Ukraine is striving to build a more modern and dynamic economy while struggling to overcome decades of corruption and government mismanagement. Hard-won reforms have brought macro-economic stability and some improvements in the business environment. In the past year however, partly due to the 2019 presidential and parliamentary election cycle, there has been a decrease in the pace of reforms. It remains to be seen whether the pace will pick up after the October 2019 parliamentary election, though the main political parties profess a commitment to reforms.
Ukraine has significant investment potential given its large consumer market, highly educated and cost-competitive work force, and abundant natural resources. The Ukrainian government actively seeks foreign investment and established investment promotion agencies that have facilitated foreign investments. Ukraine’s Association Agreement with the EU gives Ukraine preferential market access and is accelerating Ukraine’s economic integration with the EU. Ukraine’s economy demonstrated real GDP growth of 3.3 percent in 2018, and the IMF forecasts growth of 2.7 percent in 2019.
U.S. companies have found success in Ukraine, particularly in the agriculture, consumer goods, and technology sectors. Ukraine is an agricultural powerhouse, and is the world’s third-largest grain exporter. Ukraine’s IT service and software R&D sectors show great potential due to the country’s large, skilled workforce. An array of local IT outsourcing companies serve clients worldwide.
Foreign direct investment (FDI) generally remains low with net inflow in 2018 equal to only two percent of GDP. The most significant constraints on FDI remain the business climate and corruption. Foreign investors cite corruption in the judiciary, poor infrastructure, powerful vested interests, and weak protection of property rights as some of the major challenges to doing business. Labor migration abroad, particularly to the EU, is reducing Ukraine’s labor force.
The Ukrainian government recognizes these problems and has implemented reforms to improve the business environment. Notably in June 2018, Ukraine adopted legislation to create the High Anti-Corruption Court of Ukraine, which should be fully established and operational in 2019. Overall, however, the pace of reforms has slowed and a culture of impunity among elites continues. The government has targeted civil society activists and independent journalists for their work in reforming Ukraine. Ukraine has agreed to continue anti-corruption reforms as a key part of its IMF program, which is vital for Ukraine to meet its financial needs and maintain its hard-fought macro-economic stability.
The conflict with Russia also continues to impede greater investment in Ukraine. In the non-government controlled areas in the Donbas region of Ukraine, the conflict with Russia-led forces has wrought significant damage to freight rail, mines, and industrial facilities. Investors should note that the situation in both Crimea (unlawfully occupied by Russia since the spring of 2014) and in occupied areas of Donbas remains dire. U.S. sanctions prohibit U.S. companies from participating in most transactions in Crimea.
|TI Corruption Perceptions Index||2018||120 of 176||https://www.transparency.org/news/feature/corruption_perceptions_index_2017|
|World Bank’s Doing Business||2018||71 of 190||http://doingbusiness.org/rankings|
|Global Innovation Index||2018||43 of 128||http://globalinnovationindex.org/content/page/data-analysis|
|U.S. FDI in partner country ($M, stock positions)||2017||$398||https://www.bea.gov/international/factsheet/factsheet.cfm?Area=344|
|World Bank GNI per capita||2017||$3,079||http://www.data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
The government of Ukraine actively seeks FDI. In 2014, the president established the National Investment Council as a consultative and advisory body under the President, and in 2016 the Ukrainian government established the Ukraine investment promotion office (UkraineInvest.com), a state agency 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.
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. Registering a foreign investment is governed by “The Law on Foreign Investments” (2013). Before registering their business, non-Ukrainian citizens must register with the Office of Immigration in the Ministry of Foreign Affairs and receive a taxpayer identification number through the State Fiscal Service. However, the accreditation process for representative offices of foreign companies and their branches is significantly slower than the simplified registration process for Ukrainian businesses. Accreditation for representative offices is issued by the Ministry of Economic Development and Trade, and it typically costs USD 2,500 and takes 60 days. In comparison, registering a Joint-Stock company or a Limited Liability company takes approximately six days.
Foreign and domestic private entities can engage in all forms of remunerative activity, with some exceptions: foreign companies are restricted from owning agricultural land, producing bio-ethanol, manufacturing carrier rockets, and some publishing activities. In addition, Ukrainian law authorizes the government to set limits on foreign participation in state-owned enterprises, although the definition of “foreign participation” is vague, and the law is rarely used in practice. Certain critical infrastructure, especially in the energy sector, is precluded by law from private ownership and therefore not available to foreign investors. This includes the gas transmission system, electricity grids, and various manufacturing operations.
Ukraine currently reviews merger and acquisition investments on competition grounds, but is considering a mechanism for investment review on national security grounds. According to Ukraine’s investment promotion office, UkraineInvest, foreign direct investments are reviewed on an ad hoc basis by the Cabinet of Ministers if concerns arise, but there is currently no formal process in place.
Other Investment Policy Reviews
The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) conducted formal investment and trade reviews in 2016, and can be found at OECD: WTO: . The OECD further reported on SOE reforms in the hydrocarbons sector in 2019: and analyzed Ukraine’s efforts at decentralization in 2018:
The Ukrainian government has taken major steps forward to facilitate the ease of doing business, particularly in improving the protection of minority investors, simplifying procedures for small claims and pre-trial conferences for contract enforcement, and eliminating certain verification requirements that have hindered trading across borders. As a result, Ukraine moved up five spots in the World Bank’s 2019 Doing Business Ranking, from 76th place in 2018 to 71st. The previous year, Ukraine had climbed four positions in the ranking. In March 2019, the government abolished 149 outdated regulations and requirements in order to simplify doing business in Ukraine.
Private entrepreneurs and legal entities can register online at and . Companies can submit documents online for the Registrar to share 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. Usually it takes up to six days to register a business.
As of December 31, 2018 Ukraine’s investments in foreign countries totaled approximately USD 6.3 billion, according to data provided by the State Statistics Service of Ukraine. Individuals are limited to investing a maximum of EUR 50,000 (USD 56,000) abroad per year and any investment exceeding this cap requires a license from the National Bank of Ukraine. Legal entities and private entrepreneurs registered in Ukraine have a cap of EUR 2 million (USD 2.24 million) per year.
2. Bilateral Investment Agreements and Taxation Treaties
Ukraine has signed more than 70 bilateral investment treaties (BITs). The BIT between the United States and Ukraine has been in force since 1996. A full list of Ukraine’s BITs can be found at . Ukraine has over 60 bilateral taxation treaties, including with the United States. A list of Ukraine’s bilateral taxation treaties can be found at . 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. (However, some of this information is outdated). Ukraine signed a FTA with Thailand September 2018 and with Israel January 2019. Ukraine is currently negotiating a FTA with Turkey.
In February 2017, Ukraine signed an agreement with the United States to apply the provisions of the U.S. Foreign Account Tax Compliance Act (FATCA). The legislation needed to ratify FATCA, as well as two other necessary laws to enforce it, are pending in the Parliament.
3. Legal Regime
Transparency of the Regulatory System
Ukraine is struggling to build a transparent and consistent regulatory environment. The current regulatory regime is characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and 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 towards clearer rules and fair competition. Ukraine’s efforts to implement its EU Association Agreement, 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 (parliament) 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.
The formulation of regulations falls solely under the purview of the government. In Ukraine there are no regulatory processes managed by non-governmental organizations or private sector associations. The relevant ministry or regulatory agency is required by law to publish draft text of proposed regulations on its website for review and comment for at least one month but not more than three months. Along with the draft text, the governmental body must include a data-based assessment justifying the need for the regulation and analyzing potential impact. The ministry or agency receives comments via its website, 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.
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.
Public finances and debt obligations are mostly transparent. Budget documents and information on debt obligations are widely and easily accessible to the general public, including online. Budget documents provide a mostly full picture of the government’s planned expenditures and revenue streams. Information on debt obligations is publicly available, and is published as part of the budget document on the Parliament’s website. Information on the status of sovereign and guaranteed debt is published and updated on a monthly basis on the Finance Ministry’s website. Ukraine’s finances related to state-owned enterprises, its three social insurance funds, and natural resource extraction are not yet fully transparent, however.
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. The Ministry of Economic Development and Trade (MEDT) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade. MEDT typically submits draft text to the WTO for comment, but there have been instances where the draft text was submitted, relatively late in the legislative process, after it had already passed the first reading in the Parliament.
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 (such as the case of independent arbitration through the investor-State dispute settlement provisions of the U.S.-Ukraine BIT).
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 the Supreme Court. Local courts are either courts of general jurisdiction 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 in the court system 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 executive and prosecutorial influence on judges. Ukraine is ranked 117 out of 140 countries with regard to judicial independence by the report 2017-2018 (up twelve spots since the 2016-2017 report).
In general, regulations are appealable, but determining whether a regulation is appealable in the national court system depends on the nature and origin of the regulation.
Laws and Regulations on Foreign Direct Investment
The Law of Ukraine on Investment Activity (1991) established 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.” The website of Ukraine’s Investment Promotion Office ( ) provides relevant laws, rules, procedures, and reporting requirements for potential investors. Potential investors can also receive specific investment support by emailing email@example.com.
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.
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 and acquisitions, considering applications regarding violations of public procurement as an appeal body, monitoring the state aid system, competition advocacy within the government, and formulating competition policy.
Expropriation and Compensation
Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfil 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.
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: .
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
While U.S. investors have faced many challenges with the Government of Ukraine over the years that have devolved into disputes, international arbitration under provisions of the Bilateral Investment Treaty between the United States and Ukraine have been rare, with two known arbitral proceedings 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 2019, 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 (particularly VAT) 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) occur 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 slow.
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.
In a turning point for Ukrainian bankruptcy law reform, in October 2018 the Ukrainian parliament adopted the Code of Bankruptcy Proceedings to replace the existing bankruptcy law that had been in force since 1992. The President signed the bill into law in April 2019. The new Bankruptcy Code enters into force six months after the legislation is published (provisions on electronic auctions will enter into force three month after publication).
The new Bankruptcy Code improves creditors’ rights by allowing them to select the bankruptcy administrator, decide the starting price of debtor assets at auction, and participate in other matters regarding asset sales. 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 Bankruptcy Code also improves the procedures for selling debtor’s assets by introducing online electronic auctions. Currently, assets are often sold offline in a non-transparent way. In addition, the new Bankruptcy Code does not require prior collection through courts or enforcement services for insolvency proceedings to begin. For creditors this might significantly ease the debt collection process and reduce legal costs and court fees.
Bankruptcy is not criminalized in Ukraine. The Criminal Code of Ukraine, however, criminalizes 1) intentionally making an entity bankrupt; 2) distorting certain financial data in order to conceal insolvency of a financial institution.
In the 2019 World Bank’s Doing Business Report Ukraine ranked 145 (improved from 149th in 2018) in the “resolving insolvency” subcategory. Ukraine’s low ranking is driven by a low recovery rate and the high costs associated with recovering funds from the insolvent firm by creditors.
Parliament passed legislation in February 2018 to create a national credit registry administered by the National Bank of Ukraine. This EU-mandated legislation seeks to reduce lending risks through the publication of credit histories, including bankruptcies.
4. Industrial Policies
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 relatively 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. Overall, Ukraine’s IT infrastructure and Internet Service Providers are largely unregulated. However, Ukraine implemented sanctions in 2017 that ban internet service providers from providing access to the Russian social networks VKontakte and Odnoklassniki as well as all services from Yandex and Mail.Ru.
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.
There are no legal measures preventing or impeding companies from transmitting business-related data outside of Ukraine. In terms of data storage and protection requirements, the EU–Ukraine Association Agreement requires Ukraine to revise legislation to bring it in compliance with the EU’s General Data Protection Regulation (GDPR). Ukraine’s adoption of regulations harmonized with the EU’s GDPR is still in progress.
An employer is free to employ a foreign national as long as the employer has obtained a work permit for this person. The law of Ukraine “On Employment of the Population” sets forth the procedure for issuing work permits to foreigners. 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 not for 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 who spends more than 90 days within a 180-day period in Ukraine, can obtain a temporary residence certificate. As of June 1, 2018, temporary residence certificates are now contactless electronic cards with biometric data. The new permits are generally issued for the term of an individual’s work permit. There are also no age or nationality restrictions on who can be a manager or company director in the private sector.
Citizens of EU countries, the United States, Canada, Japan and some other countries do not require a visa to enter Ukraine for a stay of up to 90 days within a 180-day period. Individuals who are planning to get a temporary residence permit in Ukraine due to work must obtain a long-term type D visa. The list of countries and respective visa requirements are available on the website of the Ministry of Foreign Affairs of Ukraine ( ). There are no reports from foreign investors and their employees of excessively onerous visa requirements inhibiting their mobility. However, Russian citizens have reported difficulties and heightened scrutiny when arranging travel to Ukraine. Additionally, people who previously traveled to Russian-occupied Crimea since 2014 have been reported being denied entry to Ukraine.
5. Protection of Property Rights
Ukraine’s regulatory framework generally protects property interests, as well as mortgages and liens. The record system is generally reliable and maintained by the Ministry of Justice. Nonetheless, judicial reform is needed to improve efficient enforcement of property rights. Foreign nationals are able to lease land, but there is a moratorium on the sale of agricultural land to foreigners.
Ukrainian media estimates that five 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 would prevent data manipulation and improve control over the system, but the status of this initiative is unclear. Pilot projects to transfer the State Land Cadaster and the legal registry to blockchain began in late 2018. Unoccupied property can become communal property only by court decision following a request from the local body authorized to manage real estate property. The request can only be made a year after the property was registered as unoccupied.
Intellectual Property Rights
Ukraine has a long history of inadequate enforcement and protection of intellectual property rights (IPR). Ukraine has been listed on the Priority Watch List of the U.S Trade Representative’s Special 301 Report since 2015 due to the widespread use of unlicensed (pirated) software, the transshipment and sale of counterfeit goods, rampant Internet piracy, and an overabundance of rogue of collective management organizations (CMOs). Moreover, in 2017, the United States announced the partial suspension of Ukraine’s benefits under the Generalized System of Preferences (GSP) for failure to meet the GSP eligibility criterion related to the adequate and effective protection of IPR. Ukraine is also listed in the USTR’s Notorious Markets List.
Over the past year, Ukraine has passed significant legislation and developed laudable plans to improve the protection of IPR, but the implementation of this legislation and these plans to date has been slow and ineffective. Despite the passage of new legislation and early steps to implement it, in operation Ukraine’s system of CMOs remains non-transparent and corrupt. Rights holders report it is still difficult to combat online copyright infringement despite Ukraine improving its anti-piracy legislative framework in 2017. Furthermore, the presence of counterfeit goods in Ukraine continues to be high due to limited action by law enforcement, and there is widespread use of unlicensed software.
Due to Ukraine’s weak protection of IPR, online markets that facilitate the sale and distribution of counterfeit goods continue to operate in Ukraine. Industry reports that a high volume of allegedly counterfeit goods is readily available on these marketplaces, and that the process to remove the listings of these items is cumbersome and ineffective.
Sales of counterfeit goods in physical marketplaces continue to be widespread as well. One of the largest counterfeit markets in Europe, with around 6,000 merchants, is the 7th Kilometer Market in Odesa. Law enforcement authorities do not perform raids or seizures at this market, according to stakeholders and local media. The Troyeshchyna and Petrivka markets in Kyiv, Khmelnytskiy market as well as the Barabasova market in Kharkiv also sell a high volume of counterfeit goods.
Most counterfeit goods are not produced in Ukraine but are instead imported. Vendors reportedly source the counterfeit items from Turkey and China. In 2018, Customs reported that they inspected 7,260 shipments due to the suspicion of IP rights’ violations and reported 12 cases of illegal trade of counterfeit goods valued at USD 61,000. This is approximately 30 percent less than in 2017, when Customs authorities opened 14 criminal cases for illegal importation and exportation of counterfeit goods valued at over USD 400,000. The EU is working with Ukraine on draft law no. 4614 to improve the detection and prevention of “goods infringing intellectual property rights moving through the border” as part of Ukraine’s obligations under the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU.
6. Financial Sector
Capital Markets and Portfolio Investment
The Ukrainian government encourages foreign portfolio investment in Ukraine. Ukraine’s capital market consists of two separate sectors: stock market and commodity market. The stock market includes ten stock exchanges and a settlement center. No clearing services are offered at present.
Government bonds constitute 95 percent of the trades; a few corporate securities are listed, and the volume of their trades is insignificant. The capital market for portfolio investment is small and lacks liquidity. The local institutional investment sector, including private pension investment, is weak. The commodity market in Ukraine is underdeveloped and unregulated. It includes hundreds of commodity exchanges and other participants, not licensed or subject to any supervision.
The regulator, the National Securities and Stock Market Commission, lacks financial and operational independence and, therefore, Ukraine is not a signatory of the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (of the International Organization of Securities Commissions. The necessary legislation to strengthen the independence of the Securities Commission was submitted to the Parliament but has not been passed yet.
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).
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 credit 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 to reforms resulting in the closure of over 90 banks for insolvency or for money laundering activities. The banking sector reported a record high net profit of UAH 21.7 billion (USD 775 million) in 2018 with the number of unprofitable banks falling from 18 in 2017 to 13 in 2018. Foreign banks’ profits amounted to UAH 15 billion (USD 555 million) in 2018. Non-performing loans, however, remain one of the biggest unresolved issues of the banking sector accounting for 52.8 percent of loans as of the end of 2018.
There are approximately 77 banks operating in Ukraine, but the top 20 banks accounted for 91 percent of net assets in 2018. The market share of state-owned banks (Privatbank, Ukreximbank, Ukrgasbank, and Oshchadbank) accounted for 54.7 percent of net assets in 2018. The banking sector’s net assets amounted to USD 50 billion at end of 2018.
Ukraine’s central bank, the National Bank of Ukraine (NBU), regulates banks operating in Ukraine. The NBU Governor Smolii outlined a plan to increase the penetration of financial services in Ukraine at a 2018 Financial Inclusion Forum. The plan included developing new technologies to increase accessibility in rural areas of the country, promoting financial literacy, and protecting customer rights to instill confidence in the system. Approximately 63 percent of Ukraine’s adults have at least one bank account, according to World Bank estimates.
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 2018 continued to liberalize currency controls and restrictions on repatriating funds, which had been put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis. There is a five million euro monthly limit per company for repatriation of non-listed equities and corporate bonds (for foreign currency purchasing and transferring abroad). For all other types of investments repatriation – listed equities, government bonds, funds from reducing share in capital, company liquidation, etc. – there are no restrictions. There is a monthly limit of seven million euros for the repatriation of dividends. The NBU has indicated it intends to raise the monthly limit to ten million euros.
Companies that receive payment in foreign currency are required to exchange 30 percent of the payment they receive into local Ukrainian currency. This requirement was decreased from 50 percent as of March 1, 2019.
In June 2018 Ukraine’s Parliament passed the Law “On Currency and Currency Transactions,” which liberalized the currency control framework. The currency law introduces the “everything is allowed, unless expressly forbidden” principle versus the former “everything is forbidden, unless expressly allowed” principle for cross-border currency transactions. Consequently, the law prompted a shift from the previous, heavily bureaucratic currency regulation to one more flexible and with fewer restrictions on currency operations. Government authorities should interpret any ambiguous provisions in the Currency Law and the NBU Regulations in favor of companies or individuals that perform currency transactions.
The NBU has had a floating exchange rate policy for the last four years, though the NBU carries out currency interventions to meet two objectives: reducing excessive currency fluctuations and replenishment of international reserves.
Sovereign Wealth Funds
Ukraine does not maintain or operate a sovereign wealth fund.
7. State-Owned Enterprises
The Government of Ukraine operates 1,600 state-owned enterprises (SOEs) out of 3,358 registered SOEs, with an economic output of approximately ten percent of GDP. While the government lists 3,358 enterprises, more than 1,700 of them no longer operate as profitable businesses. SOEs in Ukraine are defined as companies which the state owns at least 50 percent +1 share. SOEs are active in areas such as energy, machine-building, and infrastructure. There is no common public list of all SOEs in Ukraine and each ministry publishes a list of SOEs under its respective management. The Ministry of Economic Development and Trade periodically updates information on annual financial reports of significant SOEs (100 of the largest SOEs), which it publishes on the ministry website.
The corporate governance law, which entered into force in 2016, requires SOEs to publicize annual financial reports and disclosures on official websites, including information on financial indicators, company officials, transactions, etc. Ukrainian law also stipulates that SOEs publish their annual financial statements and audits. In 2018, the government of Ukraine stepped up its corporate governance reform efforts, and created supervisory boards in strategic SOEs. Strategic SOEs, including Ukrzaliznytsia, Ukrenergorynok, Ukrposhta, and Ukrenergo, have selected independent and government board members. These reforms have been an important step in improving the management, efficiency, and responsiveness of the companies.
Most SOEs rely on government subsidies to function and cannot directly compete with private firms. Several SOEs capable of making a profit have already been privatized, and the result has been that mostly inefficient firms have remained in government hands. The Government of Ukraine heavily subsidizes 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. 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 numerous anecdotal reports indicate that ministries and vested interests ignore this restriction. The Cabinet of Ministers has the power to decide on the creation, reorganization, and liquidation of SOEs, and to adopt and enforce SOE charters. It can delegate this authority to relevant ministries supervising the SOE. The Cabinet of Ministers may also delegate to ministries the permission to create joint ventures with state property and prepare proposals to divide state property between the national and municipal levels.
In March 2018, the government began implementing a new law on the privatization of state property aimed at attracting more investors. The legislation allows investors to settle disputes under international law, makes it obligatory to employ international advisers for the sale of larger firms, and bans Russian and off-shore companies from participating in the privatization process. Despite the launch of the new law, the government did not complete a single large-scale privatization in 2018.
On May 3, 2018, the government approved a list of companies designated for sale. The list contained 26 SOEs, including several regional energy providers, or oblenergos, the Odesa Portside Plant (OPP), and electricity generator Centrenergo. With the exception of Centrenergo, sales of the remaining SOEs were targeted to proceed under terms of the new law signed in 2018. Of the 26 companies designated for privatization, the government initiated advisor tenders for six companies in 2018. Five of these tenders were challenged by competitors believed to be acting on behalf of vested interests. As of 2019, the five advisor appointments remained stalled. A lackluster interest and poorly-prepared bidders led to the government’s decision to cancel the sale in late 2018 of the sixth company, Centerenergo, despite a promising start to the process. In 2018, Ukraine’s central budget received only UAH 0.3 billion (USD 11 million) from privatization, comprising only 1.4 percent of the original plan.
The GOU approved a revised list of 21 SOEs designated for privatization on January 16, 2019. The 2019 list excluded most utility companies due to a government decision to transfer the utilities to a communal ownership structure. The government also approved a list of smaller-scale SOEs to put up for sale in 2019.
The State Property Fund (SPC) oversees privatizations in Ukraine. The rules on privatization apply to foreign and domestic investors and, theoretically, a relatively level playing field exists. Observers have cited, however, numerous instances in past privatizations where vested interests influenced the process to fit a pre-selected bidder. Despite these concerns, the government has stated that there would be no revisions of past privatizations. Still, some court cases have surfaced wherein private companies are challenging earlier privatizations.
8. Responsible Business Conduct
There is limited but growing awareness in Ukraine of internationally accepted standards for responsible business conduct, including corporate social responsibility. 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.
In 2017, Ukraine became the 47th country to adhere to the , which provides recommendations on a due diligence approach to responsible business conduct. Ukraine established its National Contact Point to promote these guidelines for Multinational Enterprises under the Ministry of Economic Development and Trade ( ). There are also independent NGOs, such Center for the Development of Corporate Social Responsibility, as well as investment funds, worker organizations/unions, and business associations promoting or monitoring responsible business conduct. There are no reported restrictions on their activities aimed at promoting responsible business conduct.
Ukraine has been a member of the Extractive Industries Transparency Initiative (EITI) since 2013. Participation by companies in Ukraine is still voluntary.
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. On June 7, 2018 the Parliament approved long-awaited legislation to establish an Anti-Corruption Court, and the process establishing the court is underway.
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 allegedly a continuing source of corruption. The energy sector has seen some improvements, including reforms at the large oil and gas SOE Naftogaz, but participants in the sector continue to complain of significant and sometimes insurmountable corruption. Government interference in the corporate governance of Naftogaz is a persistent concern. There are allegations of corruption at specific SOEs in a variety of sectors, as well as allegations that external corrupt forces interfere regularly in SOE operations.
There are a number of NGOs actively involved in investigating corruption and advocating for anti-corruption measures. In 2017, the Parliament passed a law with broad requirements for non-governmental individuals engaged in anti-corruption activities to file public asset declarations. The declaration requirements for anti-corruption activists went into effect in early 2018, despite calls from the international community for the Parliament 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
Corruption Reporting eForm:
Contact at Transparency International:
Mr. Andriy Borovyk
Transparency International Ukraine
2A provulok Kostia Hordiienka, 1st floor, Kyiv, Ukraine 01024
10. Political and Security Environment
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 of 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 2018 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. The 2019 presidential election cycle meant increased competition among political parties, decreasing the pace of work in parliament.
11. Labor Policies and Practices
Ukraine has a well-educated and skilled labor force of about 26 million people with a nearly 100 percent literacy rate. Ukraine’s population was 42.2 million people in December 2017. Ukraine’s official unemployment rate was 9.1 percent in 2018 although unemployment in some regions, particularly in western Ukraine, remained significantly higher. According to the Ministry of Social Policy of Ukraine, there were about 1.7 million unemployed workers in 2018. However, only 21 percent were officially registered with the State Employment Service. Wages in Ukraine remain low by Western standards. In January 2019, the minimum monthly wage increased to 4173 UAH (USD 155) from 3723 UAH (USD 138) in January 2018. The real average monthly wage increased by 14.2 percent year-on-year to 9218 UAH (USD 341). 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. However, the independence of unions from government or employer control has been disputed by certain labor groups. Independent trade unions allege that the country’s largest trade union confederation, the Federation of Trade Unions of Ukraine (FPU), enjoyed a preferential relationship with employers and members of some political parties. Unions not affiliated with the FPU have been denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions. There have also been cases of workers who renounced membership in an FPU-affiliated union and who joined a new union, facing loss of pay, undesirable work assignments, and dismissal.
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.
During 2018, the State Labor Service was responsible for enforcing labor laws. Inspectors were limited in number and funding. Although the Government of Ukraine renewed planned and unplanned labor inspections, the number of completed inspections continued to fall, and experts assessed the number to be inadequate relative to the size of the Ukrainian economy. 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 312 labor disputes, which involved 1.5 million employees and 6,835 economic entities.
12. OPIC and Other Investment Insurance Programs
The United States has offered Overseas Private Investment Corporation (OPIC) political risk insurance and financing in Ukraine since 1992. OPIC has an active pipeline of projects in Ukraine, across various sectors. There are currently 20 OPIC projects in Ukraine with a value USD 983 million. Ukraine is also a member of the World Bank-based Multilateral Investment Guarantee Agency (MIGA).
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
* State Statistics Service of Ukraine
Table 3: Sources and Destination of FDI
|Direct Investment From/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$31,606||100%||Total Outward||$6,322||100%|
|United Kingdom||$1,944||6.2%||British Virgin Islands||$61||1.0%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Source: State Statistics Service of Ukraine
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||$107||100%||All Countries||3||100%||All Countries||104||100%|
|United Kingdom||$29||27%||Other||2||67%||United Kingdom||$29||27%|
|United States||$9||8%||United States||$9||8%|
14. Contact for More Information
Laura Valeria Solano
U.S. Embassy Kyiv, Ukraine