Challenges and Hopes for FDIs in Ukraine

By Ihor Olekhov

Posted: 12th October 2015 08:13

Ukraine's economy is very much dependent on foreign investment and international trade.  However, the volumes of foreign investment and international trade of Ukraine have declined significantly over the last several years primarily because of either poor regulation in Ukraine or an inability of the Ukrainian Government to protect the interests of Ukrainian exporters in foreign markets.  Apart from lack of experience in international trade matters in many markets, Ukrainian businesses do not seem to have sufficient information about the remedies available to them under international trade treaties of Ukraine and the Ministry of Economy has only recently started to focus on the right issues of international trade development without clear successes yet. 
 
Apart from political instability in 2014 and 2015, Ukraine faces many economic problems and export challenges.  First of all, because of dependency on the Russian and CIS markets, the deterioration of trade relations with the Russian Federation significantly undermined the economy of Ukraine.  The export competitiveness is also affected by such factors as: (i) significant decline in exports from Donetsk and Lugansk regions; (ii)low competitiveness of domestic products in the EU market; (iii) low share of services in trade exports; and (iv) low share ofsmall and medium enterprises in exports. 
 
In order to increase the export potential of Ukraine, the following fundamental steps should be taken:
a) elaboration of the national export strategy envisaging the priorities for state trade policy;
b) introduction of changes to the Ukrainian trade laws, in particular:
 
c) abolishment of additional import duty introduced by the Law of Ukraine "On Measures of Stabilizing Balance of Payment of Ukraine in Accordance with Article XII of GATT".  The additional importation duty is widely regarded as contradicting the nature of measures, envisaged by GATT Article XII and negatively affects trading status of Ukraine.  Potentially, it may also result in retaliation from other concerned countries and affect the temporary liberalised trading regime between Ukraine and the EU.  Significantly, this additional duty has affected negatively Ukrainian businesses importing foreign components into Ukraine and, in fact, has decreased the volume of international trade to a very significant extent;
d) acceleration of bringing the state standards in respect of goods and services in conformity with corresponding the EU standards, in order to proximate Ukrainian producers to the EU quality standards and promote competition in the internal market the market;
e) fundamentally reforming existing currency control regime by way of steady movement towards liberalisation of capital movement.  In particular, it is strongly recommended to abolish rules on compulsory sale of foreign currency by Ukrainian banks, "90 days" settlement requirement, restrictions on repatriation of foreign investments, compulsory registration of cross-border loan facilities etc.  The mentioned rules have proved to be not only obsolete and contradicting Ukrainian Constitution, as well as the EU rules of free movement of capital, but also ineffective and unnecessary.  Liberalisation of currency control regime will significantly expand possibilities for development of diverse trade finance instruments in Ukraine and simplify settlements under international trade contracts;
f) complete cancellation/termination of the Law of Ukraine “On Foreign Economic Activities”, as creating difficulties for international trade operations, inconsistencies in regulation of international trade operations and interfering into contractual relations of the parties.  This law is an atavism of a soviet system and implements into Ukrainian law approaches which no longer exist in other post-sovietcountries.  In particular, such special economic measures as individual licensing of foreign economic activities and temporary suspension of foreign economic activity block activities of businesses and create an extremely negative image of Ukraine an as a counterparty;
g) intensifying initiation of dispute settlement mechanisms within WTO, aimed at protecting interests of Ukrainian exporters from overt and disguised discrimination by other WTO members.  In the recent years Russian Federation has introduced a series of restrictions on import of products originating from Ukraine, such as agricultural goods, confectionary products, poultry, alcohol, machinery, etc.  Even though the majority of such restrictions were justified based on relevant provisions of WTO TBT and SPS agreements, there have been expressed numerous concerns that these restrictions were guided by current political agenda and had discriminatory character.  The cooperation between Ukrainian businesses and the Government in pursuing protection of Ukrainian exports in this domain should be expanded;
h) introduce clear rules of regulation of e-commerce in Ukraine by way of adopting respective specialised law.  Introducing a preferred taxation regime for e-commerce operations would boost the e-commerce infrastructure and facilitate its steady development;
i) adoption of more keen attitude towards combating smuggling, production and distribution of counterfeit products, usage of unfair trade practices by businesses in order to improve Ukraine's position in international IP protection rankings (e.g., USTR Special 301, GIPC International Index, etc.), which currently reflect negative investors' perception of Ukraine's system of IP rights protection, and in order to promote fair competition in the internal market.
 
Additionally, Ukrainian legal regulations on banking and currency control have ever encouraged neither stable development of banking and financial markets nor vigorous inflow of foreign investments in Ukraine.  Furthermore, the overall situation on the above markets was hugely impacted by economic and financial crisis experienced by Ukraine in last two year.  In such circumstances, a number of decisive measures must be immediately undertaken by Ukrainian authorities.  The National Bank of Ukraine, as well as other relevant state bodies, must substantially revise their basic approaches to the exercising of state control over cross-border transactions and re-design currently effective models of state regulation respectively.  In particular, it is necessary to abolish any limitations on opening, operating and maintaining bank accounts (denominated either in UAH or in a foreign currency) in Ukraine for foreign companies without a fixed place of business in Ukraine.  This should permit foreign companies to operate in UAH environment on cross-border deals.  Amendments must be made to the Law of Ukraine On Payment Systems and Transfer of Funds in Ukraine and NBU Regulation No. 492 to make available to non-resident legal entities an option of UAH/foreign currency current accounts.
 
Ihor Olekhov is a partner in the Banking & Finance group of the Kyiv office. He advises on general corporate and tax matters, and has significant experience on drafting sophisticated transaction documents, providing tax planning advice and assisting on transfer pricing matters in international transactions. He is also proficient in debt restructurings, aviation law and wealth management, and is knowledgeable in international trade and WTO law, trade and corporate compliance. Mr. Olekhov is a member of the Ukrainian International Law Association and the National Council for Civil Liberties, a human rights organization of the UK. He is currently a co-chair of the banking and finance committee of the American Chamber of Commerce.

Ihor can be contacted on + 380 44 590 0101 or by email at Ihor.Olekhov@bakermckenzie.com
 

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