The World Bank’s Ease of Doing Business 2013 ranked Ukraine at 137 of 185 countries – up 15 places from 2012 – while the World Economic Forum Global Competitiveness Report ranked Ukraine 73 of 144 – up 9 places from last year.
The challenge for Ukraine however, is to continue on this path and break into the Doing Business top 100 countries. It should also begin to close the performance gap on its neighbors, who are themselves continuing to reform and enhance their business and investment climates.
The World Bank highlighted three reforms completed in Ukraine recently that made doing business easier:
Starting a business – Ukraine made starting a business easier by eliminating the minimum capital requirement for company incorporation as well as the requirement to have incorporation documents notarized.
Registering property – Ukraine made property transfers faster by introducing an effective time limit for processing applications at the land cadastre in Kyiv.
Paying taxes – Ukraine made paying taxes easier by implementing electronic filing and payment for medium-size and large enterprises.
Anecdotally, businesses are also saying that the automatic VAT payment process has sped up VAT refunds, but problems remain with some businesses experiencing delays in payment.
The new Custom Code introduced in June 2012 has also improved customs clearance, cutting it in theory from one day to four hours, and introduced digital declarations. These actions should help speed up the flow of goods at the border and improve supply chain integration for Ukrainian businesses, as well as facilitate increased trade.
Further areas for reform
The biggest area of concern for domestic and international investors is the application of the rule of law, particularly when applied to commercial transactions. Here there is still much room for improvement to ensure the impartial resolution of commercial disputes. This area, where there is a lack of trust in the governance, transparency and impartiality of the court system, is where most investors, domestic and international, express concerns regarding Ukraine’s attractiveness as an investment destination and where progress on reform is required.
The continued indebtedness of the banking sector, as a result of the high level of nonperforming loans following the crash in 2008, is also slowing the growth of small and medium sized business in Ukraine, as they simply cannot undertake meaningful investment without affordable access to finance. The government should look at the advice of the European Bank for Reconstruction and Development and others to develop capital markets in local currency to increase the funding opportunities for Ukrainian business and in particular SMEs.
A final area of reform which I would mention is in the energy sector. Power generation requires major investment if the country is not to experience blackouts in the next couple of years.
According to the draft of the Energy Strategy of Ukraine until 2030, $104 billion is required by 2030 to modernize existing facilities, build new power stations and upgrade distribution. Without market liberalization, it won’t be possible to make these huge and necessary investments. Our energy business, DTEK, plans to invest $20 billion over this period to upgrade its productive capacity.
Ukraine remains one of few countries in Europe which still has a regulated electricity market. The liberalization of the electricity market was announced 10 years ago. And only now things are starting to move forward. Last year the draft law of Ukraine on Operating Principles of the Electricity Market of Ukraine passed the first reading in parliament.
It is important, however, that parliament pass the draft law before its recess. This will move Ukraine a big step forward in integrating with the European energy market and prevent the real threat of blackouts in a couple of years.
The draft law has received support of key international stakeholders – the Secretariat of the European Energy Community, the World Bank, the U.S. Chamber of Commerce and the European Business Association – and it will provide the legal grounds for liberalization, increasing transparency and bigger participation of consumers in the market. These are the necessary basic steps to bring investors to the sector.
Of course, a transitional period is necessary to make the reform efficient, but it is vital to tackle the challenge to bring tariffs to an economically justified level, and to get rid of cross-subsidization already now, while ensuring energy access for all by having an effective social protection system in place for poorer and vulnerable members of society.
European Integration
SCM has always had a clear view of the importance of Ukraine’s integration into the European Union, and in particular the need to secure the Deep and Comprehensive Free Trade Agreement. We have been active in supporting this process and remain supportive of the government’s objective of an agreement being signed in November.
We must be clear – signing the Association Agreement is not a zero sum game for trade with Russia or the EU. Russia will always be a vital trading partner for Ukraine, and business is fully supportive of developing improved bilateral trading relations with Russia and other neighbors to the East.
Signing the DCFTA and adoption of elements of the EU Acquis will give Ukraine the template for reforming its often outdated regulatory environment which governs business, and help it upgrade its institutional capacity. These factors have been repeatedly identified as being areas of weakness in terms of the country’s investment attractiveness.
Adoption of EU regulatory principles should lead to an improved ease of doing business in the country, reduce risk and act in the medium term to boost foreign direct investment – where Ukraine has for long lagged behind its Eastern European neighbors. Many countries are chasing the same investment euro or dollar in competition with Ukraine. Enhancement of the business climate and investment potential that the DCFTA would bring would significantly aid Ukraine’s competition for these funds.
Changing Ukraine’s business regulatory environment to meet European standards through the process of regulatory approximation will not be an easy task. Clearly it goes way beyond signing an agreement – this will be only the first step.
At the same time, Ukrainian business should not wait for the government to encourage reform and modernization. We have to take responsibility for our own development. I have worked in Ukraine for almost eight years, and in that time I have seen Ukrainian and international businesses acting as catalysts for change in Ukraine.
Jock Mendoza-Wilson is Director for International and Investor Relations of SCM Group, Ukraine’s largest business group that belongs to Rinat Akhmetov.
