Investor considerations
- There are very few restrictions on foreign investment.
- The Ukrainian legal system is still evolving.
- Ukraine has limited foreign exchange restrictions, but these should not create unmanageable problems.
|
Content
3.1 Foreign investment
Investment climate
Ukrainian authorities regularly declare a keenness to encourage foreign investment and the broader public is well disposed to foreign investment.
There are few restrictions on foreign ownership. The major exceptions are publishing and broadcasting, and the manufacture of weapons. Otherwise, the regulatory framework for the establishment and operation of businesses in Ukraine by foreign investors is similar to domestic investors. As a general rule, investment permits are not required, but all enterprises must be established according to the form and procedure prescribed by law and registered with appropriate government agencies. Foreign investors are generally not required to seek special approval from authorities for foreign direct investments.
Both domestic and foreign investors still encounter difficulties at a practical level. These do not relate specifically to the issue of foreign ownership or investment, but rather to administrative hurdles that are arbitrarily enforced, or random delays.
Total foreign direct investment at 1 January 2007 stood at around USD 23.2 billion, according to data from the State Statistics Committee. Foreign direct investment in 2006 totalled USD 6.3 billion.
Regulatory legislation
Ukraine is still struggling to build a legal system that facilitates easy interaction with the international community. Many issues are not dealt with by a single law, so it may be necessary to piece several laws together to develop understanding of an issue. The various laws may also be ambiguous or contradictory, which complicates the issue further. There is no consolidated tax code, although there are plans to introduce one by 1 January 2008.
The following major pieces of legislation (in addition to taxation law) affect foreign investment into Ukraine:
- On Procedure for Foreign Investments sets out in broad terms Ukraine's policy on inward investment and the rights and obligations of foreign investors.
- The Civil Code regulates civil relationships, the establishment of legal entities and personal property rights.
- The Commercial Code was enacted on the same day as the Civil Code, and governs business relationships. The Commercial Code is intended to regulate issues that are not dealt with in the Civil Code, although in practice there is some overlap.
- On Securities and Stock Market governs the public issuance and trading of securities.
- On Protection of Economic Competition restricts business monopolies, and aims to ensure an efficient operation of the Ukraine economy through the development of competition. The majority of mergers and acquisitions in Ukraine are likely to require pre-approval from the Anti-monopoly Commission.
- On Protection from Unfair Competition aims to protect business entities and consumers against unfair competition.
- On Environmental Protection establishes a framework for pollution charges to be imposed on any legal entity that discharges contaminants into the environment.
- Intellectual property rights are governed by various laws, including On Protection of Rights to Inventions and Useful Models, On Protection of Rights on Industrial Design, On Protection of Rights for Trademarks for Goods and Services, and On Copyright and Related Rights.
Restrictions on foreign investment
As mentioned above, restrictions exist for foreign investments in the publishing and broadcasting sectors, and foreigners are not allowed to participate in the manufacturing of weapons.
Investment incentives
Ukraine eliminated all investment incentives in March 2005. In August 2006, Parliament supported a draft resolution recommending that special tax regimes in free economic zones and tax incentives for technology parks be restored.
The draft resolution has not been approved at the time of writing, and it remains unclear what government policy on incentives will be in the future.
Foreign exchange issues
Foreign currency is regulated by the 1993 Cabinet of Ministers Decree, On The System Of Currency Regulation And Currency Control, as well as a number of implementing rules issued by the National Bank of Ukraine (NBU). A number of foreign currency transactions may only be undertaken if an individual license is obtained from the NBU. However, there has been an ongoing trend toward less restrictive rules, the most recent development being the removal of the requirement that Ukrainian residents convert at least 50% of any foreign currency proceeds into local currency (hryvnia).
A 1% Pension Fund charge applies to the acquisition of foreign currency.
For further discussion on the foreign exchange rules, see Foreign currency rules
Repatriation of capital and earnings
Foreign investors are entitled to repatriate profit, income or other funds relating to investments without any restrictions, after the payment of applicable taxes. Foreign investors are guaranteed the right to the prompt and unimpeded repatriation of profits and other funds in foreign currency derived from their investments in Ukraine. Conversion of funds for repatriation is effected through the Ukrainian Inter-bank Currency Exchange.
Although not strictly required under the law, registration of the foreign investment may reduce complications in the future (withdrawal of capital, for example). This involves submitting a prescribed set of registration documents to the regional (oblast) state administration, the Kyiv or Sevastopol state administration, or the government of the Autonomous Republic of Crimea, as appropriate.
Guarantees and rights
Foreign investments are not to be subject to nationalisation, expropriation, requisition, or any other measure of similar effect, except when this is in the public interest. In such cases, compensation must be provided to the investor based on the market value of the property.
Background
Privatisation of medium and large-scale enterprises was developed in 1995 under the "Mass Privatisation Program" (MPP) project sponsored by USAID. In parallel, the State Property Fund (SPF), the government's privatisation authority, privatised many small-scale enterprises, primarily for cash. The MPP was initially planned for one year (1995-96), but ended up applying through to 1999.
On privatisation program for 2000-2002 was approved in mid-2000, and ended mass privatisation in favour of selling large, ideally controlling, stakes of strategic industrial enterprises to investors who would then develop the enterprise. Although only intended to define government policy for two years, the law continues to apply.
Kryvorizhstal sale (2004 and 2005)
Before 2005, many privatisation deals were considered questionable. Most prominent was the sale of the 93.02% stake in the Kryvorizhstal steel mill in June 2004 for USD 800 million to a local consortium.
When the new President, Viktor Yushchenko, took office in early 2005, he initiated court action against the Kryvorizhstal deal. In June 2005, the courts dismissed the deal and ordered that the company be resold. In October 2005, in a bidding process broadcast live on Ukrainian television, the stake was sold for USD 4.81 billion, well in excess of the USD 3 billion predicted by analysts.
The Kryvorizhstal sale demonstrated that transparent privatisation sales in Ukraine are possible. The previous government initially indicated that several other large pre-2005 sales would be reviewed for irregularities and a limited number are being pursued. However, there is no longer a clearly defined government policy of revisiting other sales.
Legacy of privatisation
The impact of Ukraine's privatisation can be assessed in terms of the following strategic changes in Ukraine's economy:
- The State has given up majority ownership in 90% of the industrial enterprises it owned in 1991. Millions of Ukrainian citizens have become shareholders and more than 60% of Ukraine's labour force work for private enterprises.
- Although many directors and managers of privatised enterprises are from the Soviet era, they are gradually being replaced by a new post-Soviet generation of directors and managers.
- In many cases, the new generation of investment fund managers, who have become major shareholders via the privatisation program, are putting in place new enterprise directors and managers and introducing new management techniques.
- State budget support for unprofitable enterprises has been greatly reduced.
Privatisation calendar
It is difficult to talk of a privatisation calendar in Ukraine. Political considerations mean that the list of potential privatisations can be a moving target. For example, one of the more attractive entities still to be privatised is Ukrtelecom (a monopolist in the fixed-line communications market). Originally it was contemplated that a 92.9% interest would be sold, with analysts expecting proceeds in the region of USD 4.9 billion. Currently, the thinking appears to be toward the sale of a non-controlling interest.
Another example is Odessa Pryportovyi Plant. Analysts anticipate that a 94.5% interest will realise in the region of USD 1.4 billion. Because of its perceived strategic importance, however, the Plant has moved on and off the list several times in the past few years.
There is some volatility in the privatisation list, and it is necessary to monitor ongoing developments to identify opportunities that may arise. Currently, there are more than 500 entities on the privatisation list for 2007, but very little activity.
