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Cablegate: Ukraine: 2008 Investment Climate Statement, Part

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DE RUEHKV #0101/01 0170720
ZNR UUUUU ZZH
R 170720Z JAN 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 4734
INFO RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS KYIV 000101

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STATE FOR EB/IFD/OIA (JNHATCHER) AND EUR/UMB
STATE PLEASE PASS TO USTR FOR PBURKEAD
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USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYCK

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TAGS: EINV EFIN ETRD KTDB OPIC USTR UP
SUBJECT: UKRAINE: 2008 INVESTMENT CLIMATE STATEMENT, PART
II

REF: A) KYIV 99
B) 2007 STATE 158802

1. Ref A contained part one of the 2008 Investment Climate
Statement (ICS) for Ukraine. Part two of the ICS continues
below.

Begin Text of Part II:

A.7. Protection of Property Rights

MORTGAGES

During the last few years, Ukraine's policymakers have
launched several initiatives to develop a mortgage market,
which have resulted in a strong increase in the number of
mortgages and laid the legislative and administrative
groundwork for a functioning mortgage market. Adoption of
the Law "On Withholding Land Shares in Kind" in 2002 and
the Law "On Mortgages" in 2003 was particularly important.
The GOU created the State Mortgage Institution (SMI) in
October 2004 with authorized capital of UAH 50 million ($10
million) as a liquidity facility largely aimed at putting
downward pressure on lending rates by allocating capital
efficiently. The SMI began issuing corporate securities
during the first quarter of 2007. The use of mortgages in
Ukraine to secure ownership in property is growing ?
apartments, houses, office buildings, other types of
buildings, and summer house (dacha) plots have secured
mortgages. Development of the secondary mortgage market is
underway -- enabled by passage of the Covered Bond Law in
late 2005. To test the law, USAID assisted a local bank in
the spring of 2007 to issue a pilot mortgage covered bond
to demonstrate how residential mortgages can be traded as
securities. The pilot issue identified a number of
deficiencies in the law and resulted in a package of
amendments now being considered by the government. Their
passage is likely to result in rapid development of the
secondary market and securitization of nearly $10 billion
in residential mortgages -- an increase of $9.5 billion
since the beginning of 2005. USAID helped create of a
pledge registry, the first of its kind in the former Soviet
Union, which applies to individuals' obligations with
regard to movable property and tax liens. Though
rudimentary, the registry is nationwide, providing a more
transparent lending market for personal property.

INTELLECTUAL PROPERTY RIGHTS (IPR)

The United States withdrew Ukraine's benefits under the
Generalized System of Preferences (GSP) program in 2001 and
imposed trade sanctions and elevated Ukraine to the Special
301 Priority Watch List in 2002 as a result of Ukraine's
failure to adequately protect intellectual property,
particularly copyrighted music. The United States lifted
sanctions in August 2005, after the Ukrainian government
made significant improvements to IPR protection over a
number of years, culminating in the passing of amendments
to the Law "On Laser-Readable Disks" in July 2005. In
January 2006, the United States reinstated GSP benefits for
Ukraine and lowered Ukraine's designation under Special 301
from Priority Foreign Country to Priority Watch List. Also
in January 2006, the GOU agreed to work with the U.S.
Government and with U.S. and domestic industry to monitor
the progress of future enforcement efforts through the IPR
Enforcement Cooperation Group. This bilateral group has
conducted a series of successful dialogues, meeting roughly
once every four months. The GOU has also agreed to meet
biannually with European Commission officials as part of an
EU-Ukraine IP Dialogue. Despite these positive
developments, Ukraine remains a trans-shipment point,
storage location, and market for pirated and counterfeit
goods produced in Russia and elsewhere.

Ukraine is an active member of the World Intellectual
Property Organization and a signatory to a number of IPR-
related international agreements and conventions. As part
of its ongoing efforts to negotiate accession to the WTO,
Ukraine has adopted a series of laws to bring its IPR
regime into compliance with the WTO Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS).
Parliament passed amendments to its Customs Code in
November 2006 that provide customs officials the ability to
use ex officio authority to seize suspected pirated or
counterfeit goods. In May 2007, Parliament passed a law

amending the Civil and Criminal Codes of Ukraine in order
to provide for the seizure and destruction of IPR-
infringing goods and equipment, in line with Article 46 of
TRIPS.

Ukraine amended its Law "On Medicinal Drugs" in November
2006 to provide a five-year period for the protection of
pharmaceutical test data that is submitted to government
authorities to obtain marketing approval. In September
2007, the Ministry of Health issued a regulatory act to
ensure implementation of this law and to clarify some
procedures. Pharmaceutical industry representatives
complain that implementation of the law remains a problem,
however. Parliament also passed an amendment to the Law
"On Pesticides and Agrochemicals" in November 2006 that
provides a ten-year period of protection for agricultural
chemicals. In September, the Cabinet of Ministers issued a
regulation to abolish discriminatory fees on the testing
and registration of plant varieties.

The State Department of Intellectual Property (SDIP) is
responsible for the formulation and implementation of
Ukraine's intellectual property policy. In order to
improve IPR enforcement, the Ministry of Internal Affairs
and the State Customs Service have also set up units to
deal exclusively with IPR violations. These under-staffed
units have difficulty dealing with the large number of IPR
infringements. Amendments to the Criminal Code of Ukraine
passed in February 2006 lowered thresholds, so that
violations with smaller amounts of damage to rights holders
can also be prosecuted as IPR infringement. As a result,
prosecutions and convictions of IPR-related crimes have
increased significantly in recent years. However, in many
cases, the rights holder must actively engage with the
Ministry of Internal Affairs or the State Customs Service
to obtain enforcement. Judges too often dismiss cases for
improper reasons, or hand down minimal sentences.
Generally speaking, the number of judges trained in IPR law
remains low.

Trademarked and copyrighted goods must be registered for a
fee ($400 for the first good for the first year) in
Customs' rights holder database in order to be guaranteed
protection. Generally low confidence in the Ukrainian
judicial system has meant few enterprises have brought
private lawsuits to protect intellectual property rights,
although there was a landmark ruling in September 2007 by
Ukraine's High Commercial Court against an illegal music
download website. Legal experts and government officials
have called for the formation of a special patent court in
Ukraine to adjudicate patent cases, but to date there has
been no concrete action towards this end.

A.8. Transparency of the Regulatory System

BUREAUCRATIC REGULATORY PROCEDURES

The number of regulations, required certificates, and
inspection regimes in Ukraine imposes a significant
regulatory burden on private enterprise. While the time
and costs related to business registration have been
reduced, the GOU still requires enterprises to obtain
numerous permits to conduct business. The Law "On Permits
System in Economic Activity," which entered into force in
January 2006, canceled more than half of the required
permits and increased the number of locations for obtaining
permits six fold. The government also tried to expand
"One-stop Registration Shops" that allow new businesses to
be registered within two to three days, instead of a month,
as in the past. The World Bank "Doing Business" database
rated Ukraine 109th in 2008 for ease in starting a
business, down from 105th in 2007. "Doing Business 2008"
estimates that on average it takes 27 days and $152.10
(7.8% of GNI per capita) to open a business in Ukraine;
OECD averages are 14.9 days and 5.1% of GNI per capita.

LICENSING

Ukraine applies both activity and import licensing regimes.
The Law "On Licensing Certain Types of Economic Activities"
of June 2000 (and amended on January 17, 2002) provides a
list of activities subject to licensing. Licensing applies
to nearly 60 economic activities and is meant for
protection of human, animal or plant health, the
environment, public morals, and national security, or for

prudential regulation of the financial sector.
Businesspeople continue to cite burdensome activity
licensing requirements as major impediments to commerce in
Ukraine. Fees are described as high and compliance
burdensome, particularly for telecommunications equipment.

Import licenses are required for some goods. The list of
goods covered by the licensing regime and the license terms
are decided annually by the Cabinet of Ministers. In 2007
the list included pesticides, alcohol products, optical
media production inputs, some industrial chemical products
and equipment containing them, official foreign postage
stamps, excise marks, officially stamped/headed paper,
checks and securities, some goods that contain sensitive
encryption technologies, and ozone-depleting substances.
For some products an importer is required to receive prior
approval, which may or may not be automatic, from the
relevant administrative agency before receiving the
necessary import license from the Ministry of Economy. For
some goods, product certification is a prerequisite for an
import license. Importers can certify the compliance of a
foreign facility to Ukraine's technical regulations applied
to imports. The U.S. distilled spirits industry reports
that this option usually involves a burdensome visit and
costly inspection by Ukrainian government officials. If
approved, however, the supplier receives a certificate of
conformity valid for two to three years, which avoids the
burden of certifying each shipment and subjecting goods to
mandatory laboratory tests upon arrival in Ukraine.

RULEMAKING/INSPECTIONS

Proposed draft laws and regulations are available on
Parliament's website for public review, but there is no
formal procedure for submitting comments.

Current Ukrainian legislation envisages a mandatory
financial inspection of a business entity per year and
requires a minimum of 10 days notice. Non-financial
inspections (i.e. taxes, fire safety, sanitation, etc.) can
be burdensome and impediments to doing business in Ukraine.

CERTIFICATION/HEALTH AND SAFETY POLICIES

Technical standards and certification requirements are
imposed on many imports. The certification body is the
State Committee of Ukraine for Technical Regulation and
Consumer Policy ("DerzhSpozhyvStandard"). Although Ukraine
belongs to several international standardization bodies,
such as the International Organization for Standardization
(ISO), for many years it generally had not recognized
foreign product certificates, even if they are issued in
line with international standards, unless recognition is
mandated through an international treaty signed by Ukraine.
Standardization procedures can be lengthy, burdensome, and
expensive; standards can be vague, inflexible, and subject
to frequent changes. Product standards are compulsory for
a larger percentage of goods and services than in most of
the world. According to a 2007 survey by the International
Finance Corporation, over 60% of Ukrainian businesses have
to comply with compulsory standards and/or technical
specifications.

DerzhSpozhyvStandard is responsible simultaneously for
development and approval of standards, issuing
certificates, conducting inspections of producers, and
ensuring market surveillance and protection of consumer
rights, which some experts consider a conflict of interest.
DerzhSpozhyvStandard has a network of 114 accredited
product certifying bodies, including 60 accredited
certifying bodies for quality management systems, as well
as about 780 testing laboratories throughout Ukraine, 170
of which are accredited by the National Accreditation
Agency as complying with international standards.
Depending on the type of product, testing and applicable
certification scheme, the certification process can take
from three days to one month. Companies seeking testing
should contact DerzhSpozhyvStandard.

Importers can apply for three types of technical standard
certificates: a certificate for a single batch of goods; a
certificate for one year, which is valid for all imported
goods during that year with one or two additional selective
tests (this type of certification is the most common in
Ukraine); and a certificate for five years, which requires

inspection of production facilities.

Some certification agencies do much of their regulatory
work with little or no coordination with other Ukrainian
bodies performing similar tests. Many products require
multiple certificates from different agencies, with local,
regional, and municipal authorities often requesting
additional documentation beyond that required by central
bodies. Experts allege that government officials
responsible for issuing licenses often require businesses
to provide documents that are not mandatory, deliberately
conceal information in order to confuse a potential
licensee, or delay issuing documents in order to induce
licensees to offer a bribe.

These issues are being addressed during Ukraine's WTO
accession negotiations, and, as recently as September 2007,
Ukraine has reduced the number of products subject to
mandatory certification. Upon WTO accession, Ukraine will
be obliged to apply such mandatory requirements only in
conformity with WTO provisions on technical regulations
(i.e., only in defense of human, animal, and plant health
and safety), and only based on sound science. A May 2007
amendment to the Law "On Standards, Technical Regulations
and Conformity Assessment Procedures" helped to guarantee
precedence of international over regional standards and
introduced provisions related to conformity assessment
recognition, although further amendments may be needed to
ensure that Ukrainian authorities will accept the results
of conformity assessment procedures performed in the United
States. Ukraine's National Accreditation Agency is taking
steps to become a member of the International Laboratory
Accreditation Cooperation (ILAC), anticipated in 2009.
Once an ILAC member, Ukraine should significantly increase
the acceptance of test results of laboratories accredited
with, and notified by, ILAC member bodies.

In addition, Ukraine has, in the past, applied a range of
sanitary and phytosanitary (SPS) measures that restrict
imports of a number of U.S. agricultural products, among
them, pork, beef, and poultry. Ukraine's certification and
approval process is lengthy, duplicative, and expensive.
Ukraine maintains a complex and non-transparent system for
overseeing human and animal health measures that involves
overlapping authority by the Veterinary Service, Sanitary
Service, and DerzhSpozhyvStandard. Over the past few
years, however, Ukraine has passed amendments to several
laws and regulations, most importantly to the Law "On
Veterinary Medicine" and the Law "Quality and Safety of
Food Products and Food Raw Materials," to bring its
legislative and regulatory framework into compliance with
requirements of the WTO SPS Agreement.

Ukraine's biotechnology approval process has been
inoperative for some time. This has resulted in
unpredictable sales conditions for corn products, soybeans,
and meal. The United States is working with Ukraine to
establish procedures regarding biotechnology that are based
on modern, science-based risk assessment principles and
guidelines, including those of the WTO SPS and Technical
Barriers to Trade (TBT) Agreements, the Codex Alimentarius,
and the International Plant Protection Convention (IPPC).
In May 2007, Parliament passed a new law establishing a
framework for the creation, testing, and use of products of
biotechnology. The government still needs to issue
implementing regulations for the law to take practical
effect, however.

For many years, Ukraine has worked to bring its
standardization system into conformity with the European
Standards System. The law "On Assurance of Conformity" is
replacing mandatory certification for many types of
products with assessment procedures in conformance with
international standards and the "New Approach" directives
of the European Union, including the principle of
"presumption of conformity to standards." On August 1,
2002, the National Accreditation Body started operations to
ensure the use of standards and procedures consistent with
European Cooperation for Accreditation (ECA) policy.

A.9. Efficient Capital Markets and Portfolio Investment

BANKING

The Ukrainian banking system consists of the National Bank

of Ukraine (NBU) and commercial banks. The NBU is
responsible for monetary policy, licensing of commercial
banks, and oversight of their activities.

Ukraine's banking sector is modernizing and growing
rapidly, and is playing a growing role in Ukraine's
economy. Bank capital is about 10% of GDP. Total bank
assets in Ukraine are about UAH 510 billion, with total
loan assets of UAH 370 billion (as of October 2007). Money
lending and deposits grew at a fast 56% and 36%
respectively in January-October, 2007. Bank deposits
account for 40% of GDP. Interest rates continued to
decline from 15.0% in 2006 to 13.8% in 2007, making credit
more accessible. There are 154 banks operating in Ukraine,
but a handful of banks dominate the market. The top
fifteen banks control 64% of the loans outstanding and own
45% of the total capital of the system. As the volume of
consumer lending grew by over 70% in January-October, 2007,
the share of loans exceeding one year stood at 44% of the
total loan portfolio of the banking system, up from 43%
last year. Non-performing loans were registered at 2% of
the total lending portfolio in 2006, the latest data
available. Foreign borrowing by Ukrainian banks has grown
rapidly in recent years, from $7.8 billion at the beginning
of 2006 to $25.7 billion after nine months of 2007.
Greater reliance of banks on foreign borrowing to fund
domestic lending operations raised concerns about the
sensitivity of Ukraine's banking sector to international
shocks. Borrowing rates for Ukrainian banks on
international markets rose substantially as a result of the
summer 2007 sub-prime crisis and credit crunch, yet as of
December 2007 banks were still able to raise funds abroad,
in part because several larger banks are now owned by
foreign banks and can rely on their parent bank. Borrowing
by Ukrainian banks from other banks grew by over 70% in
2007.

In January 2002, the Law "On Banks and Banking Activity"
eliminated discrimination against foreign banks. It
entrusted the NBU with issuing banking licenses and
includes provisions to prevent money laundering. The NBU
sets minimum capital requirements each year to be met by
the banks by the year-end. Current minimum capital
requirements range from UAH 20.04 million ($4 million) to
UAH 133.3 million ($26.3 million). Foreign licensed banks
may carry out all the same activities as domestic banks and
there is no ceiling on their participation in the banking
system. Foreign banks can operate via subsidiaries in
Ukraine. In November 2006, Parliament approved an
amendment to the law "On Banks and Banking Activity"
permitting foreign banks to operate via branch offices.
The law anticipates a transition period of five years and
sets requirements for branches of foreign banks, including
cooperation with the Financial Action Task Force and UAH
68.8 million ($13.6 million or EUR 10 million) minimum
capital of the branch. Foreign banks have significantly
increased their presence in Ukraine's banking sector in
recent years, usually through the acquisition of Ukrainian
banks. Foreign banks now account for approximately 31% of
bank capital in Ukraine.

Ukraine remains a cash economy, but the use of credit cards
is on the rise. From January through September 2007, the
use of credit cards increased by 13% and use of ATM cards
increased by 51%, despite widespread credit/ATM card fraud
in Ukraine.

INSURANCE

Currently, based on the 1996 Law "On Insurance," only
insurance companies registered in Ukraine may carry out
insurance operations. There is a lower minimum capital

requirement for domestic insurance companies than insurance
companies with foreign shareholders. Foreign insurance
companies can invest in local companies, but to operate
locally they are required to open branch offices.
Parliament adopted amendments to the Law "On Insurance" in
November 2006 and May 2007, however, that give foreign
companies the right to operate in Ukraine through
affiliates five years after Ukraine accedes to the WTO.

CAPITAL MARKETS

The legal and regulatory framework, as well as financial
disclosure systems for the securities market, continues to

lag behind international standards. Basic market
infrastructure exists as does a competent regulator, but
the legislative basis for capital market operations is
weak. Rulings of the Securities and Stock Market State
Commission (SSMSC) have insufficient enforcement power and
are not always followed by the courts. Investors continue
to face low market confidence, transitional accounting
standards, a lack of accurate company information,
inadequate protection of minority shareholders' rights, and
a macroeconomic environment that, despite marked growth and
economic modernization in recent years, remains volatile.
Deficiencies in regulations governing operation of
registrars led to frequent cases of double registration of
shares, resulting in low protection of shareholders'
rights.

Ukrainian law allows for the following types of securities:
* share securities (shares, investment certificates);
* debt securities (bonds of enterprises, state bonds of
Ukraine, bonds of local loans, treasury obligations of
Ukraine, savings (depository) certificates, bills of
exchange);
* mortgage securities (mortgage bonds, mortgage
certificates, mortgages, certificates of funds of
operations with real estate);
* privatization securities;
* derivative securities;
* title securities

According to the SSMSC, 29 collective investment
institutions, 757 securities traders, 186 custodians, 2
depositories, 361 registrars, and 11 self-regulatory
organizations (six of which are associations) operated in
Ukraine last year. Seven stock exchanges were registered
in Ukraine. A Ukrainian securities industry broker/dealer
self-regulatory organization (SRO) and its nationwide
electronic trading system (PFTS) are the largest stock
exchange with about 94.8% of secondary onshore trading.
PFTS Stock Exchange market capitalization was UAH 565
billion (USD 112 billion) in late 2007. The Ukrainian
government is currently considering options to consolidate
the remaining, mostly dormant stock exchanges to enhance
price transparency, and improve stock exchanges listing
standards to establish corporate governance and information
disclosure based on international norms.

The absence of a central securities depository complicates
transparent and efficient transfer of ownership records,
protection of ownership rights and clearance and settlement
of trades. Although a state-owned National Depository was
created in 1999, the market-owned MFS Depository has been
operating commercially as the Ukrainian Depository since
1997 in line with current international practice. The
Ukrainian government is currently considering reform
options to establish a predominately privately owned
Ukrainian Central Depository through the merging of the two
institutions.

Principal laws, decrees, and regulations governing
Ukraine's capital markets include: the Law "On Securities
and Stock Exchanges" (1991), replaced in May 2006 by the
Law "On Securities and the Stock Market" (2006), the Law
"On Business Associations" (1991), a Presidential Decree
"On Investment Funds and Investment Companies" (1994), the
Law "On State Regulation of Securities Markets" (1996),
Amendments to the Law "On Business Associations" (1996),
the Law "On the National Depository System" (1997), the Law
"On Accounting and Financial Reporting" (1999), the Law "On
Bankruptcy" (1992), the Law "On Collective Investment
Institutions" (2001), and the Law "On Financial Services"
(2001).

The Law "On Collective Investment Institutions" encourages
the creation of mutual funds, introduces the idea of a
licensed asset manager, regulates the establishment and
operation of subjects of mutual investment, provides
guarantees of ownership rights to securities, and protects
rights of exchange market participants. The Law "On the
Circulation of Promissory Notes" (2001) provides a
framework for the circulation of promissory notes in
accordance with the Geneva Convention of 1930.

The new Law "On Securities and Stock Market" (2006)
represents a major improvement over the prior Law "On
Securities and Stock Exchanges" (1991), especially

regarding internationally compliant disclosure requirements
for listed companies, issues of transparency of ownership,
and the new rules for insider information and insider
trading.

The Law "On Business Associations" is vague and does not
support basic shareholders rights and facilitates a large
number of corporate governance abuses (including share
dilution, asset stripping, and dubious transfer pricing).
The law is widely recognized to be inadequate and in need
of reform.

A.10. Political Violence

Ukraine is largely free of significant civil unrest or
disorders. However, occasionally, mass demonstrations
occur in larger cities, such as Kyiv, usually sponsored by
individual political forces. Pre-term parliamentary
elections took place in September 2007 without any
significant disruptions or violence. The likelihood of
future widespread, politically inspired violence that would
affect foreign property interests remains relatively low.

A.11. Corruption

Corruption pervades all levels of society and government
and all spheres of economic activity in Ukraine and is a
major obstacle to foreign investment. President Yushchenko
has made combating corruption a top priority, although much
remains to be accomplished. Ukraine worsened in
Transparency International's Year 2007 Corruption
Perception Index (CPI), which was published in September
2007. The country moved down to 105th place in 2007 on the
list of 180 countries, from 99th place out of 163 countries
in 2006. In 2007, Transparency International rated Ukraine
at 2.7 points on the CPI's 10-point scale, a decline from
the 2006 rating of 2.8 points.

Corruption stems from a number of factors, such as a lack
of institutional traditions of transparent decision-making
and low societal understanding of the importance of
corporate governance and transparency. Low public sector
salaries fuel corruption in local administrative bodies
such as the highway police, the health system, the tax
administration, and the education system. Corruption
within the Customs Service often makes it more difficult
and more costly for businesses to import/export goods.
High-level corruption ranges from misuse of government
resources and tax evasion to non-transparent privatization
and procurement procedures. In short, corruption impacts
the daily lives of Ukraine's citizens and important
decisions taken at the state level.

Ukraine's prosecution of corruption is based on the Law "On
Combating Corruption," which was passed in October 1995.
The law is rarely enforced, and on the rare occasions it is
enforced, it is normally aimed at lower-level state
employees or used retributively in political vendettas. In
January 2006, the President Yushchenko signed a decree
requiring Ukraine to honor its obligations to the Council
of Europe, which include several anti-corruption
provisions. In September 2006, the President signed a
separate decree adopting a national anti-corruption
strategy that directs all branches of government to support
these efforts, and the Government of Ukraine followed up by
adopting an Action Plan to implement this strategy. In
October 2006, the President submitted to parliament a
package of draft laws on anti-corruption and ratification
instruments for the Council of Europe Criminal Law
Convention on Corruption and the UN Convention against
Corruption. In August 2007 the President announced a list
of several "anti-corruption initiatives" that includes the
setting up of a single anti-corruption agency that would
develop a comprehensive anti-corruption policy and
implement various anti-corruption measures.

In 2006 the U.S. Millennium Challenge Corporation funded
Ukraine's proposal for a Threshold Country Program aimed at
reducing corruption. This two-year program is providing
about $45 million in assistance to reform the judiciary,
streamline regulatory procedures, institute internal assets
declaration and inspector generals, enhance civil society
and media monitoring of corruption, and reduce corruption
in higher education admissions through standardized
testing.


Although government action is still limited and
uncoordinated, fundamental changes have taken place in the
GOU's attitude towards corruption. Gone are the days when
GOU officials refused to admit that corruption existed in
Ukraine. Government and parliamentary officials now openly
discuss the problem of corruption with USG contacts and
with the press and public at large. In March 2005, Ukraine
ratified the Council of Europe Civil Law Convention on
Corruption and became a member of the Council of Europe's
Group of States Against Corruption (GRECO). GRECO has
concluded its Joint First and Second Rounds of Evaluation
of Ukraine and published its report in October 2007.
Parliament has passed laws to ratify the Council of Europe
Criminal Law Convention on Corruption, signed in January
1999, and the UN Anticorruption Convention, signed in
December 2003. However, ratification of these Conventions
will come into effect only when additional implementing
legislation is adopted. Ukraine is not party to the OECD
Convention on Combating Bribery of Foreign Public Officials
in International Business Transactions.

A.12. Bilateral Investment Agreements

BILATERAL INVESTMENT AGREEMENTS

The Bilateral Investment Treaty between the United States
and Ukraine came into force on November 16, 1996. The
following countries have also signed bilateral investment
agreements with Ukraine: Albania (2004), Austria (1996),
Argentina (1995), Armenia (1994), Azerbaijan (1997),
Belarus (1995), Belgium (2001), Bulgaria (1994), Brunei
(2006), Canada (1994), Chile (1995), China (1992), Cuba
(1995), Croatia (1997), the Czech Republic (1994), Denmark
(1992), Egypt (1992), Estonia (1995), Finland (1992),
France (1994), Gambia (2006), Georgia (1995), Germany
(1993), Greece (1994), Indonesia (1996), Iran (1996),
Israel (1995), Italy (1993), Hungary (1995), Kazakhstan
(1994), Korea (1996), Kyrgyzstan (1993), Latvia (1997),
Lebanon (1996), Lithuania (1994), Macedonia (1998), Moldova
(1995), Mongolia (1992), the Netherlands (1994), Panama
(2005), Poland (1993), Portugal (2003), Russia (1998),
Saudi Arabia (2003), Slovakia (1994), Slovenia (1999),
South Korea (1996), Spain (1998), Sweden (1995),
Switzerland (1995), Turkmenistan (1998), Turkey (1996), UK
(1993), Uzbekistan (1993), Vietnam (1994), Yugoslavia
(2001), Yemen (2002).

A.13. OPIC and Other Investment Insurance Programs

The U.S.-Ukraine Overseas Private Investment Corporation
(OPIC) Agreement was signed in Washington on May 6, 1992.
OPIC halted support for projects in Ukraine in 1999,
however, after the government of Ukraine failed to
reimburse OPIC for OPIC's payment of a claim by a U.S.
business whose investment had been expropriated. The
government is now actively working to find a resolution to
this dispute so that OPIC can resume its activities in
Ukraine.

In July 2002, the Board of the U.S. Export-Import bank
opened facilities for short and medium-term (up to seven
years) lending for commercial, and sub-sovereign projects.
Ukraine is a member of the Multilateral Investment
Guarantee Agency (MIGA).

A.14. Labor

LABOR AVAILABILITY

Ukraine has a well-educated and skilled labor force with
nearly a 100 percent literacy rate. As of September 2007,
unemployment (ILO methodology) stood at 6.2 percent,
although unemployment in some regions, particularly in
western Ukraine, was significantly higher.

WAGES

Wages in Ukraine are very low by Western standards but
continue to grow steadily. As of October 2007, the nominal
average monthly wage in Ukraine was UAH 1475 ($292), up
35.6% from UAH 1088 ($215) in October 2006. Real wages
grew 12.6% between January and October 2007, compared to
the same period in 2006. The highest wages are in the
financial and aviation sectors while the lowest wages are

paid to agricultural and public health workers.

MINIMUM WAGE

The minimum monthly wage was increased on January 1, 2008
to UAH 515 ($102). Regular increases of the minimum wage
are planned.

PENSIONS

In 2004 Ukraine began a comprehensive pension reform
program, based on international standards, which envisaged
a three-pillar system: Pillar I, a solidarity system,
Pillar II, a mandatory accumulation system, and Pillar III,
a voluntary private pension system.

For the solidarity system, Pillar I, retirement payouts are
determined on the basis of the individual's labor records
and contributions. Despite the major reform, the Pillar I
system is complex with low retirement ages (60 for men and
55 for woman), full retirement benefits based on 20 years
of service for woman and 25 years of service for men, and
many special early retirement provisions.

Pillar II, the Mandatory Accumulation System, is to be
funded by pension contributions made by individuals. The
conditions for the introduction of Pillar II have been met,
but new legislation is required. The draft law to
introduce Pillar II was submitted to Parliament in December
2006 and passed the first reading in April 2007. The draft
law provides for a gradual phase-in of employee
contributions to the Accumulation Fund starting with 2% in
2009 and increasing by 1% per year to 7% in 2014.

Pillar III, voluntary private pension funds, began actual
operations at the end of 2004. The development of private
pension funds was positive in 2006, with an almost three-
fold increase in assets and a 46 percent increase in the
number of funds (from 54 private pension funds to 79).

According to the financial services regulator, private
pension fund assets have increased by an average 35 percent
per fiscal quarter since becoming available in 2004. In Q1
2005, assets under management of Private Pension Funds were
$2.53 million, in Q4 2006 - $27.20 million, and in Q3 2007
- $44.85 million. However, Ukraine's capital markets
remain underdeveloped and do not provide these funds with
enough sound, long-term investment opportunities in the
equity, debt and real estate markets. As a result, assets
of private pension funds continue to be invested primarily
in bank deposits, which do not meet the long-term portfolio
needs of these funds. The ongoing weakness of the market
regulatory structure compounds the problem. If the
situation continues, the risk will grow that private
pension funds will fail to perform in line with the overall
growth of the economy in the future. Various international
donor initiatives are supporting the Ukrainian government's
efforts to strengthen the breadth, liquidity and regulatory
framework of the country's markets with the goal of
creating the conditions for sustainable long term
investment opportunities.

LABOR/MANAGEMENT RELATIONS

Ukrainian workers are generally accustomed to "top-down"
management practices and therefore tend not to demonstrate
initiative. A younger, more independent-minded generation
is slowly moving into the workforce, and it is becoming
easier to find professional personnel who function
independently.

Although investors may encounter government resistance to
trimming the work force to an efficient level, across-the-
board demands to maintain employment levels are
disappearing. Ukrainian enterprises often still maintain
much of the social infrastructure of their immediate
community (schools for local children, cafeterias, and
medical facilities). While many local officials are
willing to work with businesses to identify social services
that an enterprise must support, such arrangements should
be clearly spelled out before investments are started.

Ukraine's Labor Code remains outdated and inappropriate for
a market economy. The government has drafted a new, more
modern Labor Code, but it failed to move forward in

Parliament in 2007 due to a protracted political crisis in
the country.

A.15. Foreign Trade Zones/ Free Ports

Ukraine has in the past maintained two forms of special
economic zones (SEZs): Free Economic Zones (FEZs) and
Priority Development Territories (PDTs). In April 2005,
Ukraine canceled all tax exemptions (i.e., from land tax,
corporate income tax, import duty, and VAT on imports) to
investors in all SEZs to stop large-scale misuse of these
zones for tax evasion and smuggling. While the step
reduced corruption and expanded the tax base, the abrupt
cancellation of privileges and lack of compensatory
provisions caused losses to some legitimate investors. At
the end of 2006, the Ukrainian government announced its
intention to renew tax privileges granted to businesses
operating in some SEZs and to introduce a compensation
mechanism for investors, but a draft law on the subject
never went forward. At least one SEZ had retained tax
privileges due to a court ruling, but those and all other
privileges were again annulled by the new Ukrainian
government in December 2007. In November 2005, the
Parliament adopted legislation to create technology parks,
providing for some government financial support, targeted
subsidies, and tax privileges for a list of 16 technoparks
based on existing scientific and research institutes.

A.16. Foreign Direct Investment Statistics

FOREIGN DIRECT INVESTMENT

According to Ukraine's State Statistics Committee, as of
October 2007 the total stock of FDI in Ukraine was $26.9
billion, or $576 per capita. This was a 35.2% increase
from October 2006, when the total stock of FDI stood at
$19.9 billion, or $424 per capita.

Mittal Steel's October 2005 purchase of the Kryvorizhstal
Steel Mill represented a major inflow of FDI, at $4.8
billion, into Ukraine. Purchases of Ukrainian banks by
European banks have represented another major inflow of
foreign direct investment in recent years: Raiffeisen
International acquired Bank Aval for $1.0 billion in 2005;
BNP Paribas acquired Ukrsibbank for $360 million in 2005;
UniCredit Group acquired Ukrsotsbank for $2.1 billion in
2007; Swedbank acquired TAS-Kommerzbank for $735 million in
2007; and Commerzbank acquired Forum Bank for $600 million
in 2007. Also in 2007, PepsiAmericas and PepsiCo jointly
purchased 100% of the leading Ukrainian juice producer
Sandora for a total of $679 million.

FDI BY COUNTRY

As of October 1, 2007 Ukraine's major investors included:
Germany (21.4% of total FDI), Cyprus (18.5%), the
Netherlands (8.1%), Austria (7.5%), the United Kingdom
(6.8%), the United States (5.3%), and Russia (5.0%).
Cyprus remains a popular offshore destination for Ukrainian
and Russian enterprises through which to channel
investments.

FDI BY INDUSTRY SECTOR DESTINATION

Over the first 9 months of 2007, 15.7% of new FDI went to
the financial sector, 8.5% -- to domestic trade, 8.4% -- to
real estate, 5.7 % -- to the metallurgy sector, 5.6% -- to
food, beverages, and tobacco production, 5.2% -- to
construction, and 3.8% -- to machine building.

End Text.

TAYLOR

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