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 Regulatory institutions are characterized by outdated, contradictory, and burdensome regulations, a high degree of favoritism in decisions by government officials, weak protection of property rights and minority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.
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).
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.