Cablegate: Ukraine: 2008 Investment Climate Statement, Part I


DE RUEHKV #0099/01 0170259
R 170259Z JAN 08





E.O. 12958: N/A

REF: 2007 STATE 158802

1. As requested reftel, below is Part I of the 2008
Investment Climate Statement (ICS) for Ukraine. Post is
transmitting the ICS in two separate parts due to its large
size. Post will send the ICS in Microsoft Word version to
EB/IFD/OIA by email.

Begin Text:

A.1. Openness to Foreign Investment


Since taking office in January 2005, President Viktor
Yushchenko has made improving the investment climate one of
his top economic policy goals. While progress has not been
as swift as some may have hoped, almost all of Ukraine's
major political forces remain committed to improving the
business and investment climate. There have been several
positive steps for U.S.-Ukraine trade and investment
relations over the past several years. Both the United
States and the European Union granted Ukraine market
economy status, in February 2006 and December 2005,
respectively. In March 2006 the United States terminated
the application of the Jackson-Vanik amendment to the Trade
Act of 1974 to Ukraine, providing Ukraine permanent normal
trade relations status.

After eight years of decline following independence, the
Ukrainian economy has been growing steadily since 1999,
with real GDP growth at about 7% in 2007. Over the past
few years, Ukraine has taken steps to liberalize its
markets, reduce regulation, eliminate most licensing
requirements, eliminate most restrictions on foreign
exchange, and begin the transformation of the agricultural
sector from state-run farms to private agriculture. After
years of hyperinflation and plummeting currency values, the
national currency, the hryvnia (UAH), has been stable
against the U.S. dollar for over six years. The inflation
rate remains high, however, and was 16.6% in 2007. Ukraine
remains in need of substantial reforms in order to achieve
full economic liberalization. Ukraine's economy is still
shackled by corruption, poorly developed rule of law, over-
regulation, and excessive government interference in what
should be private business decisions.

Ukraine is in the process of negotiating terms of accession
to the World Trade Organization (WTO). Ukraine made
significant progress during 2007 in adopting legislation
and regulations needed for compliance with WTO
requirements, enacting some 11 WTO-related laws in May and
adding to its steady progress in this area during the
previous three years. Ukraine also made a major
breakthrough in signing a bilateral market access agreement
with Kyrgyzstan, the last such agreement outstanding.
Ukraine had signed a bilateral agreement with the United
States in March 2006. Accession to the WTO remains a
priority for the government and now appears imminent.

Foreign investors continued to express little confidence in
the Ukrainian court system. In a noticeable number of
cases, predatory minority shareholders have been able to
procure dubious court decisions in an effort to wrest
control of companies away from the majority investors.
Some researchers claim that as many as 2,500 Ukrainian
enterprises have suffered so-called corporate hijacking
attempts in the last several years. Ukrainian courts have
a long record of striking down or ignoring contractual
provisions that assign legal responsibility for dispute
resolution to a foreign court or arbitrator.

Many investor complaints over the years have involved the
State Tax Administration's (STA) selective enforcement of
tax policy. Businesses have claimed that STA local and
regional branches use investigative authority to advance
favored political or business interests. Arrears in the
payment of VAT refunds to exporters have also been a
serious problem. The GOU decreased the pace of VAT refunds
beginning in August 2006, reimbursing only 76 percent of
verified claims, down from 87 percent refunded in 2005. VAT
refund problems continued in 2007, leading to calls for an
overhaul of the VAT reimbursement mechanism. Delays in
reimbursements can create opportunities for tax officials
to demand kickbacks in return for quicker processing of
rebates. Numerous exporting companies, both Ukrainian and
foreign, claim that STA officials openly expect bribes
between 10 and 30 percent of outstanding VAT refunds in
order to process reimbursement. Currently, the process for
obtaining a refund of VAT payments can take from 3 to 18
months for foreign companies. Increasingly, the delays in
reimbursement are becoming an important cost factor for
many foreign companies and are seriously affecting the
profitability of planned investments.


Ukraine's Law "On the Foreign Investment Regime" (1996)
provides for equal treatment of foreign and Ukrainian-owned
business with some restrictions in broadcasting and weapons

Both a new Civil Code and a competing new Commercial Code
went into effect on January 1, 2004. Lawyers and judges
continue to grapple with how to implement the two laws,
whose approaches to the regulation of business activities
are contradictory. The Commercial Code has a number of
provisions considered to be incompatible with market
economics, and most experts believe it should be eliminated

In October 2001, the Ukrainian Parliament passed a Land
Code. It provides for private ownership of land,
facilitating the privatization of land for agricultural
purposes, but also provides for a moratorium on
agricultural land sales. This moratorium has been extended
until the GOU succeeds in adopting new legislation
necessary to open the land market. This legislation has
been drafted, but prospects for its enactment are currently
unclear. The moratorium blocks private investors from
purchasing some of the 33 million hectares of agricultural
land in Ukraine and constitutes a serious obstacle to the
development of the sector. The Land Code also prohibits
foreign ownership of farmland.

A new Customs Code that went into effect in January 2004,
along with December 2005 amendments to the Customs Code and
Single Customs Tariff, brought Ukraine's customs regime
into near-complete compliance with WTO rules. Problems,
particularly in the area of customs valuation, remain,
however, and industry representatives have expressed
concern with current draft amendments meant to fix the
Customs Code. Cabinet of Ministers Resolution #269 from
2005 introduced preliminary documentary control at customs
checkpoints in order to simplify customs clearance of goods
entering Ukraine, and to reduce the wait time for
importers. Implementation of this resolution has been
imperfect, however, as imported goods entering Ukraine
often still must be "cleared" by a number of state bodies,
some of which do not operate 24 hours a day, causing
extended delays. Corruption also remains a serious
problem. President Yushchenko pushed in November 2007 for
the dismissal of several high-level Customs officials and
for the creation of a new body within the State Security
Service to combat smuggling. Prime Minister Yuliya
Tymoshenko announced in January 2008 that her government
would restart an anti-smuggling campaign that had had some
success back in 2005.

Under the 2001 Law "On the Customs Tariff of Ukraine," only
Parliament can introduce or change tariffs. The import
tariff system of Ukraine has 21 sections, encompasses 97
groups of goods, and lists over 11,000 import duty rates.
In 2005, Parliament passed amendments to the Customs Code
to decrease tariff rates in an effort to meet WTO accession
requirements. The average applied tariff rate for all
goods is now 6.5 percent, and 61.5 percent of the total
tariff lines face ad valorem rates of five percent of less.
For agricultural goods, the average applied rate is 13.8
percent (down from 19.7 percent) and for industrial goods
the average applied rate is 4.4 percent (down from 8.3

Ukraine's Anti-Monopoly Committee implements anti-monopoly,
competition, and consumer protection legislation under the
March 2002 Law "On Protection of Economic Competition."
New companies and mergers/acquisitions face strict
controls. Most investments, joint ventures with multiple
partners, and share acquisitions require the Committee's
approval. Those violating fair competition rules may be
fined up to 10% of the prior year's turnover. If unfairly
gained profit exceeds 10% of income, up to three times the
normal penalty can be collected. The applicant, defendant,
or a third party may appeal a Committee decision, but the
appeal must be filed within two months after the decision
is taken.


The State Property Fund oversees the privatization process
in Ukraine. Privatization rules generally apply to both
foreign and domestic investors, and, in theory, a
relatively level playing field exists. Observers claim,
however, that a common abuse of privatization laws is the
adjustment of the terms of a privatization contest to fit
the characteristics of a certain, pre-selected bidder. Few
major, new privatizations have been conducted since the
privatization rush of 2004. As of September 2007, revenues
from privatization were only 15.4 percent ($320 million) of
the fiscal year's budget target. In 2005, the GOU revoked
the privatization of the Krivorizhstal steel factory, which
had been sold to a group of domestic investors for $800
million, and subsequently sold it in a fair and transparent
tender to Mittal Steel for $4.8 billion. Since then, the
GOU has taken no further steps to reverse previous
privatizations, although Prime Minister Tymoshenko has
stated she expects the government may stage re-
privatizations in a handful of cases where the courts have
overturned privatizations.

The few privatizations that took place in 2007 were often
marked by controversy. In March, the State Property Fund
sold a majority share in Luganskteplovoz (a Ukrainian
locomotive manufacturer) to Russian-owned CJSC Bryansk
Machine Building Plant. Only two bidders (both related
parties) were able to meet the tender requirements as set
by the State Property Fund, and the Fund also appeared to
have violated rules governing the announcement of the
tender, making it impossible for potential investors to
learn of the tender in time to submit bids. The courts
subsequently ruled that the sale was in fact illegal.

In August, the state-owned electricity generation company
Dniproenergo increased its capital by 52 percent, allowing
the Donbas Fuel and Energy Company (DTEK), owned by a
Member of Parliament in the then-ruling coalition, to
purchase the fresh capital and causing the state's share in
the company to shrink from 76 percent to 50 percent plus
one share. The transfer was conducted as a controversial
debt-for-shares swap, whereby DTEK acquired the shares in
exchange for covering a debt owed by Dniproenergo to coal
suppliers. Some experts claimed that DTEK acquired the
shares in Dniproenergo for only 30-40 percent of the market
value. A court of first instance ruled the sale to be
illegal, but an appeal is pending.

Ukrainian law authorizes the government to set limits on
foreign participation in "strategically important areas,"
although the wording is vague and rarely used in practice.
Some strategically important companies, including natural
monopolies, producers of military equipment, and some fuel
and energy companies, are barred from privatization and
foreign ownership. A company's "strategic status" can be
lifted by Parliament, on the recommendation of the Cabinet
of Ministers, and foreign entities would then be allowed to
participate in its privatization. Foreign shares of TV and
radio broadcasting and publishing companies are restricted,
and can generally not exceed 30%. In January, 2006,
Parliament adopted a new law "On Television and Radio
Broadcasting" that eliminated restrictions on the share of
foreign capital in the charter funds of television and
radio broadcasting companies. Foreigners are prohibited
from founding TV or radio stations, however.


Ukraine is not currently a signatory to the WTO Agreement
on Government Procurement (GPA), but will become an
observer to the GPA upon WTO accession, and has promised to
then begin negotiations to accede to the GPA.

Most experts agree that recent amendments to the law "On
Procurement of Goods, Works and Services Using State Funds"
have been a step backwards in terms of bringing Ukraine's
procurement system into compliance with international
norms. A recent study on Ukraine by the Atlantic Council
of the United States concluded that "government procurement
is one of the most corrupt spheres of state activity."
Amendments to the procurement law passed in March 2006
transferred the authority to coordinate government
procurement from the Ministry of Economy to the Anti-
Monopoly Committee of Ukraine, a body with no particular
expertise in regulating public procurement, and one that
has struggled to secure compliance with its own rulings.
The amendments scattered policy and oversight functions
across several bodies, including the Anti-Monopoly
Committee, the Accounting Chamber of Ukraine (reporting to
Parliament), the State Control and Audit Unit (under the
Ministry of Finance), and the Tender Chamber of Ukraine.
The amendments have been criticized for creating an overlap
in authority of various regulatory agencies and decreasing
the transparency of the system.

The 2006 amendments granted the Tender Chamber of Ukraine,
purportedly a non-governmental organization for monitoring
the procurement process, a number of key operational
functions that are inherently governmental. The Tender
Chamber has exclusive authority to maintain a catalog of
bidders, consider claims of tender participants, and issue
conclusions. It also maintains a UAH 7000 ($1400)
obligatory fee for bidders that want to be registered in
the catalogue, in conflict with the international practice
of free listing for all interested parties. The Tender
Chamber has faced widespread criticism, including from some
of its former members, as contributing to the procurement
system's corruption and lack of transparency.

The March 2006 amendments also introduced special security
requirements for websites in order to be eligible for
tender announcements. Only one organization, the European
Consulting Agency, a Ukrainian private enterprise with
links to the Tender Chamber, has been allowed to operate a
website announcing tenders. Several observers have charged
that this intermediary fosters corruption in the process
and decreases transparency. In addition, the March 2006
amendments introduced burdensome and lengthy procurement
procedures, and required all tender proposals to be secured
by collateral, limiting the number of tender participants
and increasing the cost of participation. For some
procurements, the Tender Chamber assesses fees at four
percent of the value of the procurement, which in many
cases makes the fees extremely high by international norms.

December 2006 amendments to the law created a legion of
special public sectors, such as defense, postal and
telecommunications services, and railways, for which
procurement rules do not apply for all tenders. Yet the
December 2006 amendments also required most state-owned and
municipal companies to follow state procurement procedures,
resulting in some disruptions, most notably for procurement
done by municipal hospitals and the military. Parliament
attempted to amend the law again in June 2007 in order to
exempt all state-owned enterprises from government
procurement rules, but the President and the Kyiv
Commercial Court blocked the amendment from taking effect.

All government procurement of goods and services valued at
more than $10,000 and works valued at more than $80,000
must be procured through competitive tenders. Open
international tenders must be used when procurement is
financed by any entity outside of Ukraine. The Tender
Chamber publishes information on government procurement in
the "State Procurement Bulletin."

The procurement law does not restrict foreign enterprises
from participating in government procurement, but in
practice foreign companies are rarely able to compete on an
equal footing. Foreign companies generally win only a tiny
fraction of the total tenders (0.01 percent during the
first nine months of 2006, with no more recent statistics
available). Among the problems faced by foreign firms are:
(1) the lack of public notice of tender rules and
requirements; (2) covert preferences in tender awards; (3)
subjecting awards to conditions that were not part of the
original tender requirements; and (4) non-effective
grievance and dispute resolution mechanisms, which often
allow a losing bidder to block the tender after the
contract has been awarded. March 2007 amendments to the
law did eliminate preferential provisions in favor of
domestic bidders on tenders below certain values. Some
regulations still serve to exclude foreign bidders,
however. For example, there is a practice in health sector
procurement of only accepting bids from Ukrainian resellers
or Ukrainian producers of pharmaceuticals.

The Law "On Production Sharing Agreements" (PSA), effective
October 1999, provides a legal framework guaranteeing that
the terms of agreements between foreign investors and the
GOU for natural resources development cannot be changed
once an investment is made. However, additional enabling
legislation is needed in order to harmonize Ukrainian laws
with the PSA's joint exploration and production license.
Also needed are Cabinet of Ministers resolutions to
establish special tax benefits envisioned by the PSA law,
such as the amount of profit tax revenue the government
will receive from the PSA producer. The development of
PSAs was tested after the GOU awarded the U.S. company
Vanco a tender for the Prikercheskiy block for offshore oil
exploration in the Black Sea in April, 2006. Vanco and the
GOU signed Ukraine's first-ever production sharing
agreement in October 2007. It is unclear, however, if the
GOU is willing to pursue additional PSAs for offshore
exploration at this time, especially since additional PSA
legislation is still required.

A.2. Conversion and Transfer Policies


The 1996 Law "On Foreign Investment" guarantees the
"unhindered transfer" of profits, revenues, and other
proceeds in foreign currency after taxes and other
mandatory payments. By intervening in exchange markets,
the National Bank of Ukraine (NBU) maintains a de facto peg
of Ukraine's currency, the hryvnia, to the dollar. In
2007, the hryvnia traded against the U.S. dollar at or near
UAH 5.05 to the dollar.

While foreign investors may repatriate earnings, companies
must obtain a license from the NBU for some operations.
For repatriation of hard currency, each transaction over
$50,000 must be approved by the NBU. The NBU also charges
a fee to review the transaction. In view of increased hard
currency inflows, the NBU in 2005 canceled its 1998
surrender requirement that exporters convert half of their
hard currency revenues into hryvnias. As of January 2008,
foreign currency derived from export sales has to be
repatriated within 180 days. Foreign exchange is readily
available at market-determined rates, which generally do
not vary greatly from the daily official exchange rate. In
February 2005, the NBU lifted the 2% limitation on
deviation of bank exchange rates from the official exchange
rate, which had been in effect since October 2004. A
pension fund tax is levied on transactions to purchase hard
currency. The Law on the 2008 Budget lowered the tax from
1.0% to 0.5%.

Foreign investors have complained of cumbersome NBU
regulations (2005 Resolutions 280 and 281) requiring them
to open local accounts in Ukrainian banks and to use the
services of Ukrainian brokers in order to make investments
in Ukraine. Past direct investors seeking to liquidate and
repatriate their investments face stringent documentary
requirements, though the NBU has stated its willingness to
waive requirements if documents from the original
transactions are no longer available. On December 4, 2007,
the NBU issued a new regulation requiring nonresident
investors who wish to convert dividends or divestment
income into foreign currency to provide proof of the
initial foreign investment, making such operations more

Investors convert their earnings into foreign currency
through commercial banks, which purchase foreign currency
on the electronic inter-bank currency market. Commercial
banks may trade foreign currency in electronic form with
other banks through participation in electronic inter-bank
currency market, regulated and operated by the NBU. To
purchase hard currency, companies must provide their banks
with a copy of their foreign trade contracts. In an
attempt to expedite purchases of hard currency, in March,
2005, the NBU cancelled the requirement that companies
obtain State Tax Administration permission to purchase hard
currency. Commercial banks must announce their clients'
intentions to sell on inter-bank currency market if the
transactions exceeded $500,000. The Law "On the
Circulation of Promissory Notes" provides an opportunity
for payments in foreign currency and issuance and
circulation of promissory notes, in accordance with the
1930 Geneva Convention "Providing a Uniform Law for Bills
of Exchange and Promissory Notes." Residents may transfer
up to USD 600 abroad without opening a bank account.
Illegal trade of hard currency is not a criminal matter but
brings administrative penalties.

A.3. Expropriation and Compensation

Under the 1996 Law "On the Regime of Foreign Investment," a
qualified foreign investor is provided guarantees against
nationalization, except in cases of national emergencies,
accidents, or epidemics. Expropriation of property is
rare. International institutions have recommended that
definitions of expropriation and nationalization in the
foreign investment law and bilateral treaties be expanded
to include indirect and creeping expropriation. Courts can
determine whether owners of privatized enterprises failed
to pay for an enterprise or to implement investment
commitments in a privatization sale. Failure to pay or
invest allows the GOU, with court permission, to revoke
ownership and resell the property.

A.4. Dispute Settlement


The Embassy continues to provide advocacy on behalf of U.S.
investors. For many years, investment disputes frequently
have involved key problems with the investment climate such
as the lack of adequate rule of law, fair and impartial
dispute resolution mechanisms, and enforcement of domestic
court and international arbitration decisions. Another
problem is poor corporate governance (inadequate protection
for shareholder rights, inadequate disclosure, asset-
stripping, and voting fraud). Currently, there is no
single point of contact in the Ukrainian government tasked
to help resolve business and investment disputes involving
foreign companies, although the Ukrainian Center for
Foreign Investment Promotion, a state body commonly known
as InvestUkraine (, has
pledged to take on this role. Most U.S. businesses have
little confidence in Ukrainian courts. Commercial
contracts may permit the parties to use international
arbitration or specified foreign courts to settle disputes.
Though Ukrainian legislation recognizes international
arbitration decisions, in practice such decisions can be
very difficult to enforce in Ukraine.

Corruption continues to lie at the heart of many investor
disputes. Laws and regulations are vague, with
considerable room for interpretation, providing officials
at every bureaucratic layer ample opportunities for rent


Ukraine has a civil law system relying on codes and
separate legislative acts. The court system comprises the
Constitutional Court, which interprets the Constitution and
laws of Ukraine, and a system of courts of general
jurisdiction. The courts of general jurisdiction are
further divided into general courts, which handle civil,
criminal, and administrative matters, and specialized
commercial courts, which review business disputes,
bankruptcy, and anti-monopoly cases. Both the general and
commercial court systems feature a hierarchy of local
and/or regional courts and appeals courts. The Supreme
Court of Ukraine is the highest court in the system of
courts of general jurisdiction.

The Law "On the Judiciary," in force as of June 2002,
creates four levels of courts -- local courts, courts of
appeal, courts of cassation (higher specialized courts),
and the Supreme Court. This law also establishes an
independent judicial department, the State Judicial
Administration, to manage the court system, with the
exception of the Supreme Court, which is self-administered.
There is also a separate system of Administrative courts,
and the Supreme Administrative Court started its work in
2005. The Administrative Procedural Code, which entered
into force on September 1, 2005, governs the organization
and work of the administrative courts.


Investors criticize Ukraine's legal system for its
inefficiency, burdensome procedures, unpredictability,
corruption, and susceptibility to political interference.
Even when they obtain favorable decisions, investors claim
the decisions are often not enforced. The enforcement
responsibilities fall under the State Enforcement Service,
which reports to the Ministry of Justice, but whose head is
appointed by the Cabinet of Ministers.

The procedure for recognizing and enforcing foreign court
decisions is regulated by Section 8 of the Code of Civil
Court Procedures of Ukraine. In accordance with the Code,
a foreign court decision is recognized and enforced in
Ukraine if such recognition and enforcement is provided for
in international treaties, the mandatory nature of which
has been endorsed by the parliament, or based on a mutual
ad-hoc agreement with a foreign state whose court has
rendered a decision that is to be enforced in Ukraine.

The State Enforcement Service implements decisions rendered
by foreign courts and arbitration tribunals in accordance
with the Law "On Enforcement Proceedings." The Law "On
Implementing Decisions and Applying Practices of the
European Court of Human Rights" entered into force on March
30, 2006. Along with a subsequent Cabinet of Ministers
implementing Resolution, the law obligates the Ministry of
Justice to ensure implementation of the Court's decisions.


A new Civil Code and a competing Commercial Code both went
into effect on January 1, 2004. Lawyers and judges have
since grappled with how to implement the two conflicting
laws. Despite heavy criticism of the Commercial Code by
businessmen and GOU officials, Parliament has not yet taken
action to amend or annul it. The Civil Code ensures
protection of the rights of private property, of engaging
in contracts, and of entrepreneurial activity. It provides
a unified framework for economic regulations.

The Civil Code is generally market-oriented and modern, but
the Commercial Code is often contrary to market economy
principles and directly contradicts provisions of the Civil
Code in numerous instances. The Commercial Code aims to
preserve a privileged position for the public sector of the
economy and allows for governmental interference in private
commercial relations. Further, in both codes gaps in
regulation exist. The existence of these two codes creates
uncertainty in planning and structuring transactions, and
leaves questions surrounding transactions unanswered.
Problems arising from these two codes also surface in the
resolution of disputes, as courts are not able to resolve
the conflicting provisions of the codes, or are not able to
fill in the gaps in regulation that arise as a result of
the missing provisions in the codes. Finally, other
commercial laws have not been harmonized with these codes.

A 1999 bankruptcy law provides for debtor-led
reorganization, a meaningful moratorium on payment and
collection of pre-existing debt, and a tax forgiveness
provision. The 1999 law provided thousands of heavily
indebted industrial enterprises with an alternative to
liquidation that did not exist under Ukraine's original
1992 bankruptcy law. Since then, many firms have reached
amicable settlements with their creditors and established a
workable schedule of debt forgiveness and repayment.
Creditors protect their rights under the law by electing a
creditors' committee, which is actively involved in the
bankruptcy proceedings.

Most observers believe the bankruptcy laws must be amended
to provide more protection for creditors. Notice
provisions, protections for the rights of minority
shareholders, and procedures for valuation and the sale of
assets to satisfy liabilities are undeveloped.


Problems with corporate governance in Ukraine involve
corporate ownership, shareholder rights, transparency, and
disclosure. The Law "On Companies" offers scant protection
for minority shareholders against insider dealing, asset
stripping, profit skimming, and share dilution. Corporate
finance is restricted. Some examples of shareholder rights
abuses include limited disclosure, capital restructuring
without shareholders' consent, and shareholder voting
fraud. Nevertheless, a Company Register that was
established in 2004 improved transparency. A new Joint
Stock Company law was first drafted in 1998 to improve the
current law by introducing sound corporate practices that
meet international standards. It has failed repeatedly in
Parliament, despite increasing interest in the business
community. In May 2007, Parliament passed the latest
version of this draft law in the first reading, but a
protracted political crisis prevented the law from moving


Ukraine enacted an international commercial arbitration law
in February 1994, which parallels commercial arbitration
laws set forth by the United Nations Commission on
International Trade Law. Ukraine is a member of the New
York Convention of 1958 on the Recognition and Enforcement
of Foreign Arbitration Awards. Some investors have
problems enforcing foreign arbitration awards in Ukraine.
Foreign arbitral award enforcement procedures in Ukraine
are regulated by a number of statutes and regulations,
including the Section 8 of the Civil Procedural Code and a
law "On Enforcement Proceedings." In early 2000 Ukraine
ratified the Washington Convention, providing for use of
the International Center for Settlement of Investment
Disputes (ICSID), an internationally recognized mechanism
for resolving investment disputes between investors and the
GOU. The U.S.-Ukraine Bilateral Investment Treaty (BIT),
signed in November 1996, recognizes arbitration of
investment disputes before the ICSID. One major investment
dispute involving a U.S. company was resolved in May 2006
through a combination of direct consultations with the
Ukrainian government and international arbitration by

A.5. Performance Requirements/Incentives


There are no known cases of performance requirements
imposed on foreign investors other than those clearly
spelled out in privatizations conducted via open tender.
Ukraine has pledged to eliminate measures that conflict
with the WTO Agreement on Trade-Related Investment Measures
(TRIMs) in the automobile industry and other sectors in the
context of its accession efforts.


Ukraine modified its foreign investment law of 1996 to
provide foreign investors a number of state guarantees, the
most important being the unhindered and immediate
repatriation of profits and stable regulations for the time
of the investment. Foreign investors are exempt from
customs duties for any in-kind contribution imported into
Ukraine for the company's charter fund. Some restrictions
apply and import duties must be paid if the enterprise
sells, transfers, or otherwise disposes of the property.


According to Ukrainian Presidential Decree No. 1008 dated
June 30, 2005 (with amendment dated August 18, 2005), U.S.
citizens traveling to Ukraine on short-term tourist,
business, or private travel do not need a visa to enter
Ukraine. Visas are still required of other categories of
travelers including those who intend to study, reside, or
work in Ukraine. Short-term travelers entering Ukraine
under the auspices of this decree can stay in Ukraine up to
90 days during a 180 day period. Any requests for
extension of stay due to extenuating circumstances should
be directed to the Ministry of Interior's Department of
Citizenship, Immigration and Registration (formerly known
as OVIR). Extensions are not automatic, however, and are
valid only for continued presence in the country. It is
not possible to depart Ukraine and return on the extension,
nor can an adjustment to visa status be made from within
Ukraine. Visas may be obtained from the Consular Office of
the Embassy of Ukraine in Washington, D.C., or from
Ukrainian Consulates General in New York, Chicago, or San

Ukrainian law requires that foreign residents of Ukraine
register with local authorities. American travelers
entering Ukraine under the visa-free regime do not have to
register any stays of 90 days or less. Travelers entering
Ukraine on a visa must register after six months' stay in
Ukraine. Registration is done at the local offices of the
Department of Citizenship, Immigration, and Registration.

All foreigners -- except those with permanent residency
status -- are required to have a work permit to work in
Ukraine. The Laws of Ukraine "On Population Employment"
and "On the Legal Status of Foreigners" define the
procedures for obtaining a permit at the State Employment
Service. Cabinet of Ministers Resolution #917 from July
11, 2007 introduced some changes to the rules surrounding
work permits, although implementation of this new
regulation has been unclear and inconsistent.

Resolution #917 states that, if a foreigner intends to
travel to Ukraine for employment, the employer in Ukraine
must obtain a work permit from the Ministry of Labor. The
foreigner should then apply at a Ukrainian Consulate for an
IM-1 visa. After the applicant enters Ukraine, he/she
should submit his/her passport with the IM-1 visa and work
permit to the local Department of Citizenship, Immigration,
and Registration, which will provide a passport stamp
allowing the person to leave and re-enter Ukraine. For
stays longer than one year, the employer must apply to the
Ministry of Labor for an extension of the work permit. If
a foreigner enters Ukraine without a visa, the employer
must apply to the Ministry of Labor for a work permit, and,
upon approval, the employee must register with the
Department of Citizenship, Immigration, and Registration.
Spouses/family members of IM-1 visa holders are not
automatically entitled to IM-1 status. However, if they
intend to stay in Ukraine for more than 90 days, they must
have a visa - most likely a P-1 (private) visa. When the
IM-1 visa holder registers his/her work permit at the
Department of Citizenship, Immigration, and Registration,
he/she should request the same status for family members.
Family members will receive a different stamp (most likely
a permit for temporary residence) to allow them to stay in
Ukraine and travel in/out of the country just like the IM-1
visa holder.

Cabinet of Ministers Instruction No. 892, dated September
12, 2005, extended work permits from one year to the tenure
of employment for foreign citizens working in managerial or
specialized positions in Ukraine and individuals providing
services without their commercial presence in Ukraine.
Employers must notify employment centers, police, and the
State Committee for Border Protection three days before
revoking contracts with foreign nationals.

A.6. Right to Private Ownership and Establishment

The Constitution of Ukraine guarantees the right to private
ownership, including the right to own land. A new Land
Code consistent with the Constitution was adopted on
October 25, 2001. The Land Code provides for foreign
ownership of non-agricultural land and clarifies the rights
of foreign investors.

The major provisions of the Land Code address the right of
individuals to own, buy and sell land. It classifies land
into seven categories, based on potential use including
agricultural, industrial and natural reserve lands. The
mix of state control and ownership rights varies with each
type of land. It is easier to own, buy, sell, and mortgage
industrial land than agricultural land. A moratorium on
the sale of agricultural land remains in place, and the
Land Code also restricts agricultural land purchases by any
one legal entity (Ukrainian citizen or Ukrainian-based
business) to no more than 100 hectares until 2015. Efforts
to cancel the moratorium on agricultural land sale in 2007
failed. The Land Code continues to prohibit foreigners
from owning agricultural land directly. The creation of a
legal Ukrainian-registered business to purchase and manage
land in Ukraine is not prohibited. The Land Code codifies
the state's right to oversee private land transactions via
registration, the court system, and dispute mediation, as
well as broad government/state rights to "influence" the
land market. In 2003, Parliament adopted a new law on
mortgages that allows the use of agricultural land as
collateral and spells out foreclosure and eviction

Ukraine's Law "On Ownership" recognizes private ownership
and includes Ukrainian residents, foreign individuals, and
foreign legal entities among those entities able to own
property in Ukraine. It permits owners of property
(including foreign investors and joint ventures) to use
property for commercial purposes, to lease property, and to
keep the revenues, profits, and production derived from its
use. The Law "On Ownership" is not comprehensive and
mechanisms for the transfer of ownership rights are weak.
Some difficulties have arisen when foreigners acquire
majority control of enterprises, with the government or the
current management in some cases continuing to exercise
effective control of company decisions.

End Text of Part I.


© Scoop Media

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