Investment Climate 2018

Policies toward Foreign Direct Investment

The government of Ukraine actively seeks FDI. In 2014, the president established the National Investment Council as consultative and advisory body under the President, and in 2016 the Ukrainian government also established the Ukraine Investment Promotion Office (UkraineInvest) as an independent advisory body with a mandate to attract and support FDI. Ukraine also established a Business Ombudsman in 2015 to provide a forum for domestic or foreign businesses to file complaints about unjust treatment by state or municipal authorities, state-owned or controlled companies or their officials.

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, however, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.

Limits on Foreign Control and Right to Private Ownership and Establishment

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 businesses. Accreditation by the Ministry of Economic Development and Trade takes 60 days and typically costs USD 2,000. Non-Ukrainian citizens establishing a business are required to receive a registration through the Office of Immigration in the Ministry of Foreign Affairs and to receive a taxpayer identification number through the State Fiscal Service. Registering a foreign investment is governed by “The Law on Foreign Investments” (2013). Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with the exceptions that 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, although the definition is vague and the law is rarely used in practice. Generally, these restrictions limit the maximum permissible percentage of foreign investment in Ukrainian firms in the defense and energy sectors.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) and the WTO conducted formal reviews in 2016, and can be found at OECD: http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm; WTO:https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm. The United Nations Conference on Trade and Development (UNCTAD) so far has not conducted a formal review of Ukraine’s investment policy.

Business Facilitation

The Ukrainian government has taken several steps over the past year to facilitate the ease of doing business. Some of these actions included: a new law on limited liability companies (LLCs) that liberalized corporate regulations for LLCs and increased protection of minority shareholders’ rights; a new privatization law designed to streamline the process of selling 3,000 state companies, and better protect investors’ rights; simplified procedures from the National Bank of Ukraine for companies to open and manage bank accounts; eased payment of dividends to foreign investors by allowing payment of a maximum amount of USD 7 million per month; and a new law to stop abusive practices by law enforcement agencies, including the State Fiscal Service’s tax police, Prosecutor General’s Office, and State Security Service, during investigations of businesses.

A website for registration of private entrepreneurs and legal entities is available at https://poslugy.gov.ua/ and https://online.minjust.gov.ua/dokumenty/choise/. Usually, it can take up to six days to register. Companies are able to submit documents online while the Registrar 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.

Outward Investment

As of December 31, 2017 Ukraine’s investments in foreign countries totaled more than USD 8.156 billion, according to the National Bank of Ukraine (NBU).

Ukraine has signed more than 70 bilateral investment treaties. The Bilateral Investment Treaty between the United States and Ukraine has been in force since 1996. A list of Ukraine’s bilateral investment treaties can be found at https://feao.org.ua/news/ukraines-bilateral-treaties-investments/?lang=en. Ukraine has over 60 bilateral taxation treaties, including with the United States. A list of Ukraine’s bilateral taxation treaties can be found at http://sfs.gov.ua/en/sts-activity/international-tax-relations/international-treaties–conventions–on-taxation/. Ukraine also has a number of free trade agreements (FTAs), and information on these treaties is available at http://mfa.gov.ua/en/about-ukraine/economic-cooperation/trade-agreements. Ukraine is currently negotiating FTAs with Turkey and Israel.

Transparency of the Regulatory System

Ukraine is struggling to build a transparent, consistent regulatory environment. Regulatory institutions are characterized by outdated, contradictory, and burdensome regulations, a high degree of favoritism in decisions by government officials, weak protection of property rights and minority shareholders’ interests, and irregular payments and other bribes. The country, however, is generally moving in the right direction toward clearer rules and fairer competition. Ukraine’s efforts to implement its EU Association Agreement (AA), including the Deep and Comprehensive Free Trade Area (DCFTA), should help boost overall transparency and legal certainty as Ukraine strives to meet EU standards. Continued deregulation is also one of Ukraine’s key commitments under its IMF program.

Information on existing and draft legislation is available on the Verkhovna Rada and Cabinet of Ministers websites. Proposed legislation may be published on the corresponding Ministry website for public commentary, but often draft legislative initiatives are not publicly available or they reappear in dramatically different form. In a sign of increased openness, the government in the past few years has consulted with NGOs and business associations such as the American Chamber of Commerce and the European Business Association when drafting business- or finance-related regulations and legislation. These organizations have provided feedback and proposed amendments during the review and approval process.

Proposed regulations are required by law to be publicly available for review and comment for at least one month, but not more than three months. The draft text is published on the website of the relevant ministry or regulatory agency. Comments are received online, at public meetings, and through targeted outreach to stakeholders. At the end of the consultation period, the relevant ministry or regulator must publish the results on its website.

Post is not aware of any informal regulatory processes managed by non-governmental organizations or private sector associations. Such processes fall under the purview of the government.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to harmonize many of its standards to meet EU requirements and facilitate access to EU markets. As Ukraine drafts laws, it often incorporates or references EU norms and standards. Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by the parliamentary body, the Verkhovna Rada. In the event of a commercial dispute, a foreign investor may seek recourse through a number of institutions. Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided for by international treaties.

Courts of general jurisdiction are organized by territory and specialty and include: local courts; appellate courts; specialized high courts for civil and criminal cases; and supreme courts. Local courts are either courts of general jurisdiction (including military courts) or specialized courts (i.e. commercial and administrative courts). Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in legal disputes connected with state government and municipalities, with the exception of military disputes.

The judicial system is independent of the executive branch; however, extensive corruption exists throughout the court system, and the judiciary provides an opening for outside influence. Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of prosecutorial influence on judges. Ukraine is ranked 129 out of 140 countries with regard to judicial independence by the Global Competitiveness Index 2016-2017 (up three spots since the 2015-2016 report) (https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1).

In general, regulations are appealable, but it depends on the nature and origin of the regulation to determine whether it is appealable in the national court system.

Laws and Regulations on Foreign Direct Investment

The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment and was subsequently followed by additional legislative acts, most recently the Law of Ukraine #2058-YIII of May 2017 “On Amendments to Some Laws to Remove Obstacles for Attracting Foreign Investments.”

Competition and Anti-Trust Laws

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition. AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers, considering applications regarding violations of public procurement as an appeal body, monitoring and control of the state aid system, competition advocacy within the government, and forming competition policy.

Expropriation and Compensation

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfill investment obligations during privatization procedures. Additionally, the Law on Legal Regime of Martial Law and the Law on Confiscation of Property During Legal Regime of Martial Law allow for voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law” in place due to military operations in eastern Ukraine.

Post has not received any expropriation claims from U.S. companies, and is not aware of any particularly high-risk sectors prone to expropriation actions.

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation. The full text of the communication is available at: https://treaties.un.org/doc/Publication/CN/2015/CN.597.2015-Eng.pdf.

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

• The Law on International Commercial Arbitration (ICAL, 1994). ICAL is almost a literal translation of the UNCITRAL Model Law.
• The Code of Civil Procedure of Ukraine (CPC, 2004). Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that: recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

American investors continue to make claims under the Bilateral Investment Treaty between the United States and Ukraine, but this is rare, with two known filings since 2016. The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine. Such disputes are a significant problem, however, both in fact and in terms of public perception. As of early 2018, the Embassy was tracking approximately 20 active disputes, some very protracted. Going back 10 years, the Embassy has tracked almost 100 disputes involving a U.S. business or individual. The majority of disputes are related to customs and tax issues, or corporate raids.

ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intracompany disputes of these enterprises. ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) has been and remains fairly common in Ukraine. The current Ukrainian government has made it a stated priority to improve the business environment and attract more foreign investment, but progress has been uneven.

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can now refer most of their commercial or civil law disputes to courts of arbitration, which are non-state bodies. Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court. The Embassy, however, is not aware to what extent arbitration is used by the business community.

Ukraine’s International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law. ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations. Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958. However, the reliability, consistency, and timeliness of implementation are unknown.

The Embassy is not aware of any investment disputes that have involved state-owned enterprises (SOEs).

Bankruptcy Regulations

The Law on Bankruptcy (1992) does not require approval by creditors for selection or appointment of an insolvency representative, nor does it require approval by creditors for sale of substantial assets of the debtor. The creditor does not have the right to request information from the insolvency representative, and provides that a debtor has the right to object to decisions accepting or rejecting creditors’ claims. The Verkhovna Rada is considering a draft law to reform the bankruptcy system.

In February 2018, the Verkhovna Rada passed legislation to create a national credit registry administered by the National Bank of Ukraine. This EU-mandated legislation seeks to reduce lending risks through publication of credit history, including bankruptcies.

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. 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

In most cases, Ukrainian laws regulating employment apply to foreign nationals in Ukraine. There are a few exceptions to this rule related to foreign nationals working for other foreign organizations, such as diplomatic missions or international organizations. In other cases, a Ukrainian employer and a foreign national employee cannot choose a foreign law to govern the employment contract.

Citizens of EU countries, the United States, Canada, Japan and some other countries do not require a visa to enter Ukraine for a stay up to 90 days within a 180-day period. The list of countries and respective visa requirements are available on the website of the Ministry of Foreign Affairs of Ukraine (http://mfa.gov.ua/en). Citizens of other countries wishing to formalize their employment relations in Ukraine must obtain a long-term type D visa.

An employer wishing to employ a foreign national must obtain a work permit for this person. Authorities issue work permits on a case-by-case basis, for a particular applicant and a particular position in a company. A work permit is normally issued for the period of employment indicated in the employment contract, but for not more than one year. A work permit can be renewed for the same term, for an unlimited number of times and free of charge.

A foreign citizen with a valid work permit must normally spend more than 90 days within a 180-day period in Ukraine. When this occurs, the foreign national can obtain a temporary residence certificate. The temporary residence certificate is issued for a term of one year and can be renewed for consecutive terms.

There are no age or nationality restrictions on who can be a manager or company director in the private sector.

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.

The regulatory framework for processing personal data in Ukraine is generally aligned with the Convention for the Protection of Individuals with Regard to Automated Processing of Personal Data of 1981 adopted by the Council of Europe. Ukraine adopted a law in 2011 on protection of personal data, which is based on the framework EU Directive 95/46/EC. The EU–Ukraine AA requires Ukraine to revise legislation on personal data protection to bring it in compliance with the EU’s General Data Protection Regulation (GDPR). The adoption of regulations harmonized with the EU’s GDPR in Ukraine is expected by the end of 2018.

Government Agencies involved in personal data protection are:

• The Ukrainian Parliament’s Commissioner for Human Rights (regarding control over processing of personal data);
• The State Service of Ukraine for Special Communications and Information Protection (regarding protection of e-signatures and other encrypted information);
• The National Commission for State Regulation of Communications and Information (regarding issues related to regulation of internet access).

Under Article II, clause 6 of the Bilateral Investment Treaty between the United States and Ukraine, neither Party shall impose performance requirements as a condition of establishment, expansion or maintenance of investments, which require or enforce commitments to export goods produced, or which specify that goods or services must be purchased locally, or which impose any other similar requirements.

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. Ukrainian media estimates that 5 percent of land in Ukraine does not have clear title. The government in 2017 ordered the transfer of the State Land Cadaster to blockchain technology in order to allow for reliable data synchronization, which will prevent data manipulation and improve control over the system.

Intellectual Property Rights

While the Government of Ukraine has demonstrated some limited progress in IPR reforms to date, Ukraine continues to have serious IPR challenges. The U.S. Trade Representative has placed Ukraine on the Priority Watch List since 2017. Three main IPR concerns are: nontransparent administration of colleting and distributing royalties to U.S. and other rights holders; widespread use of unlicensed software by government institutions; and failure to combat widespread online copyright infringement. In 2017, the USG announced a partial suspension of Generalized System of Preferences benefits due to Ukraine’s inability to address IP issues.

Large internet pirate sites are still operating in Ukraine, though cyber police investigators opened 18 criminal digital piracy investigations in 2017, and 45 pirate sites were closed by the police or sites’ owners. Police investigators told post that courts dismissed many of their cases, and the sites reopened. There was not a single online piracy-related conviction in Ukraine in 2017. Ukraine improved its anti-piracy legislative framework in 2017. In particular, the Law on State Support of Cinematography criminalized unauthorized recording of copyrighted works, as well as the financing of pirating operations. The new law also established detailed procedures and timelines for takedown notices and responses. Its proper enforcement would considerably improve regulation of the online environment in Ukraine.

In the area of software piracy, the Government of Ukraine continued limited efforts to license the business software it uses. The government plans to allocate USD 28 million for legalization measures, up from USD 5.6 million in 2017. The government admits that 35 percent of software in government ministries and enterprises in 2017 was unlicensed, although this is down from 40 percent in 2016.

In addition to digital piracy, Ukraine’s many open-air markets continue to sell illegally copied music, films, and entertainment software. Other counterfeit goods, including products containing protected trademarks, also remain readily available. Industry experts reported that criminal prosecution for selling counterfeit goods are stalled and ineffective, and that seized goods are not disposed of or released in a timely manner. The government does not provide public statistics on seizures of counterfeit goods.

A number of rogue collective management organizations (CMOs), out of 19 total, continue to operate freely 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. As of April 2018, parliamentarians were close to passing a CMO reform law.

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. In October 2017, the Verkhovna Rada established a dedicated high court for intellectual property cases. Once the court is fully functioning, it should provide a forum for IPR cases heard by specially selected and trained judges. Appeals will be considered by the Appellate Chamber of the IP court, while the Commercial Cassation Court of the Supreme Court will consider appeals from the IP Appellate Chamber.

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 may open an account in a bank operating in Ukraine and transfer in funds for further investment, or invest directly to an account of a Ukrainian resident company. In 2017, the National Bank of Ukraine began allowing foreign investors to use escrow accounts to make investments in Ukraine. Only Ukrainian-licensed securities traders may handle securities transactions (subject to certain exceptions). In 2014, the National Bank 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 set to expire in June 2016, but remains in place.

Ukraine’s capital market includes nine operational privately-owned stock exchanges, including five licensed exchanges, hundreds of commodity exchanges, two central securities depositaries, and one settlement center. In addition, some of the exchanges offer clearing services for derivatives.

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, though interest rates remain high. 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

Ukraine’s banking sector has seen remarkable progress following the 2014-2015 crisis thanks in large part to the authorities’ banking sector cleanup, resulting in the closure of 90 banks for insolvency or for money laundering activities. The banking sector’s recovered net assets grew by 6.4 percent to USD 50 billion in 2017, with nearly all key performance indicators of financial institutions improving. In 2017, 14 banks left the market, of which four became non-bank financial companies and one merged with another bank. Concentration in the banking sector increased by 1.3 percent, with the top 20 banks accounting for 90.7 percent of net assets.

The market share of state-owned banks (Privatbank, Ukreximbank, Ukrgasbank and Oshchadbank) in terms of net assets rose by 3.6 percent to nearly 55 percent. Due to significant provisioning, the banking sector booked losses of USD 920 million in 2017. The number of loss-making banks decreased from 33 in 2016 to 18 in 2017. The losses were mostly generated by PrivatBank, which was nationalized in December 2016, and two banks with Russian capital that faced sanctions from the government. In 2015, the government impose sanctions on five Ukrainian banks with Russian state capital: Sberbank PJSC, VS Bank PJSC, Prominvestbank PJSC, VTB Bank PJSC, and BM Bank PJSC. The sanctions prohibit these banks from transferring capital outside the territory of Ukraine in favor of any affiliated entities.

Since July 2017, the share of non-performing loans (NPLs) has been decreasing in all groups of banks, apart from PrivatBank. As of the reporting period, the shares of NPLs stood at 55.6 percent in state-owned banks (apart from PrivatBank, where it has increased sharply to 87.6 percent), 41 percent in foreign banks, and 27.2 percent in privately owned banks. In 2017, the banks’ total liabilities increased by 3.6 percent to USD 44 billion.

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.

Foreign Exchange and Remittances

The National Bank in 2017 continued to liberalize currency controls and restrictions on dividend repatriation, which were put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis. In particular, the National Bank relaxed some restrictions on repatriation of investment proceeds, cross-border lending, and restrictions on individuals transferring money from Ukraine for non-trading operations. In addition, the National Bank amended the rules for registering cross-border loans of Ukrainian borrowers such that a Ukrainian bank, responsible for the registration of a cross-border loan with the National Bank, will be required to establish the ultimate beneficial owners of each foreign lender under such loan before submitting the documents for registration. The National Bank also decreased the mandatory foreign currency sales share from 65 to 50 percent, originally imposed to safeguard the stability of the foreign exchange market. Certain restrictions are likely to remain in place until the Ukrainian economy further strengthens, allowing the National Bank to further liberalize currency controls.

The National Bank in early 2018 revised its methodology for calculating remittances, factoring in the new data on labor migration and estimates by the central banks of Poland and Russia —the two largest sources of remittances to Ukraine. The improved methodology revealed an average USD 2 billion more in remittances inflows each year, in particular: USD 7 million in 2015, USD 7.5 billion in 2016 and USD 9.3 billion in 2017.

Sovereign Wealth Funds

Ukraine does not maintain or operate a sovereign wealth fund.

The Government of Ukraine operates 1,833 SOEs out of 3,350 registered SOEs, with an economic output of approximately 10 percent of GDP. 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. There is no common public list of all SOEs in Ukraine. Each Ministry publishes a list of SOEs under its management.

The corporate governance law, which entered into force in 2016, requires SOEs to publicize their annual financial reports on their official websites, including information on financial indicators, officials, transactions, etc. SOEs must also publish their annual financial statements and audits.

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 heavily subsidized its SOEs (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has supported debts of many SOEs with sovereign loan guarantees. 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. Ukrainian law specifies that 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. Amendments from 2015 to the Law on Joint-Stock Companies enabled owners of 50 percent +1 share in a company to call shareholder meetings.

Privatization Program

On March 7, 2018 a new law on privatization of state property, aimed at attracting more investors, came into force in Ukraine. The legislation allows investors to settle disputes under international law, makes it obligatory to employ international advisers for the sale of larger firms, and also bans Russian and offshore companies from participating in privatizations.

In addition to the sale of large SOEs, Ukraine plans to privatize about 600 small SOEs in 2018. Assets assessed at less than USD 10 million—generally real estate and small businesses—will be sold at electronic auction, using the ProZorro Sales platform.

The State Property Fund oversees privatizations. Privatization rules generally apply to both foreign and domestic investors and, on paper, a relatively level playing field exists. Observers note numerous instances of past privatizations adjusted to fit a pre-selected bidder. The government has stated that there will be no revisions of past privatizations. Still, some court cases have surfaced wherein private companies are challenging earlier privatizations. In 2017 the budget received approximately USD 125 million from privatizations, which was 20 percent of the original plan, but still the best result in recent years.

There is limited but growing awareness in Ukraine of internationally accepted standards for responsible business conduct, including corporate social responsibility (CSR). Primary drivers for the introduction of these standards have been Ukraine’s vibrant civil society, international companies and investors, and efforts by business associations such as the American Chamber of Commerce and the European Business Association. The Government of Ukraine has put in place corporate governance standards to protect shareholders, however, these are voluntary.

On March 15, 2017, Ukraine became the 47th country to adhere to the OECD Declaration and Decisions on International Investment and Multinational Enterprises. Ukraine established its National Contact Point in 2016 under the Ministry of Economic Development and Trade, with an official website due to launch in April 2018.

There are independent NGOs, investment funds, worker organizations/unions, and business associations promoting or monitoring responsible business conduct. Post is aware of the NGO Center “Development of Corporate Social Responsibility” (CSR, http://csr-ukraine.org/) along with joint projects on development of corporate social responsibility 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 Ukraine, however, is still voluntary. Ukraine has not joined the Voluntary Principles on Security and Human Rights.

Ukraine has numerous laws to combat corruption by public officials, and following the Revolution of Dignity in 2014 the government launched new anti-corruption institutions, including the National Anti-Corruption Bureau (NABU) to investigate corruption by public officials, the Special Anti-Corruption Prosecutor’s Office (SAP), and the National Agency for Prevention of Corruption (NAPC). In addition, a law mandated that public officials declare their assets on a publicly viewable online system. These new institutions, however, have had an uneven track record. After the successful 2016 launch of the asset declaration system for public officials, the NAPC failed to fulfill its mandate to verify officials’ declarations and to fairly manage political party finance reporting. NABU and SAP have taken 107 corruption cases to court since 2015, including indictments of high-level officials, but have failed to obtain a single conviction as cases became mired in court proceedings. The Verkhovna Rada at the time of this report was considering draft legislation to establish a specialized anti-corruption court, which is an IMF program condition.

Foreign businesses, including U.S. companies, continue to identify corruption in many sectors as a significant obstacle to FDI. Reform of public procurement has been a success story, with the introduction of the online ProZorro system providing transparency for most procurement, except in the defense sector, which remains non-transparent and a continuing source of corruption. The energy sector has seen some improvements, including on-going reforms at the large oil and gas SOE Naftogaz, but participants in the sector continue to complain of significant corruption. There are also allegations of corruption at SOEs in a variety of sectors.

There are a number of NGOs actively involved in investigating corruption and advocating for anti-corruption measures. In 2017, the Verkhovna Rada passed a law with broad requirements for non-governmental individuals engaged in anti-corruption activities to file public asset declarations, which activists fear could undermine their advocacy and be used to increase law enforcement harassment of their activities. The declaration requirements for anti-corruption activists went into effect in early 2018, despite calls from the international community for the Verkhovna Rada to scrap the requirement.

Resources to Report Corruption

NABU, established in October 2014, is the appropriate resource for the reporting of high-level corruption.

Government of Ukraine contact for combating corruption:

Mr. Artem Sytnyk, Director
National Anti-Corruption Bureau
3, Vasyl Surikov St, Kyiv, Ukraine 03035
Hot-line: 0-800-503-200
info@nabu.gov.ua
Corruption Reporting eForm:
http://nabu.gov.ua/povidomlennya-pro-kryminalne-pravoporushennya

Contact at Transparency International:

Mr. Yaroslav Yuchyshyn
Executive Director
Transparency International Ukraine
2A provulok Kostia Hordiienka, 1st floor, Kyiv, Ukraine 01024
+38(044) 360-52-42
office@ti-ukraine.org

The military conflict continues in parts of Donetsk and Luhansk oblasts between Ukrainian government troops and forces that Russia leads, arms, and funds. Residents of Russia-controlled areas are subject to political violence at the hands of Russia’s proxy authorities. Civilian casualties occur regularly due to landmines and shelling, as fighting occurs in and around major population centers. Infrastructure for water, gas, and electricity are also frequently damaged by fighting. Ukraine lacks control over 500 km of its border in Donetsk and Luhansk, allowing Russia to freely supply its proxies with equipment, weapons, and soldiers. Russia continues its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol.

There were several protests and demonstrations during 2017 against the government, mainly evoking populist messaging against economic conditions in the country and perceptions of the government failing to fight corruption. These protests, however, have generally been peaceful with few instances of violence. Politically, the country’s ruling coalition remains in power, albeit legislatively the coalition often needs support from opposition parties to pass important legislation. Political campaigns are beginning to increase in preparation for the 2019 presidential and parliamentary elections.

Ukraine has a well-educated and skilled labor force of about 26 million people with a nearly 100 percent literacy rate. As of December 2017, the unemployment rate of the population aged 15-70 (ILO methodology) averaged 9.5 percent, and the unemployment rate of the population of working age individuals averaged 9.9 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. In December 2017, the unemployment insurance allotted to each worker amounted to USD 85 per month. Unemployment increased in 2017 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. As of January 1, 2018, the minimum monthly wage for private-sector workers was USD 140. In December 2017, the nominal average monthly wage increased by 35.5 percent year-on-year to USD 328, 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.

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.

The independence of unions from government or employer control, however, has been disputed by certain labor groups. Independent trade unions alleged that the country’s largest trade union confederation, the Federation of Trade Unions of Ukraine (FPU), enjoyed a cozy relationship with employers and members of some political parties. Unions 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.

During 2017, 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 respects this right. It does not extend the right to strike to personnel of the Prosecutor General’s Office, 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. A new law established the National Mediation and Reconciliation Service (NMRS) to mediate labor disputes. According to official Ukrainian statistics, during 2017 the NMRS resolved 216 labor disputes, which involved 1.5 million employees and 6,767 economic entities.

The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in Washington in 1992. 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 is sought. 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 projects through FY 2016 and 2017 totaled USD 865 million, with a number of potential projects in the early stages.

In previous years, Ukraine’s FDI growth was driven partly by recapitalization of domestic banks when banks conducted operations of converting debt into equity. According to the National Bank of Ukraine, net inflow of FDI to Ukraine in 2017 was USD 2.3 billion or 2.1 percent of GDP (USD 1.8 billion excluding banks recapitalization), falling from USD 3.4 billion in 2016 and bringing the total FDI stock to USD 39.1 billion.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

*Inward investment data are from the IMF, but is far less than the National Bank of Ukraine (NBU)’s inward investment calculation of USD 48.858 billion in 2016 and USD 51.653 billion in 2017 (which is closer to the USD 47.777 billion figure cited in the 2017 ICS. The IMF’s CDIS data do not include information on outward direct investment from Ukraine.
Table 4: Sources of Portfolio Investment

*IMF data match those provided by the National Bank of Ukraine (NBU), though NBU indicates information is current as of December 31, 2017. Ukrainian nationals and firms may be the ultimate beneficial owners of a large percentage of the assets, nearly all of which held by non-financial corporations and households in Cyprus and UK.

Michael Latham
Economic Officer
U.S. Embassy Kyiv, Ukraine
+380-44-521-5000
LathamME@state.gov