As Ukraine emerges from a long and painful economic crisis, a clear and effective legislative framework for foreign direct investment is crucial to attract the limited funds available by convincing investors that Ukraine is a lucrative and reliable market.
The government has trumpeted legislative changes and political stability as providing a stronger basis for attracting foreign money. But lawyers said that, for all the legislative hard work, it remains unclear that it has actually helped the investment climate.
“Unfortunately, I can’t recall any healthy changes to the investment environment in recent years,” says Vladimir Kotenko, partner and head of tax and law at Ernst & Young in Ukraine.
The biggest change for the country’s FDI environment, for good or for ill, has been the consolidation of Ukraine’s various tax laws into the one document – the Tax Code of Ukraine – which entered into force on April 1.
Sergiy Oberkovych, of Gvozdiy & Oberkovych law firm, said he regarded the new code as a net positive, despite its complexity. “It provides incentives for agricultural and for renewable energy businesses,” he said.
Oberkovych added that energy-related value added tax exemptions and a zero capital tax rate will encourage more foreign interest in alternative energy.
(Photo: Igor Reutov, head of corporate issues and investment at Gramatskiy & Partners)
Other lawyers, however, are less sanguine. “I would strongly disagree that the tax code reforms made business easier in the country,” said Kotenko from Ernst & Young.
Igor Reutov, head of corporate issues and investment at Gramatskiy & Partners, agrees. While he acknowledges that it provides some order by unifying taxation principles and policies, “provisions of the Code do not provide fair principles and plain rules for a taxpayer. …The Code cannot be deemed as an investment climate improver,” he said.
Another suite of legislative amendments to attract domestic and international attention is the Law on the Foreign Investment Regime. In May 2010, the government overturned a 2009 law requiring registration of foreign investments, following complaints that the procedures discouraged FDI.
Despite the backflip, Reutov and the U.S. State Department, in its annual investment climate statement, are among those who said the change has not stimulated investment.
“De facto,” Reutov said, “the state registration of the foreign investment remains obligatory,” otherwise they lose legal protection and privileges.
Denys Sytnyk, a partner with the Kyiv office of Schoenherr law firm, sees a further F-grade for the Ukrainian government in banking legislation.
Sytnyk believes amendments in July to Article 34 of the Law of Ukraine on Banks and Banking Activity make it “practically impossible for foreign investors to directly or indirectly acquire shares in Ukrainian banks.”
The new law requires National Bank of Ukraine approval of acquisitions by non-residents but limits acquisitions to residents of countries with which the NBU has a banking supervision cooperation agreement. Only eight such agreements exist presently.
(Photo: Vladimir Kotenko, partner and head of tax and law at Ernst & Young in Ukraine.)
Sytnyk said he has clients who wanted to sell their shares in Ukrainian banks to other foreign banks but now can’t.
“The Basel Principles [globally applied standards in international banking and finance known] are meant to make life easier. The Ukrainian parliament made it more difficult because it applied them improperly,” he said.
Kateryna Domashenko, associate at Pavlenko & Poberezhnyuk Law Group, added that “compliance with the law and obtaining consent in particular for foreigners will be very difficult.”
Yet Ukraine’s lawyers are not all doom and gloom.
Serhiy Piontkovsky, co-managing partner of Baker & McKenzie in Ukraine, agrees with Oberkovych that there are some positive notes. “Generally speaking, the investment climate has stabilized,” he said. “It is clear for investors who to speak to.”
A study by the European Business Association also indicated that political stability following the 2010 presidential elections has improved Ukraine’s attractiveness for investment, while the World Bank’s Doing Business Report for 2011 found some positives, including the reduction of the minimum capital requirement and an enhancement of the electronic filing system for VAT.
Piontkovsky also praised the Law of Ukraine on Public-Private Partnership, which allows this common form of financing public infrastructure for the first time in Ukraine since July 2010.
Also, the Law of Ukraine on Regulation of City Development Activity of February 2011 simplifies procedures for real estate developers.
Piontkovsky said that the most important legislative priority is to remove the existing moratorium on the sale of agricultural land. Oberkovych agrees, saying that the free sale of agricultural land “will definitely attract substantial foreign investment to Ukraine.”
In this field, Oberkovych thinks that the Law of Ukraine on State Land Cadastre, which enters into effect on Jan. 1, and the draft land market law are potential improvements.
Much of this activity has come after President Viktor Yanukovych announced his program of economic reforms for 2010-2014. His ambitious goal is to turn Ukraine into one of the world’s 20 most developed countries in 10 years. But many think this is unlikely.
Ernst & Young’s FDI Report 2011, in noting that Ukraine’s FDI inflows declined in 2010 by 9 percent, cites “uncertainty regarding the investment climate” and an increase in corruption, customs’ delays and VAT refunding.
The World Bank’s Doing Business Report 2011 downgraded Ukraine from 143th to 145th out of 184 nations in terms of ease of doing business. This puts Ukraine well behind neighbors Romania (56), Belarus (68) and Russia (123).
And while rampant corruption and the global economic crisis have also reduced Ukraine’s FDI credentials, legal commentators agree on the need for more legislative reform.
“The faster we move, the faster we fix these problems, the better chance Ukraine has of attracting FDI,” Ernst & Young’s Kotenko said.
However, experts are skeptical as to whether or not such change will be forthcoming.
“We do not expect any considerable improvements in investment regulation within next five-year period,” said Reutov.
Reutov said the government’s Program for Facilitation of Investment Activity, announced June 15, shows a shallow understanding of investors’ problems on the ground.
The program purports to “facilitate operation of business by foreign companies and companies with foreign investments in Ukraine,” but instead establishes further paperwork hurdles for potential foreign investors, Reutov said.
“It is not black and white, but the general trend [in legislative reform] we see is negative,” Piontkovsky said.
Kyiv Post staff writer Will Fitzgibbon can be reached at [email protected]
