukrainian households and businesses. Banks’ portfolio of loans to individuals decreased by UAH 3 billion (USD111 million) in hryvnia-denominated loans and by USD660 million in foreign-currency-denominated loans. Total hryvnia-denominated business lending portfolio increased by UAH 75 billion (USD2.8 billion), though decreased in foreign currency-denominated loans by USD4.2 billion. NBU stress tests have revealed that the share of non-performing loans (NPL) today is around 50 percent of the total loan portfolio of Ukrainian banks. Overall the quality of banking oversight is improving as the NBU strengthens prudential capital requirements for the sector and works to unwind related party lending positions.

Foreign-licensed banks may carry out all activities conducted by domestic banks, and there is no ceiling on participation in the banking system, including operating via subsidiaries. A foreign company can open a bank account in Ukraine for the purposes of investment operations. Otherwise it needs to register a representative office in Ukraine. A nonresident private person can open a bank account in Ukraine.

Legislation aimed at protecting businesses from hostile takeovers or “raids” pertains to both domestic and foreign companies.

Foreign Exchange and Remittances

In 2016, the National Bank of Ukraine gradually relaxed currency controls and restrictions on dividend repatriation that were put in place to stabilize the hyrvnia in the post-Maidan economic crisis. It allowed repatriation of foreign investments dividends for 2014-2015 totaling less than USD1 million or 10 percent of the total dividends amount (whichever is larger) per month, with a cap of USD5 million if ten percent of dividends exceeded that amount. Further, the NBU is considering allowing the dividends repatriation for the years preceding 2014 as well as those earned in 2016. According to the NBU’s management, the Central Bank will assess the amounts based on regular input from the banks in order to design the appropriate schedule for future repatriations. Also, NBU has reduced the share of foreign currency received from abroad subject to mandatory conversion into Ukrainian hryvnia from 75 percent to 65 percent. The conversion requirement applies to proceeds in major convertible currencies (including USD, EUR, GBP and CHF) and Russian rubles received from abroad by legal entities (excluding Ukrainian banks) and individual entrepreneurs. Proceeds in the above-mentioned foreign currencies credited to accounts of joint ventures opened with the Ukrainian banks, or accounts opened by the Ukrainian residents outside of Ukraine, are also subject to mandatory conversion. The requirement does not cover certain types of transfers, including foreign investment, proceeds received by the state or under state-guaranteed instruments, borrowings from international financial institutions in which Ukraine is a member, funds in correspondent accounts, and deposits of foreign banks with Ukrainian banks, etc. In February 2017, the NBU announced its intent to decrease the mandatory foreign currency sales share from 65 to 50 percent, and to fully cancel this requirement in future. Other changes to currency control restrictions include:

The Government of Ukraine has 1,833 operating SOEs out of 3,350 registered SOEs, with output amounting to around 10 percent of GDP. Nonetheless, according to the Ministry of Economic Development and Trade (MEDT), the state sector is one of the largest in Europe. The SOEs, which are defined as companies in which the state owns at least 50 percent +1 share, employ 900,000 people. SOEs are active in areas such as energy, machine-building, and infrastructure. Companies include Turboatom, a producer of energy turbines, energy generator Centerenergo and energy company Naftogaz, which, along with its subsidiaries - domestic oil producer Ukrnafta and UkrGasVydubuvannia (UGV) - hold substantial shares of their respective markets. There is no common public list of all SOEs in Ukraine. Each Ministry publishes the list of SOEs under its management. The sector is inefficient and often unprofitable. According to MEDT the cumulative loss of top 100 state-owned companies decreased from UAH 119 billion in 2014 (USD5.5 billion) to UAH 42.6 billion (USD1.95 billion) in 2015. On February 18, 2016, the Parliament approved legislation increasing corporate governance standards for SOEs, providing for mandatory independent audits of SOEs, and requiring the results be published.

On March 10, 2017, the Cabinet of Ministers adopted procedures for the creation of independent supervisory boards in SOEs. The procedures are aimed at creating supervisory boards that will independently form long-term strategies for SOEs; appoint management officers; evaluate work and elect an independent auditor; and reduce political interference in the work of SOEs. According to the procedures, independent supervisory boards must be created in state owned enterprises and economic entities with state ownership over 50 percent, as well as assets of over UAH2 billion (USD74 million) and net profit of UAH1.5 billion (USD55.5 million) generated in the previous year. Other unitary companies and businesses can create independent supervisory boards at the discretion of their management.

SOEs purchase and supply goods and services to private firms, including foreign firms. Transparency of procurement by SOEs has increased markedly after the April 2014 amendments to the procurement legislation, which obliged SOEs to follow procurement regulations. On March 16, 2016, Ukraine ratified the WTO Government Procurement Agreement. The majority of SOEs rely on government subsidies to function, and cannot directly compete with private firms. Most of the SOEs capable of making a profit have already been privatized, leaving mainly inefficient firms in government hands. The Government of Ukraine has heavily subsidized its state-owned enterprises (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has supported debts of many SOEs with sovereign loan guarantees. In 2014 and 2015, the Ukrainian government tightened its enforcement and improved the budget discipline of many SOEs. SOE access to extensions of tax payment deadlines remains nontransparent, especially where SOEs are directed to sell their products at below-market prices.

SOE senior managers traditionally report directly to the relevant ministry, which has had the authority to appoint the firm's management. Ukrainian law specifies that the ministries are not permitted to interfere with the daily economic activities of an SOE, but anecdotal reports indicate that this restriction is often ignored. Ministries have the power to decide on the creation, reorganization, and liquidation of SOEs; adopt and enforce SOE charters; conclude and cancel contracts with SOE executives; grant permission to the State Property Fund to create joint ventures with state property; and prepare proposals to divide state property between the national and municipal levels. March 2015 amendments to the Law on Joint-Stock companies enabled owners of 50 percent+1 share in a company to call shareholder meetings. This will allow the state to increase managerial control over certain SOEs, where private minority shareholders were able to gain managerial control, most notably at UkrNafta, the domestic oil producer. Judicial reform is long overdue in Ukraine and an efficient system of protection of investor rights is lacking, including in disputes involving SOEs.

Privatization Program

The government is looking into further expanding the list of companies slated for privatization in order to increase management efficiencies. The current legislation, amended in 2016, allows the State Property Fund to hire foreign advisors, increases transparency of asset evaluation procedures, removes the mandatory requirement to sell 5-10 percent of a privatized entity via a securities exchange, and bans Russian and off-shore companies from participating in privatization in Ukraine.

The State Property Fund (SPF) oversees privatizations. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers note numerous instances of past privatizations adjusted to fit a pre-selected bidder. The new government has made statements that there will be no revisions of past privatizations. Still, some court cases have surfaced wherein private companies are challenging earlier privatizations.

The government has developed a list of SOEs to privatize in 2017. There are a number of reasons, however, why the SPF cannot start preparations for these privatizations, including: some SOEs are eligible or prioritized for privatization; delay in transmission of SOEs from their Ministries to the SPF; poor SOE condition; a lack of demand for minority shareholdings; and a delay in the adoption of laws that would accelerate privatization to international standards. At the same time, SPF, with MEDT and international partners, developed (still under review) a new privatization law that would replace the current seven laws that partially cover the privatization process. The new law introduces a penalty for delaying asset transfers by the Ministries to SPF; and reducing the bidding security deposit from 5-25 percent to five percent. The deadline for due diligence and applications is extended up to 180 days. A legal bar, instead of the current informal one, against Russian participation was introduced. According to the new law there will be only two categories of privatizations - large and small. Large privatization will include approximately 50 companies of strategic importance with minimum criteria UAH2 billion assets and UAH1.5 billion in cash. The sale of large privatization companies will be outsourced to an advisor, who will provide to SPF the starting price, documentation, and due diligence. Then this package will go to a Tender Commission created by SPF which includes representatives from corresponding Ministries and organizations. The Commission is regulated by SPF’s order only, not by law or by the Cabinet of Ministers. The Commission can stop the privatization process, or can approve a starting price by vote (requires a quorum/majority of votes) and sends the decision to Cabinet of Ministers for further actions. The Commission can only increase the starting price, not lower it.

In 2014 the budget received from privatization approximately UAH 447 million (USD37.6 million), in 2015 – UAH 167 million (USD7.65 million), and in 2016 – UAH 189 million (USD7.39 million).

There is limited but growing awareness in Ukraine of internationally accepted standards for responsible business conduct (RBC), including corporate social responsibility (CSR). Primary drivers for the introduction of these standards have been Ukraine’s vibrant civil society, international companies and investment, and efforts by business associations such as the American Chamber of Commerce and the European Business Association. For example, NGOs such as the East Europe Foundation and UN Global Compact Initiative have worked to educate Ukrainian companies on the potential long-term benefits of CSR, while the American Chamber of Commerce promulgates general standards of conduct for all member companies in Ukraine (approximately 600) that reinforce RBC principles.

The government has made it a stated priority to create a more coherent, business-friendly investment environment based on internationally accepted standards, to include labor rights, consumer protection, environmental protections, and other principles that fall under RBC. The legal and regulatory framework, as well as the government’s capacity to implement and enforce it, is still very much a work in progress. The Government of Ukraine has put in place corporate governance standards to protect shareholders; however those are voluntary rather than mandatory.

On March 15, 2017, Ukraine became the 47th country to adhere to the OECD Declaration and Decisions on International Investment and Multinational Enterprises. On March 27, Ukraine signed the OECD agreement to strengthen investment climate.

There are independent NGOs, investment funds, worker organizations/unions, or business associations promoting or monitoring RBC. Post is aware of the NGO Center “Development of Corporate social responsibility” (CSR) http://csr-ukraine.org/ along with joint projects on development of CSR involving NGOs and charity organizations. The Embassy is not aware of cases of sanctions or restrictions on such activities.

Ukraine has been a member of the Extractive Industries Transparency Initiative (EITI) since 2013. Participation by companies in the country is still voluntary, however. A recent legislative initiative mandating participation in EITI failed to pass the Parliament by only a few votes and will likely be put to vote again. Ukraine has not joined the Voluntary Principles on Security and Human Rights.

Ukraine’s anti-corruption legislation consists of the following key legislation and resolutions:

The conflict between the Ukrainian government and Russian-backed separatists in Donetsk and Luhansk oblasts continued in 2016. Individuals in separatist controlled territories are subject to political violence at the hands of so-called authorities. There are also widespread reports of civilian casualties as the fighting occurs in and around civilian areas. Ukraine lacks control over its border in parts of Donetsk and Luhansk, allowing for the free flow of soldiers and weapons from Russia. Russia continues its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol.

There have been sporadic protests and demonstrations during 2016 against the government, mainly evoking populist messaging against economic conditions in the country. These protests, however, have proceeded peacefully and there were few instances of violence, with the exception of targeted assassinations, including a prominent journalist and a former Russian government official. Politically, the country’s ruling coalition remains in power, albeit needing support of specific opposition parties to garner votes for legislation in the country’s parliament. Opposition figures and new political movements increased during 2016, but these movements have yet to significantly alter the country’s political landscape.

Ukraine has a well-educated and skilled labor force of about 26 million people with a nearly 100 percent literacy rate. As of October 2016, the unemployment rate of the population aged 15-70 (ILO methodology) averaged 9.2 percent, and the unemployment rate of the population of working age individuals (ILO methodology) averaged 9.5 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. As of December 2016, the State Employment Service registered 390,800 unemployed people and 317,100 unemployed people received state assistance. According to official statistics, which count only those registered to receive unemployment benefits, unemployment was only 1.5 percent in December 2016. In December 2016, the unemployment insurance allotted to each worker amounted to UAH 1997 (USD75). Throughout 2016 unemployment continued, increasing in the industrial eastern regions, and many big enterprises faced lay-offs due to severe economic challenges, including the loss of access to Russian and CIS markets. In addition, some enterprises were destroyed, robbed, dismantled, and shipped to Russian territory.

Wages in Ukraine remain low by Western standards. In December 2016, the nominal average monthly wage increased by 23.8 percent year-on-year to UAH 6475 (USD240), while the real average wage increased by 11.6 percent 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 January 1, 2017, total wage arrears in Ukraine stood at UAH 1.79 billion (USD66.33 million), with about 73.7 percent of wage arrears accumulated in the industrial sector and 9.9 percent in transportation, storage, postal and courier activities. More than 50 percent of the wage arrears were in eastern Ukraine, specifically in Luhansk (23.0 percent), Donetsk (14.7 percent) and Kharkiv (12.9 percent) regions.

Minimum Wage: The monthly minimum wage was UAH1,378 (USD51) from January 1 through April 30, 2016. The monthly minimum wage rose to UAH1,450 (USD54) on May 1, 2016 and to UAH1,600 (USD59) on December 1. As of January 1, 2017, the minimum wage for private-sector workers increased to UAH3,200 (USD119). The hourly minimum wage was UAH 8.29 (USD0.31) from January through April, and rose to UAH8.69 (USD0.32) on May 1, 2016, and again to UAH 9.29 (USD.034) on December 1. Some workers in the informal sector received wages below the established minimum. The poverty level rose during the year from UAH1,330 (USD49) per month to UAH1,399 (USD52) during the year. According to the 2017 State budget, the subsistence level per person per month from January 1, 2017 is UAH1,544 (USD57), from May 1 - UAH1624 (USD60), and from December 1 - UAH1700 (USD63).

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. According to Ukraine’s Statistics Service, 79.8 percent of employees were covered by collective bargaining agreements in 2014.

The independence of unions from government or employer control, however, was disputed. Independent trade unions alleged that the country’s largest trade union confederation, the FPU, enjoyed a cozy relationship with employers and members of some political parties. Unions that were not affiliated with the FPU were denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions. There were cases of workers, who renounced membership in an FPU-affiliated union and joined a new union, facing loss of pay, undesirable work assignments, and dismissal.

The law sets 16 as the minimum age for most employment. Children who are 15 years of age may perform “light work” with a parent’s consent, but the law does not clearly define the term. The law allows children to do some forms of work beginning at age 14 as part of an apprenticeship in the context of vocational training. The most frequent violations of labor law for minors related to their work in hazardous conditions, long workdays, failure to maintain work records, and delayed salary payments.

During 2016, the State Labor Service and its predecessor, the State Labor Inspectorate, was responsible for enforcing labor laws. Inspectors were limited in number and funding. Although the Government of Ukraine renewed planned and unplanned labor inspections in 2016, the number of completed inspections continued to fall, and experts assessed the number to be inadequate relative to the size of the Ukrainian economy.

The law provides for the right to strike "to defend one's economic and social interests," as long as strikes do not jeopardize national security, public health, or the rights and liberties of others; the government generally respected this right. It does not extend the right to strike to personnel of the PGO, the judiciary, armed forces, security services, law enforcement agencies, the transportation sector, or public servants. Workers who strike in prohibited sectors may receive prison terms of up to three years.

The law established the National Mediation and Reconciliation Service (NMRS) to mediate labor disputes. According to official statistics, during 2016 the Service resolved 106 labor disputes: one – national, two – territorial, 103 – enterprise level, involving 2.1 million employees and 11,466 economic entities. 16.8 percent of the disputes were related to wage arrears, 11 percent - to the violations of employment and dismissal process, seven percent - to labor safety, etc. In 2016 National Mediation and Reconciliation Service mediated four strikes and 139 social protest actions that had mostly economic demands.

The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in Washington in 1992. OPIC resolved a long-standing dispute in 2009, and restored its programs in Ukraine after an extended 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. OPIC currently provides political risk insurance to several U.S. companies operating in Ukraine and has the capacity to insure other U.S. eligible investors if such coverage was sought. 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). OPIC has an active pipeline of projects in Ukraine across various sectors. OPIC’s pipeline of projects in Ukraine through FY 2016 and 2017 included several projects for a total of USD865 million, with a number of potential projects in the early stages.

UkrStat official data, as of January 1, 2017, the total stock of FDI in Ukraine was USD47.777 billion or approximately USD1,121 per capita, representing a 17.0 percent growth y-o-y. The majority of Ukraine’s 2016 FDI was generated by foreign parent companies recapitalizing subsidiary banks in Ukraine.

FDI by Country

In 2016, Ukraine's major investors, accounting for 70 percent of investments included: Russian Federation (37.8 percent of FDI), Cyprus (9.7 percent), Great Britain (9.2 percent), the Netherlands (5.8 percent), Austria (5.7 percent), Italy (4.8 percent), Hungary (4.3 percent), the British Virgin Islands (3.2 percent), Switzerland (2.5 percent), and Turkey (2.3 percent). U.S. investment comprised 1.9 percent of FDI in 2016. Many Ukrainian and Russian enterprises continue to channel investments through Cyprus due to a favorable bilateral tax treaty. In 2012, Ukraine and Cyprus signed a Double Taxation Convention to replace the bilateral agreement dating from 1982. Under the new treaty, which was ratified by the Parliament in July 2013 and entered into force in August 2013, most income earned in Cyprus is taxed between 5 and 15 percent, reducing the tax gap between the two countries. While the Government of Ukraine announced plans to introduce a 12 percent tax on the operations of companies registered in offshore countries (in order to increase collections to the Pension Fund), Cyprus was not included on this list.

FDI by Industry Sector Destination

64.1 percent of FDI in Ukraine went to the financial and insurance sector to facilitate recapitalization of foreign banks; 11.9 percent of FDI went to trade and auto repairs, and 10.8 percent - to industry.

FDI from Ukraine

As of October 1, 2016, Ukraine's FDI to other countries equaled almost USD6.237 billion. 93.4 percent of Ukrainian investment (USD5.825 billion) is reported as moving through Cyprus (the revised OECD Benchmark Definition of FDI is designed to filter out such detours or round-tripping through tax havens; FDI statistics may thus be more informative in future reports). Russia is generally observed to be the chief destination of actual Ukrainian FDI, while official statistics ranks it as second destination with 2.2 percent of FDI from Ukraine, Latvia has 1.1 percent, the British Virgin Islands the British Virgin Islands – 0.8 percent, Poland – 0.8 percent.

Ukraine’s Macroeconomic Indicators:

Trae Watson
Economic Officer
U.S. Embassy Kyiv, Ukraine
WatsonTR@state.gov