1. SUMMARY.
UKRAINE HAS PUBLICLY STATED IT SEEKS FOREIGN INVESTMENT, BUT THUS
FAR IT HAS FAILED TO CREATE AN ATTRACTIVE INVESTMENT CLIMATE, IN SPITE OF RECENT
NUMEROUS BUT UNCOORDINATED STEPS IN THAT DIRECTION. IT HAS RECEIVED A CUMULATIVE
FOREIGN INVESTMENT OF APPROXIMATELY USD 2.2 BILLION, AMONG THE LOWEST IN THE
REGION. COMPANIES ENJOY UNHINDERED TRANSFER OF PROFITS. THE HRYVNYA HAS
MAINTAINED RELATIVE EXCHANGE RATE STABILITY UNTIL RECENTLY, BUT IT HAS SHOWN
CONSIDERABLE MOVEMENT IN THE LAST TWO WEEKS, FALLING ABOUT FIVE PERCENT IN
RELATION TO THE U.S. DOLLAR. UKRAINE'S CURRENT FINANCIAL UNCERTAINTIES CAST
DOUBT ON THE GOVERNMENT'S ABILITY TO PREVENT A FURTHER DEVALUATION OF THE
HRYVNYA, BUT THE IMP'S LIKELY GRANTING OF AN EFF MAY STAVE OFF A PRECIPITOUS
FALL, AND THE HRYVNYA WILL PROBABLY CONTINUE ITS GRADUAL DEPRECIATION OVER THE
NEXT YEAR.
2. SINCE GAINING ITS INDEPENDENCE IN 1991, UKRAINE HAS NOT ENGAGED IN ANY KNOWN
ACTS OF EXPROPRIATION, BUT SEVERAL INCIDENTS HAVE CAUSED CONCERN. THE INCIDENCE
OF BUSINESS DISPUTE CASES HAS LEVELED OFF, BUT BUSINESSES CONTINUE TO CITE THE
LACK OF TRANSPARENCY IN UKRAINE'S BUSINESS ENVIRONMENTS THE PROBLEM OF AUTHORITY
(OR LACK THEREOF), TAX ISSUES, AND FAILURE TO IMPLEMENT COURT DECISIONS AS
PRIMARY PROBLEMS. UNFORTUNATELY, IN SPITE OF THE POSITIVE FORMAL CHARACTER OF
UKRAINE'S INTERNATIONAL COMMERCIAL ARBITRATION LAW, DISPUTE SETTLEMENT REMAINS
WEAK IN UKRAINE. ONE PARTIALLY SUCCESSFUL METHOD USED FOR THE SETTLEMENT OF
INVESTMENT DISPUTES HAS BEEN EMBASSY APPEAL FOR INTERVENTION AT THE HIGHEST
LEVELS OF GOVERNMENT -- CLEARLY NOT A VIABLE LONG-TERM SOLUTION. ANOTHER HAS
BEEN THROUGH THE NEWLY-CREATED CHAMBER OF INDEPENDENT EXPERTS.
3. THERE ARE NO KNOWN CASES OF PERFORMANCE REQUIREMENTS BEING IMPOSED ON FOREIGN
INVESTORS IN UKRAINE. THE RECENTLY ADOPTED CONSTITUTION OF UKRAINE (JUNE 28,
1996) GUARANTEES THE RIGHT TO PRIVATE OWNERSHIP, INCLUDING THE RIGHT TO OWN
LAND. FORMALLY, UKRAINE'S INTELLECTUAL PROPERTY RIGHTS (IPR) LAWS LOOK GOOD, BUT
ON MAY 1, 1998, UKRAINE WAS PLACED ON THE SPECIAL 301 WATCH LIST BECAUSE
COPYRIGHT PIRACY IS EXTENSIVE AND ENFORCEMENT IS MINIMAL, CAUSING SUBSTANTIAL
LOSSES TO U.S. INDUSTRY. THE LEGAL ENVIRONMENT IS FAR FROM TRANSPARENT AND THERE
ARE STILL MANY REGULATIONS AND PROCEDURES THAT SERVE AS BARRIERS TO ENTRY FOR
NEW BUSINESS ESTABLISHMENTS AND UNNECESSARILY INTERFERE WITH THE CONDUCT OF
LEGITIMATE BUSINESS ACTIVITY. FOREIGN INVESTORS REGARD UKRAINE'S COMPLEX AND
ONEROUS PRODUCT CERTIFICATION SYSTEM AS ONE OF THE MOST SERIOUS OBSTACLES TO
TRADE, INVESTMENT, AND ONGOING BUSINESS.
4. WHILE UKRAINE'S FINANCIAL SECTOR IS IN THE EARLY STAGES OF DEVELOPMENT, THE
BANKING SECTOR IS ONE OF THE MOST PROGRESSIVE SECTORS IN UKRAINE. UKRAINE
CONTINUES TO REMAIN A CASH ECONOMY, BUT A FEW BANKS HAVE STARTED ISSUING CREDIT
CARDS. POLITICAL DEMONSTRATIONS AND DISAGREEMENTS IN UKRAINE RARELY INVOLVE
VIOLENCE AND ARE GENERALLY RESOLVED PEACEFULLY. INDIVIDUAL COMPLAINTS OF
CORRUPTION WITHIN UKRAINIAN MINISTRIES HAVE ALSO SURFACED. UKRAINE HAS A NUMBER
OF BILATERAL INVESTMENT AGREEMENTS WITH VARIOUS COUNTRIES, INCLUDING THE U.S.
(1996). THE U.S. EXPORT-IMPORT BANK IS CURRENTLY OPEN FOR SHORT-TERM AND
MEDIUM-TERM TRANSACTIONS IN UKRAINE. OVERSEAS PRIVATE INVESTMENT CORPORATION
(OPIC) RISK INSURANCE AND DIRECT FINANCING PROGRAMS ARE ALSO AVAILABLE TO U.S.
INVESTORS IN UKRAINE. UKRAINE HAS A WELL-EDUCATED AND SKILLED LABOR FORCE, WITH
A NEARLY 100 PERCENT LITERACY RATE. UNEMPLOYMENT AND UNDEREMPLOYMENT ARE SEVERE
PROBLEMS AND OFFICIALLY UNDERSTATED. THE WORLD BANK ESTIMATES THAT THE INFORMAL
ECONOMY ACCOUNTS FOR NEARLY HALF OF ESTIMATED TOTAL GDP (OFFICIAL PLUS
UNOFFICIAL ECONOMIES). WAGE ARREARS, OFTEN FOR SEVERAL MONTHS OR MORE, ARE
COMMON THROUGHOUT THE ECONOMY.
A.L OPENNESS TO FOREIGN INVESTMENT
5. THE UKRAINIAN GOVERNMENT OFFICIALLY MAINTAINS THAT IT IS ACTIVELY INTERESTED
IN CREATING A FREE MARKET ECONOMY AND OPENLY SEEKS FOREIGN INVESTMENT. HOWEVER,
UKRAINE IS STRUGGLING THROUGH ITS TRANSITION, HAS BEEN VERY SLOW IN IMPLEMENTING
MUCH NEEDED REFORMS, AND HAS FAILED TO ESTABLISH AN INVESTMENT CLIMATE THAT
ENCOURAGES BUSINESS AND INVESTMENT. IN 1996, UKRAINE HAD PUBLICLY STATED A NEED
FOR USO 40 BILLION IN FOREIGN INVESTMENT FOR THE NEXT FIVE YEARS. IF TAKEN FROM
TODAY'S WEAKENED ECONOMIC BASE, THE AMOUNT IS PROBABLY SIGNIFICANTLY HIGHER. THE
KEY INVESTMENT SECTORS ARE LIKELY TO BE TELECOMMUNICATIONS, ENERGY,
INFRASTRUCTURE, AGRICULTURE, AND THE CHEMICAL INDUSTRY. HOWEVER, UKRAINE HAS
RECEIVED A CUMULATIVE TOTAL OF USD 2.178 BILLION THROUGH THE FIRST QUARTER OF
1998 ACCORDING TO THE STATE STATISTICS COMMITTEE, AMONG THE LOWEST IN THE
REGION. BY CONTRAST, HUNGARY HAS RECEIVED APPROXIMATELY USD 16 BILLION AND
POLAND USD 20 BILLION.
6. ALTHOUGH THE UKRAINIAN GOVERNMENT WANTS FOREIGN INVESTORS, IT HAS HAD
DIFFICULTY ADOPTING AND IMPLEMENTING LEGISLATION THAT WOULD ENCOURAGE IT. IT
PASSED A FOREIGN INVESTMENT LAW IN APRIL 1996 WHICH GUARANTEED REGISTERED
FOREIGN INVESTORS EQUAL TREATMENT WITH LOCAL COMPANIES AND POSSIBLE SPECIAL
PRIVILEGES FOR INVESTORS IN THE FOLLOWING GOVERNMENT-DESIGNATED PRIORITY
SECTORS: ENERGY DEVELOPMENT, MILITARY CONVERSION, AGRICULTURE AND FOOD
PROCESSING, HEALTH CARE, TELECOMMUNICATIONS, TRANSPORTATION, INFORMATION
SERVICES, AND BANKING. FURTHERMORE, THE LAW PROVIDED CERTAIN PROTECTIONS,
INCLUDING GENERAL GUARANTEES AGAINST EXPROPRIATION, UNHINDERED TRANSFER OF
PROFITS AND POST-TAX REVENUES, AND A TEN-YEAR GUARANTEE AGAINST CHANGES IN
LEGISLATION THAT AFFECT THESE BASIC PROTECTIONS. HOWEVER, CERTAIN OF ITS
PROVISIONS, IN PARTICULAR, A TAX HOLIDAY, WERE SUBSEQUENTLY SUSPENDED BY
PARLIAMENT, THUS DAMPING THE INFLOW OF FOREIGN CAPITAL.
7. IN 1997, PRESIDENT KUCHMA CREATED THE FOREIGN INVESTMENT ADVISORY COUNCIL,
WITH FOREIGN COMPANY PARTICIPATION, TO ADVISE THE PRESIDENT ON TRADE AND
INVESTMENT MATTERS. ITS FIRST MEETING WAS UNPRODUCTIVE, BUT AFTER ITS SECOND
MEETING (APRIL 1998), FOREIGN INVESTORS WERE CAUTIOUSLY OPTIMISTIC THAT THE
COUNCIL COULD PRODUCE CONSTRUCTIVE RESULTS. ALSO IN APRIL 1998, ECONOMICS
MINISTER SUSLOV SIGNED AN ORDER TO OPEN A "HOT LINE" FOR FOREIGN INVESTORS.
UKRAINE HAS PASSED A NUMBER OF LAWS AND REGULATIONS ON LICENSING CERTAIN FOREIGN
TRADE TRANSACTIONS, PRIVATIZATION INVOLVING FOREIGN INVESTORS, ENERGY AND MINING
INVESTMENT, AND TAXATION OF GOODS AND SERVICES IMPORTED BY FOREIGN INVESTORS. IN
SOME CASES, THE INTENT WAS TO ATTRACT FOREIGN INVESTMENT; IN OTHERS, THE LAWS
WERE CLEARLY PROTECTIONIST. THE U.S.-UKRAINE BILATERAL INVESTMENT TREATY, WHICH
TOOK EFFECT ON NOVEMBER 16, 1996, PROVIDES FURTHER PROTECTION FOR U.S.
INVESTORS. HOWEVER, THIS IS REGARDED AS A TOOL OF LAST RESORT AND IS NOT VERY
PRACTICAL FOR SOLVING EVERYDAY PROBLEMS THAT BUSINESSES CONTINUALLY FACE.
INVESTORS HAVE HAD DIFFICULTIES IN REACHING AGREEMENTS WITH INDIVIDUAL
ENTERPRISES, IN PART DUE TO OBSTRUCTIONS AT THE REGIONAL OR LOCAL LEVELS,
PROBLEMS WITH TAX ENFORCEMENT, THE UNCERTAIN REGULATORY CLIMATE, AND A LACK OF
TRANSPARENCY IN THE LEGAL SYSTEM. INDIVIDUAL COMPLAINTS OF CORRUPTION WITHIN
UKRAINIAN MINISTRIES HAVE ALSO SURFACED.
8. PRIVATIZATION OFFICIALLY STARTED IN 1992 WITH THE ESTABLISHMENT OF THE STATE
PROPERTY FUND. PRIVATIZATION MET STRONG BUREAUCRATIC AND PARLIAMENTARY
RESISTANCE AND WAS SUSPENDED IN 1994. A PRESIDENTIAL DECREE IN NOVEMBER 1994
INSTITUTED A NEW VOUCHER-BASED MASS PRIVATIZATION PROGRAM (MPP). PRIOR TO 1995,
1200 MEDIUM TO LARGE ENTERPRISES WERE PRIVATIZED THROUGH AN EMPLOYEE LEASE-BUY
OUT PROGRAM, WHEREBY EMPLOYEES' LEASES WERE CONVERTED TO OWNERSHIP. BEGINNING IN
1996, VOUCHER SALES BEGAN FOR MEDIUM AND LARGE INDUSTRIAL ENTERPRISES. ON
AVERAGE, 20 PERCENT OF THE SHARES IN AN ENTERPRISE WERE SOLD ON A PREFERENTIAL
BASIS TO EMPLOYEES; ON AVERAGE, 20 PERCENT WERE SOLD TO THE PUBLIC IN EXCHANGE
FOR PRIVATIZATION CERTIFICATES; AND THE BALANCE OF SHARES REMAINING WERE THEN
SOLD FOR CASH. THERE WAS NO RESTRICTION ON FOREIGN OWNERSHIP. IN A LIMITED
NUMBER OF CASES INVOLVING "STRATEGIC ENTERPRISES," THE STATE RETAINED 26-51
PERCENT OWNERSHIP.
9. FOREIGN PARTIES CAN PARTICIPATE IN PUBLIC AUCTIONS, EITHER AS PRIVATE
INVESTORS OR THROUGH INVESTMENT FUNDS; COMPENSATION CERTIFICATE AUCTIONS, HELD
MONTHLY, WHICH SELL CERTIFICATES INTRODUCED IN 1996 TO COMPENSATE UKRAINIAN
CITIZENS FOR THE ADVERSE EFFECTS OF THE HYPER-INFLATION YEARS; AND TENDERS, ONE
TYPE INVOLVING ONLY AN UP-FRONT CASH PURCHASE OF A SHARE PACKAGE IN AN
ENTERPRISE, AND A SECOND TYPE WHICH ALSO REQUIRES, IN ADDITION TO THE ABOVE, A
COMMITMENT FOR FURTHER INVESTMENT IN THE FUTURE. THE PRIVATIZATION PROGRAM ALSO
PROVIDES FOR NON-COMMERCIAL TENDERS, USUALLY CLOSED TO INTERNATIONAL INVESTORS,
IN WHICH A STRATEGIC INVESTOR COULD BUY A 25 PERCENT (OCCASIONALLY MORE) BLOCK
OF SHARES.
10. TO DATE, MANAGEMENT/EMPLOYEE PURCHASES REMAIN THE MOST POPULAR FORM OF
PRIVATIZATION, WITH THE MAJORITY OF SHARES IN MEDIUM AND LARGE ENTERPRISES HELD
BY EMPLOYEES AND THE PUBLIC. HOWEVER, MOST OF THESE NEWLY PRIVATIZED ENTERPRISES
ARE NOT EASILY RESTRUCTURED: THEIR OWNERSHIP IS TOO DIFFUSE; THEIR SHARES ARE
NOT ACTIVELY TRADED IN THE SECONDARY MARKET, DISCOURAGING FURTHER INVESTORS FROM
BUYING; AND, IN SOME CASES, THE GOVERNMENT RETAINS A 25 PERCENT-PLUS-ONE BLOCK
OF SHARES, PERMITTING IT TO BLOCK RESTRUCTURING IF IT CHOOSES. AS A RESULT,
THESE ENTERPRISES CONTINUE TO SUFFER FROM A LACK OF INVESTMENT CAPITAL. THOSE
FEW THAT ARE RESTRUCTURING ARE AMONG THE MOST ATTRACTIVE FIRMS, AND THEY ARE
JUST BEGINNING THE PROCESS.
11. IN 1997 THE GOVERNMENT PLANNED TO RAISE USD 270 MILLION IN PRIVATIZATION
SALES, BUT EVENTUALLY SOLD ONLY USD 75 MILLION. THROUGH JUNE OF 1998, THE
GOVERNMENT HAS RAISED USD 62.5 MILLION, LARGELY THROUGH THE HUNDREDS OF SHARE
PACKAGES OFFERED ON STOCK MARKET EXCHANGES. TOO HIGH AN ASKING PRICE FOR SHARES
OFFERED, AN ASIAN-RUSSIAN FINANCIAL CRISIS FALLOUT ON THE UKRAINIAN STOCK
MARKET, AND AN ONEROUS INVESTMENT OBLIGATIONS ACCOMPANYING THE SHARE PACKAGES
ARE ALL CONTRIBUTING TO THE LOW PRIVATIZATION SALES. TO DATE, THREE FOURTHS OF
ALL MEDIUM AND LARGE ENTERPRISES HAVE BEEN PRIVATIZED - 7,500 OUT OF 10,000.
THEY ACCOUNT FOR 62 PERCENT OF UKRAINE'S INDUSTRIAL PRODUCTION AND 50 PERCENT OF
UKRAINE'S INDUSTRIAL EMPLOYMENT.
12. IN FEBRUARY 1998 PARLIAMENT ADOPTED ITS ANNUAL PRIVATIZATION PROGRAM, WHICH
IS ESSENTIALLY THE SAME AS THE 1997 PROGRAM. IT PROPOSES TO COMPLETE THE
PRIVATIZATION OF THE REST OF THE MEDIUM- AND LARGE- SIZED ENTERPRISES IN 1998,
WITH THE EXCEPTION OF THOSE ON PARLIAMENT'S "NEGATIVE" LIST, AND RAISE USD
500-600 MILLION IN REVENUE. THE GOVERNMENT ALSO PLANE TO CONTINUE THE
PRIVATIZATION OF THE AGRICULTURAL SECTOR, INCLUDING 400 STRATEGIC GRAIN
ELEVATORS BY 1999. LAND PRIVATIZATION WILL PROBABLY NOT BE ADDRESSED THIS YEAR.
THE GOVERNMENT ALSO PLANS TO PRESENT A LAW TO PARLIAMENT IN 1998 ON PRIVATIZING
UKRTELEKOM (THE STATE TELEPHONE MONOPOLY). IN GENERAL, THE PRIVATIZATION PROGRAM
HAS REACHED A CRITICAL STAGE. THE GOVERNMENT MUST NOW DEBATE WHETHER OR NOT TO
SELL ALL OR PART OF ITS SHARE HOLDINGS IN THE MOST STRATEGIC MEDIUM AND LARGE
ENTERPRISES. THIS DEBATE, AND THE CONTINUING WEAK STOCK MARKET, HAS SLOWED DOWN
THE SALE OF THE STRATEGIC ENTERPRISES. ON A POSITIVE NOTE, THE GOVERNMENT HAS
JUST APPROVED A NEW TENDER REGULATION FOR INTERNATIONAL ADVISORS, ACCORDING TO
WHICH THE GOVERNMENT WILL HIRE INVESTMENT BROKERS (INCLUDING FOREIGN) TO ADVISE
ON, AND CONDUCT, THE SALE OF PARTICULAR STRATEGIC ENTERPRISES.
13. THERE ARE NO DISCRIMINATORY OR EXCESSIVELY ONEROUS VISA, RESIDENCE, OR WORK
PERMIT REQUIREMENTS THAT INHIBIT FOREIGN INVESTORS IN UKRAINE. ALTHOUGH THE
GOVERNMENT HAS REDUCED MANY SUBSIDIES PROVIDED TO STATE-OWNED INDUSTRIES, THEY
STILL REMAIN QUITE SIGNIFICANT. FOR THE MOST PART, THESE SUBSIDIES APPEAR NOT TO
BE SPECIFICALLY DESIGNED TO PROVIDE DIRECT OR INDIRECT SUPPORT FOR EXPORTS, BUT
RATHER TO MAINTAIN FULL EMPLOYMENT AND PRODUCTION. THE GOVERNMENT DOES NOT
TARGET EXPORT SUBSIDIES SPECIFICALLY TO SMALL BUSINESS. IN CONJUNCTION WITH ITS
APPLICATION TO JOIN THE WORLD TRADE ORGANIZATION, UKRAINE IS NEGOTIATING TO JOIN
THE WTO SUBSIDIES CODE.
A.2 CONVERSION AND TRANSFER POLICIES
14. THE APRIL 1996 FOREIGN INVESTMENT LAW GUARANTEES FOREIGN INVESTORS THE
"UNHINDERED TRANSFER" OF PROFITS, REVENUES, AND OTHER PROCEEDS IN FOREIGN
CURRENCY AFTER COVERING TAXES AND OTHER MANDATORY PAYMENTS. THE NEW CURRENCY,
THE HRYVNYA, INTRODUCED IN SEPTEMBER 1996, IS TRADED IN UKRAINE AGAINST THE U.S.
DOLLAR AND OTHER CURRENCIES AT A RATE OF ROUGHLY 2.1 HRYVNYA PER DOLLAR, AS OF
JULY 1998. THE HRYVNYA HAS KEPT ITS EXCHANGE RATE STABILITY WITHIN ITS CORRIDOR
(CURRENTLY 1.95-2.25 UAH TO THE DOLLAR) SINCE IT WAS ISSUED, AND THE CENTRAL
BANK INTENDS TO MAINTAIN THE HRYVNYA WITHIN THAT CORRIDOR DURING I998. HOWEVER,
THE CURRENT FINANCIAL UNCERTAINTIES IN UKRAINE AND INSTABILITY IN ASIAN AND
RUSSIAN FINANCIAL MARKETS HAVE MADE MAINTENANCE OF THE EXCHANGE RATE MORE
DIFFICULT. UKRAINE'S OWN CURRENT FINANCIAL UNCERTAINTIES CAST ADDITIONAL DOUBT
ON THE GOVERNMENT'S ABILITY TO PREVENT A FURTHER DEVALUATION OF THE HRYVNYA, BUT
THE IMP'S LIKELY GRANTING OF AN EFF MAY STAVE OFF A PRECIPITOUS FALL, AND THE
HRYVNYA WILL PROBABLY CONTINUE ITS GRADUAL DEPRECIATION OVER THE NEXT YEAR.
15. THERE IS CURRENTLY NO LIMITATION ON THE FREQUENCY OF REPATRIATION OF
EARNINGS (FORMERLY IT WAS ALLOWED ONLY ONCE A YEAR). IN GENERAL, FOREIGN
EXCHANGE IS READILY AVAILABLE AT MARKET-DETERMINED RATES, AND INVESTORS CAN
CONVERT THEIR EARNINGS INTO FOREIGN CURRENCY THROUGH THEIR COMMERCIAL BANK AT
THE INTERBANK CURRENCY EXCHANGERS (UICEX) DAILY AUCTION. ACCORDING TO THE
CORPORATE INCOME TAX LAW, ADOPTED IN NOVEMBER 1997, A 15 PERCENT REPATRIATION
TAX IS CHARGED ON TRANSFERS OF FOREIGN CURRENCY ABROAD, EXCEPT FOR TRANSFERS TO
THOSE COUNTRIES WHICH SIGNED A BILATERAL AGREEMENT WITH UKRAINE ON AVOIDING
DOUBLE TAXATION. IN THE LATTER CASE, THE TAX RATE IS DEFINED BY THE BILATERAL
AGREEMENT. CURRENTLY THERE IS NO U.S.- UKRAINE BILATERAL TAX AGREEMENT, PENDING
UKRAINE'S ADEQUATE RESOLUTION OF THE ISSUE OF SECRET BANK ACCOUNTS. THERE
CURRENTLY IS NO LIMITATION ON THE FREQUENCY OF SUCH TRANSACTIONS. THERE IS NO
PARALLEL CURRENCY MARKET IN UKRAINE. THE EMBASSY PURCHASES LOCAL CURRENCY AT THE
COMMERCIAL RATE FROM A VARIETY OF LOCAL COMMERCIAL BANKS.
A.3 EXPROPRIATION AND COMPENSATION
16. SINCE GAINING ITS INDEPENDENCE IN 1991, UKRAINE HAS NOT ENGAGED IN ANY KNOWN
ACTS OF EXPROPRIATION OF FOREIGN INVESTMENTS OR PROPERTY. UNDER THE 1996 LAW ON
FOREIGN INVESTMENT, A QUALIFIED FOREIGN INVESTOR IS PROVIDED GUARANTEES AGAINST
NATIONALIZATION, EXCEPT IN CASES OF NATIONAL EMERGENCIES, ACCIDENTS, OR
EPIDEMICS. INSUFFICIENT TIME HAS PASSED TO JUDGE THE ADEQUACY OF THIS LAW IN
CASES WHERE COMPENSATION WAS DUE. HOWEVER, SOME INCIDENTS HAVE CAUSED CONCERN:
IN ONE CASE, TO MEET THE TERMS OF A GOVERNMENT DIRECTIVE, A UKRAINIAN TELEVISION
COMPANY UNILATERALLY ABROGATED ITS 10-YEAR CONTRACT WITH ITS U.S. BUSINESS
PARTNER AND REMOVED ITS PROGRAMMING FROM THE AIR.
A.4 DISPUTE SETTLEMENT
17. AS THE NUMBER OF FOREIGN INVESTMENTS HAS GROWN OVER THE PAST TWO YEARS, SO
TOO HAS THE INCIDENCE OF DISPUTES. THE EMBASSY HAS BEEN INVOLVED IN NUMEROUS
ADVOCACY CASES ON BEHALF OF AMERICAN INVESTORS WHO HAVE BEEN THE VICTIMS OF A
VARIETY OF ABUSES, INCLUDING OVERZEALOUS TAX COLLECTION, SUDDEN AND DRASTIC
TARIFF HIKES, ABROGATION OF VALID CONTRACTS AND LICENSES, AND OUTRIGHT
CORRUPTION.
18. AT THE HEART OF THE CURRENT DISPUTES IS THE LACK OF TRANSPARENCY IN
UKRAINE'S BUSINESS ENVIRONMENT, THE PROBLEM OF AUTHORITY (OR LACK THEREOF), AND
NON- IMPLEMENTATION OF DECISIONS. UKRAINIAN LAWS AND REGULATIONS ARE VAGUE AND
OPEN TO CONSIDERABLE LEEWAY IN INTERPRETATION, PROVIDING AMPLE CORRUPTION
OPPORTUNITIES FOR OFFICIALS AT EVERY BUREAUCRATIC LAYER. XENOPHOBIA ATTITUDES,
ESPECIALLY AT THE REGIONAL LEVEL, ALSO PLAY A ROLE AS FOREIGN INVESTORS ARE ALL
TOO OFTEN SEEN AS COMPETITORS OF LOCAL FIRMS AND THEIR GOVERNMENT "SPONSORS."
THE EMBASSY AND U.S. BUSINESSES RECOGNIZE THAT KEY HIGH-LEVEL UKRAINIAN
GOVERNMENT OFFICIALS IN KYIV (DEPUTY PRIME MINISTER TYHYPKO, NATIONAL AGENCY FOR
RECONSTRUCTION AND EUROPEAN INTEGRATION CHAIRMAN SHPEK, AND MINISTER OF FOREIGN
ECONOMIC RELATIONS AND TRADE OSYKA ARE USUALLY MENTIONED) ARE AWARE OF THE
PROBLEMS AND ARE SENSITIVE TO THE NEEDS OF FOREIGN COMPANIES. THE DIFFICULTY
LIES IN THE RELATIVE INDEPENDENCE OF ACTION OF THE MIDDLE LEVELS OF THE
BUREAUCRACY. THERE ARE SIMPLY TOO MANY OFFICIALS, BOTH IN THE VARIOUS LAYERS OF
GOVERNMENT AND AT THE ENTERPRISE LEVEL, WHO HAVE A STRONG, VESTED INTEREST IN
THE STATUS QUO AND SEE FOREIGN FIRMS AS A THREAT TO THEIR CURRENT POSITIONS.
19. A COMMON THREAD THAT HAS EMERGED IN SEVERAL
INVESTMENT DISPUTES INVOLVING U.S. COMPANIES IS WORTH NOTING. IN THESE CASES,
AMERICAN FIRMS, WHICH HAVE OPERATED FOR SEVERAL YEARS IN JOINT VENTURES WITH A
UKRAINIAN FIRM, EXPERIENCE DIFFICULTIES ONCE THE JV STARTS SHOWING A PROFIT.
ONCE IT BECOMES CLEAR THAT THE FIRM HAS ESTABLISHED ITSELF ON THE UKRAINIAN
MARKET, THE UKRAINIAN PARTNER ATTEMPTS, THROUGH VARIOUS ILLEGAL OR SEMI-LEGAL
MEANS, TO FORCE THE AMERICAN PARTNER OUT OF THE DEAL. THE UKRAINIAN PARTNER
CONTINUES OPERATIONS USING THE JV COMPANY NAME, PRODUCT BRAND NAMES, LOGO, AND
OTHER INTELLECTUAL PROPERTY, SOMETIMES RESORTING TO THREATS OF PHYSICAL VIOLENCE
TOWARD THE FORMER PARTNER IF THE PARTNER DOES NOT "GO AWAY."
20. IN FEBRUARY 1994, UKRAINE ENACTED AN INTERNATIONAL COMMERCIAL ARBITRATION
LAW. THE LAW PARALLELS COMMERCIAL ARBITRATION LAWS SET FORTH BY THE UNITED
NATIONS COMMISSION ON INTERNATIONAL TRADE LAW AND IS THEREFORE IN ACCORDANCE
WITH INTERNATIONAL STANDARDS. THE LAW COVERS A WIDE RANGE OF INTERNATIONAL
COMMERCIAL TRANSACTIONS, REFLECTS THE PRINCIPLES OF EQUALITY AND FAIR TREATMENT
OF PARTIES, PROVIDES FOR A SUPPORTIVE RELATIONSHIP BETWEEN THE COURTS AND
ARBITRATION TRIBUNALS, AND INCLUDES BASIC PROVISIONS FOR THE FUNCTIONING OF
ARBITRATION PROCEEDINGS WHERE THE PARTIES THEMSELVES HAVE NOT MADE NECESSARY
PROVISIONS. ACCORDING TO UKRAINE'S LAW ON FOREIGN INVESTMENT, DISPUTES BETWEEN
U.S. INVESTORS AND THE STATE ARE TO BE CONSIDERED BY UKRAINIAN COURTS OF
ARBITRATION. UKRAINE IS A MEMBER OF THE NEW YORK CONVENTION OF 1958 ON THE
RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRATION AWARDS.
21. THE FIRST MEETING OF PRESIDENT KUCHMA'S FOREIGN INVESTMENT ADVISORY COUNCIL
TOOK PLACE IN OCTOBER 1997, CHAIRED BY PRESIDENT LEONID KUCHMA AND ATTENDED BY
NUMEROUS HIGH-LEVEL UKRAINIAN GOVERNMENT OFFICIALS AND CEO'S OF HIGH PROFILE
FOREIGN COMPANIES. THE COUNCIL DISCUSSED A NUMBER OF ISSUES OF CONCERN TO
FOREIGN INVESTORS IN UKRAINE AND FORMED WORKING GROUPS WHICH WILL PRESENT THEIR
RESULTS AT THE SECOND MEETING IN 1998. IN ADDITION, THE PRESIDENT FORMED A
COUNCIL OF INDEPENDENT EXPERTS, CONSISTING OF UKRAINIAN AND FOREIGN LEGAL
EXPERTS, DESIGNED TO SERVE AS A NON- BINDING ARBITRATION FORUM CAPABLE OF
RENDERING AN IMPARTIAL OPINION ON DISPUTE CASES BROUGHT BEFORE IT. IT PROVED
EXTREMELY SUCCESSFUL IN RESOLVING ONE U.S. BUSINESS DISPUTE CASE IN 1998.
22. THE GOVERNMENT HAS A DRAFT CIVIL CODE WHICH HAS PASSED THE FIRST READING IN
PARLIAMENT. IT REPRESENTS THE FIRST MODERN CIVIL CODE IN YEARS AND CONTAINS
MODERN COMMERCIAL LAW PROVISIONS. THE PRESIDENT ALSO SIGNED A BANKRUPTCY DECREE,
PUBLISHED IN JULY 1998, WHICH ESTABLISHES A MORE SIMPLIFIED BANKRUPTCY
PROCEDURE.
23. UNFORTUNATELY, IN SPITE OF THE POSITIVE FORMAL CHARACTER OF THESE LAWS AND
MEASURES, DISPUTE SETTLEMENT REMAINS WEAK IN UKRAINE. MOST U.S. BUSINESSES AVOID
THE COURT SYSTEM BECAUSE THE LOCAL AND NATIONAL COURT SYSTEM IS BURDENSOME AND
HIGHLY UNPREDICTABLE. EVEN WHEN FIRMS RECEIVE FAVORABLE RULINGS FROM UKRAINIAN
COURTS, THERE IS RARELY ANY EFFECTIVE MECHANISM IN PLACE TO ENFORCE THE
DECISION. ONE PARTIALLY SUCCESSFUL METHOD USED FOR THE SETTLEMENT OF INVESTMENT
DISPUTES HAS BEEN EMBASSY APPEAL FOR INTERVENTION AT THE HIGHEST LEVELS OF
GOVERNMENT -- CLEARLY NOT A VIABLE LONG-TERM SOLUTION. ANOTHER HAS BEEN THROUGH
THE NEWLY-CREATED CHAMBER OF INDEPENDENT EXPERTS.
A.5 PERFORMANCE REQUIREMENTS/INCENTIVES
24. THERE ARE NO KNOWN CASES OF PERFORMANCE REQUIREMENTS BEING IMPOSED ON
FOREIGN INVESTORS IN UKRAINE. UKRAINE MODIFIED IT FOREIGN INVESTMENT LAW OF
1996, THEREBY REMOVING CERTAIN TAX BREAKS PREVIOUSLY ACCORDED FOREIGN INVESTORS,
EQUALIZING TAX TREATMENT OF FOREIGN AND DOMESTIC INVESTORS. THE SCOPE AND THE
ABILITY TO MAKE FOREIGN INVESTMENTS WAS ALSO STRENGTHENED. THERE ARE NO TAX
BREAKS PROVIDED FOR IN THE NEW LAW, BUT THE FOREIGN INVESTOR IS GRANTED A NUMBER
OF GUARANTEES, THE MOST IMPORTANT BEING UNHINDERED AND IMMEDIATE REPATRIATION OF
PROFITS. THE NEW LAW DOES AWAY WITH MINIMUM FOREIGN CAPITALIZATION REQUIREMENTS
AND THE FOREIGN OWNERSHIP THRESHOLD WAS LOWERED TO 10 PERCENT (FROM 20 PERCENT)
OF A COMPANY'S AUTHORIZED CHARTER FUND TO QUALIFY AS A FOREIGN INVESTMENT. IN
ADDITION, THE USD 50,000 IN-KIND OR USD 500,000 IN-CASH CAPITALIZATION
REQUIREMENT IS NO LONGER NECESSARY. FOREIGN INVESTORS ARE STILL EXEMPTED FROM
CUSTOMS DUTIES FOR ANY IN-KIND CONTRIBUTION IMPORTED INTO UKRAINE FOR THE
COMPANY'S CHARTER FUND. SOME RESTRICTIONS APPLY, HOWEVER, AND IMPORT DUTIES MUST
BE PAID IF THE ENTERPRISE SELLS, TRANSFERS, OR OTHERWISE DISPOSES OF THE
CONTRIBUTED PROPERTY FOR ANY REASON.
A.6 RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
25. THE CONSTITUTION OF UKRAINE (JUNE 28, 1996) GUARANTEES THE RIGHT TO PRIVATE
OWNERSHIPS INCLUDING THE RIGHT TO OWN LAND. IN ADDITION, UKRAINE'S LAW ON
OWNERSHIP, WHICH WAS ONE OF THE COUNTRY'S FIRST MAJOR PARLIAMENTARY MEASURES,
SPECIFICALLY RECOGNIZES PRIVATE OWNERSHIP AND INCLUDES UKRAINIAN RESIDENTS,
FOREIGN INDIVIDUALS, AND FOREIGN LEGAL ENTITIES AMONG THOSE ENTITIES ABLE TO OWN
PROPERTY IN UKRAINE. MOREOVER, THE LAW PERMITS OWNERS OF PROPERTY (INCLUDING
FOREIGN INVESTORS AND JOINT VENTURES) TO USE SUCH PROPERTY FOR COMMERCIAL
PURPOSES, TO LEASE PROPERTY, AND TO KEEP THE REVENUES, PROFITS, AND PRODUCTION
DERIVED FROM ITS USE. THE LAW ON OWNERSHIP DOES NOT, HOWEVER, ESTABLISH A
COMPREHENSIVE REGIME REGULATING THE RIGHTS OF OWNERSHIP AND THE MECHANISMS FOR
THEIR TRANSFER. SOME DIFFICULTIES HAVE ALSO ARISEN OVER FOREIGN ACQUISITION OF
MAJORITY CONTROL OF ENTERPRISES, WITH THE GOVERNMENT OR THE CURRENT MANAGEMENT
CONTINUING TO EXERCISE EFFECTIVE CONTROL OR VETO POWER OVER COMPANY DECISIONS.
26. THE LAND CODE PASSED IN 1992 CONTAINED A SIX-YEAR MORATORIUM (NOT A BAN) ON
AGRICULTURAL LAND SALES - WHICH STARTED THE MOMENT THE PARCEL OF LAND BECAME
PRIVATELY OWNED. IN 1997 THE MINISTRY OF JUSTICE DETERMINED THAT THIS MORATORIUM
APPLIED ONLY TO LAND SUPPLIED TO FARMERS FROM DISTRICT OR REGIONAL (OBLAST OR
RAION) RESERVES, UNDER A 1992 PROGRAM INITIATED BY THE GOVERNMENT TO CREATE
PRIVATE FARMS. THERE ARE NOW SOME 35,900 SUCH FARMS, AND THEY OCCUPY ABOUT 2
PERCENT OF THE LAND. THE MINISTRY OF JUSTICE'S DECISION SPECIFICALLY EXCLUDES
FROM THE MORATORIUM LAND OBTAINED FROM COLLECTIVE AGRICULTURAL ENTERPRISES
(FORMER COLLECTIVE FARMS) AS INDIVIDUAL LAND SHARES OR LAND TITLES. THESE
PARCELS REPRESENT 70 PERCENT OR MORE OF THE FARM LAND IN THE COUNTRY.
A.7 PROTECTION OF PROPERTY RIGHTS
27. ISSUES RELATING TO THE OWNERSHIP, USE, AND DISPOSAL OF RIGHTS AND INTERESTS
IN LAND ARE REGULATED BY THE LAND CODE OF UKRAINE, ADOPTED IN 1992. THE LAND
CODE WAS ADOPTED FOUR YEARS BEFORE THE CONSTITUTION (1996) AND IS INCONSISTENT
WITH IT IN SOME OF ITS PROVISIONS. ALTHOUGH THE LAND CODE FACILITATED WIDESPREAD
PRIVATE OWNERSHIP OF RESIDENTIAL AND DACHA PLOTS, IT REMAINS UNCLEAR AND
CONFLICTING REGARDING LAND OWNERSHIP BY PRIVATE LEGAL ENTITIES (BUSINESSES).
SUBSEQUENT PRESIDENTIAL DECREES, MOST IMPORTANTLY "ON THE PRIVATIZATION AND
LEASE OF NON-AGRICULTURAL LAND PARCELS FOR ENTREPRENEURIAL ACTIVITY," DATED JULY
1995, HAVE ATTEMPTED TO RECTIFY THIS SITUATION AND HAVE OPENED THE WAY FOR
PRIVATE ENTERPRISES TO OWN LAND. ALTHOUGH COMPREHENSIVE REVISION OF THE LAND
CODE IS ULTIMATELY NECESSARY, PROGRESSIVE MUNICIPALITIES ARE BEGINNING TO
PRIVATIZE LAND UNDER ENTERPRISES THROUGH EXECUTION AND REGISTRATION OF SALE
AGREEMENTS.
28. UKRAINE HAS ALREADY ESTABLISHED A COMPREHENSIVE LEGISLATIVE SYSTEM FOR THE
PROTECTION OF INTELLECTUAL PROPERTY RIGHTS. AS A SUCCESSOR STATE TO THE FORMER
SOVIET UNION, UKRAINE IS A MEMBER OF THE UNIVERSAL COPYRIGHT CONVENTION (MAY
1973), AND THE CONVENTION ESTABLISHING THE WORLD INTELLECTUAL PROPERTY
ORGANIZATION - WIPO (APRIL 1970). AFTER INDEPENDENCE, UKRAINE BECAME A SIGNATORY
TO A NUMBER OF AGREEMENTS, INCLUDING: PARIS CONVENTION FOR THE PROTECTION OF
INDUSTRIAL PROPERTY (1991); MADRID AGREEMENT CONCERNING THE INTERNATIONAL
REGISTRATION OF MARKS (1991); PATENT COOPERATION TREATY (1991); AGREEMENT ON THE
MEASURES BELATED TO THE PROTECTION OF INDUSTRIAL PROPERTY AND THE ESTABLISHMENT
OF THE INTERSTATE COUNCIL FOR THE PROTECTION OF INDUSTRIAL PROPERTY IN THE CIS
(1993); INTERNATIONAL CONVENTION FOR THE PROTECTION OF NEW VARIETIES OF PLANTS
(1995); BORNE CONVENTION FOR THE PROTECTION OF LITERARY AND ARTISTIC WORKS
(1995); TRADEMARK LAW TREATY (1996); AND THE BUDAPEST TREATY ON THE
INTERNATIONAL RECOGNITION OF THE DEPOSIT OF MICROORGANISMS FOR THE PURPOSE OF
PATENT PROCEDURES (1997).
29. IN ADDITION, UKRAINE HAS LAWS ON THE PROTECTION OF RIGHTS IN INVENTIONS AND
UTILITY MODELS (1993); ON THE PROTECTION OF RIGHTS IN INDUSTRIAL DESIGNS (1993);
ON THE PROTECTION OF RIGHTS IN MARKS FOR GOODS AND SERVICES (1993); AND ON THE
PROTECTION OF PLANT VARIETY RIGHTS (1993). IT HAS A NUMBER OF DRAFT LAWS RANGING
FROM THE PROTECTION OF GEOGRAPHIC PLACE NAMES TO THE PROTECTION OF SOFTWARE.
30. ON MAY 1. 1998, UKRAINE WAS PLACED ON THE SPECIAL 301 WATCH LIST BECAUSE
COPYRIGHT PIRACY IS EXTENSIVE AND ENFORCEMENT IS MINIMAL, CAUSING SUBSTANTIAL
LOSSES TO U.S. INDUSTRY. UKRAINE DOES NOT PROVIDE RETROACTIVE PROTECTION FOR
SOUND RECORDINGS, NOR FOR WORKS CREATED PRIOR TO 1973. IT HAS INADEQUATE
CRIMINAL PENALTIES FOR COPYRIGHT PIRACY AND NONE FOR INFRINGEMENT.
ADMINISTRATIVE LIABILITY, IN THE FORM OF FINES AND/OR CONFISCATION OF PRODUCTS,
EQUIPMENT, AND RAW MATERIALS, MAY BE SOUGHT IN THE EVENT THAT AN INFRINGEMENT OF
INTELLECTUAL PROPERTY RIGHTS IS ACCOMPANIED BY UNFAIR COMPETITION ON THE PART OF
THE INFRINGER. HOWEVER, FINES ARE INSIGNIFICANT, AND THE LAW DOES NOT GIVE THE
POLICE OR CUSTOMS THE AUTHORITY TO CONDUCT SEIZURE OR EX PARTE SEARCHES.
COMPOUNDING THE SITUATION, THE JUDGES UNDERSTAND LITTLE OR NOTHING ABOUT IPR,
SHOULD A CASE MAKE IT TO COURT.
A.8 TRANSPARENCY OF THE REGULATORY SYSTEM
31. UKRAINE'S DOMESTIC PRODUCTION STANDARDS AND CERTIFICATION REQUIREMENTS APPLY
EQUALLY TO DOMESTICALLY-PRODUCED AND IMPORTED PRODUCTS. PRODUCT TESTING AND
CERTIFICATION GENERALLY RELATES TO TECHNICAL, SAFETY, AND ENVIRONMENTAL
STANDARDS, AS WELL AS EFFICACY STANDARDS WITH REGARD TO PHARMACEUTICAL AND
VETERINARY PRODUCTS. AT A MINIMUM, IMPORTS TO UKRAINE ARE REQUIRED TO MEET THE
CERTIFICATION STANDARDS OF THEIR COUNTRY OF ORIGIN. IN CASES WHERE UKRAINIAN
STANDARDS ARE NOT ESTABLISHED, COUNTRY OF ORIGIN STANDARDS MAY PREVAIL.
32. UKRAINE IS MOVING INCREASINGLY TO A MARKET- ORIENTED SYSTEM. HOWEVER, THE
LEGAL ENVIRONMENT IS FAR FROM TRANSPARENT AND THERE ARE STILL MANY REGULATIONS
AND PROCEDURES THAT SERVE AS BARRIERS TO ENTRY FOR NEW BUSINESS ESTABLISHMENTS.
33. FOREIGN INVESTORS REGARD UKRAINE'S PRODUCTION CERTIFICATION SYSTEM AS ONE OF
THE MOST SERIOUS OBSTACLES TO TRADE, INVESTMENT, AND ONGOING BUSINESS, AND MANY
CONSIDER UKRAINE'S SYSTEM TO BE FAR MORE DIFFICULT THAN RUSSIA'S. IN SPITE OF
THE FACT THAT UKRAINE RECENTLY LOWERED THE OVERALL NUMBER OF LICENSES FROM 112
TO 42, MANY STILL CONSIDER THIS LOWER NUMBER TO BE EXCESSIVE. THE BUREAUCRATIC
PROCEDURES FOR OBTAINING VARIOUS PERMITS, LICENSES, ETC., ARE COMPLEX AND
UNPREDICTABLE, BURDENSOME AND DUPLICATIVE; THEY CREATE CONFUSION, SIGNIFICANTLY
RAISE THE COST OF DOING BUSINESS IN UKRAINE, PROVIDE OPPORTUNITIES FOR
CORRUPTION, AND DRIVE MUCH ACTIVITY INTO THE BURGEONING SHADOW ECONOMY.
34. THE NUMEROUS CERTIFICATION BODIES AROUND UKRAINE EFFECTIVELY OPERATE AS
INDEPENDENT ENTITIES, OFTEN WITH MONOPOLISTIC POSITIONS. FURTHERMORE, THESE
AGENCIES WORK ON A PRIVATE PROFIT BASIS, RETAINING 80 PERCENT OF THE PROFITS
DERIVED FROM CERTIFICATION FEES AND RETURNING ONLY 20 PERCENT TO THE STATE.
PRICING RULES EXIST, BUT THEY ARE TOO VAGUE TO BE ENFORCED, AND THE STATE
STANDARDS COMMITTEE (THE CENTRAL GOVERNING BODY) DOES NOT HAVE PROPER
SUPERVISION OVER THE VARIOUS BODIES. MUCH OF THE LEGISLATIVE AND INTERPRETIVE
WORK IS LEFT TO DIFFERENT AGENCIES, WITH LITTLE OR NO COORDINATION. FOR MANY
PRODUCTS, MULTIPLE AGENCIES ARE INVOLVED IN THE CERTIFICATION PROCESS, AND OFTEN
MULTIPLE CERTIFICATES ARE REQUIRED. LOCAL, REGIONAL AND MUNICIPAL AUTHORITIES
OFTEN REQUIRE ADDITIONAL DOCUMENTATION BEYOND THAT REQUIRED BY CENTRAL AGENCIES.
35. THE EXISTING SYSTEM OF RULES AND NORMS, BASED ON SOVIET PRACTICE, ENCOURAGE
RIGID FORMALITY, INFLEXIBILITY, AND AN ABSENCE OF JUSTICE IN THE PROCEDURES.
UNDER THESE RULES, EXTREMELY WIDE POWERS ARE GIVEN TO THE CERTIFICATION BODIES,
WITH LITTLE CONTROL OVER, OR RESPONSIBILITY FOR, DECISIONS TAKEN, PERMITTING THE
INTRODUCTION OR MODIFICATION OF PROCEDURES WITHOUT PROPER CONSIDERATION OF THE
APPLICANT'S RIGHTS. THE APPLICANT HAS FEW MEANS TO APPEAL AGAINST AN UNFAVORABLE
DECISION, FURTHER AGGRAVATED BY LIMITED ACCESS TO EXISTING PROCEDURES, NORMS AND
RULES.
36. U.S. BUSINESSES IN UKRAINE REPEATEDLY COMPLAIN THAT THERE IS A LACK OF CLEAR
REGULATIONS, THE SYSTEM IS NOT TRANSPARENT, THE REGISTRATION SCHEMES ARE
UNFEASIBLE FOR MASS TRADE, THE REQUIREMENTS ARE CONSTANTLY CHANGING AND UNEVENLY
ENFORCED, THERE IS A LACK OF PROCEDURAL FLEXIBILITY, THE IMPORT LICENSE
PROCEDURES ARE OVERLY COMPLEX AND LENGTHY, AND THE CERTIFICATION AND LICENSING
FEES ARE INORDINATELY HIGH. WHILE THE LAW MAY STIPULATE FORMAL EQUALITY OF
TREATMENT OF BOTH NATIONAL AND FOREIGN COMPANIES, U.S. BUSINESSES ARE LEFT WITH
A VERY STRONG IMPRESSION THAT THE LAWS ARE NOT APPLIED EQUALLY AND THAT, IN
FACT, THERE IS A DISCRIMINATION AGAINST FOREIGN COMPANIES.
37. THERE IS MUCH DISCUSSION OF REGULATORY REFORM, BUT TO DATE LITTLE CONCRETE
PROGRESS (THE ONLY CITED INSTANCE IS THE LOWERING OF THE NUMBER OF LICENSES TO
42). AT PRESENT, THERE ARE NO EFFECTIVE MECHANISMS TO RESOLVE BUSINESS DISPUTE
CASES. ON OCCASION, DISPUTES OVER INTERNATIONAL BUSINESS ARRANGEMENTS HAVE BEEN
SETTLED ONLY AFTER PRESIDENT KUCHMA OR OTHER NATIONAL LEADERS HAVE BECOME
INVOLVED AND A SPECIAL LAW OR DECREE ENACTED TO COVER THE BUSINESS ARRANGEMENT.
A.9 EFFICIENCY OF CAPITAL MARKETS AND PORTFOLIO
INVESTMENT
38. UKRAINE'S FINANCIAL SECTOR IS IN THE EARLY STAGES OF DEVELOPMENT.
NEVERTHELESS, IN CONTRAST TO MANY OTHER SECTORS OF THE UKRAINIAN ECONOMY, THERE
HAS BEEN REAL PROGRESS IN STRUCTURAL REFORM OVER THE LAST YEAR IN THE BANKING
SECTOR. DEVELOPMENT OF EFFICIENT CAPITAL MARKETS HAS BEEN A PRIMARY AREA OF
EMPHASIS OF INTERNATIONAL ASSISTANCE, INCLUDINQ FROM THE U.S. AS OF JUNE 1998,
THE BANKING SYSTEM CONSISTED OF 227 BANKS WITH TOTAL ASSETS OF USD 12 BILLION.
NINE BANKS DOMINATE THE SECTOR, WITH THE THREE LARGEST BEING UKRAYINA BANK,
PROMINVESTBANK, AND SAVINGS BANK. THE NATIONAL BANK OF UKRAINE (NBU) HAS BOTH
THE SUPERVISORY AND MONETARY POWERS OF A CENTRAL BANK.
39. ALL UKRAINIAN BANKS FORMALLY CONVERTED TO INTERNATIONAL ACCOUNTING STANDARDS
ON JANUARY 1 1998. THE GOVERNMENT PASSED A NUMBER OF NEW REGULATIONS, SUCH AS
LOAN-LOSS PROVISIONING, LOAN CLASSIFICATION AND LENDING TO INSIDERS, WHICH ARE
IN LINE WITH WESTERN PRACTICE. THE NATIONAL BANK HAS INCREASED THE NUMBER AND
QUALITY OF ITS BANK INSPECTIONS. UKRAINE HAS A WELL-DEVELOPED ELECTRONIC FUNDS
PAYMENT SYSTEM AND LIBERAL REGULATIONS WITH NO QUANTITATIVE LIMITS FOR FOREIGN
BANK PARTICIPATION. FOREIGN BANKS MAY CARRY OUT THE SAME ACTIVITIES AS DOMESTIC
BANKS. IN SEPTEMBER 1998, UKRAINE WILL BEGIN A COMPREHENSIVE EXAMINATION OF ITS
LARGEST BANKS, WHICH COULD LEAD TO STRATEGIC RESTRUCTURING, WITH U.S.A.I.O.
PLAYING A CRUCIAL ROLE. IN ADDITION, UKRAINE IS PREPARING A NATIONAL BANK LAW
AND A LAW ON BANKS AND BANKING, WHICH WOULD GIVE THE NATIONAL BANK THE
ENFORCEMENT AUTHORITY IT NEEDS TO EXERCISE BANK REGULATION. A DEPOSIT INSURANCE
LAW SHOULD ALSO BE ENACTED THIS YEAR, ALONG WITH PLANS TO DEVELOP A DEPOSIT
FUND. IN APRIL 1998, THE NATIONAL BANK ELIMINATED ITS 15 PERCENT CEILING ON
FOREIGN BANKS' STATUTORY CAPITAL.
40. FOREIGN BANKS HAVE BEEN SLOW TO ENTER UKRAINE. CREDIT LYONNAIS (PRANCE)
BEGAN FULL BANKING OPERATIONS IN 1994, FOLLOWED BY DEUTSCHE BANK, DRESDNER BANK,
COMMERZBANK, WESTDEUTSCHE, BANQUE DE FRANCE, MAGYAR KULKERESKEDELMI BANK, AND
BANQUE DE CAIRE. CITIBANK ALSO BEGAN OPERATIONS THIS YEAR AND PRESENTLY IS THE
ONLY U.S. BANK WITH A REPRESENTATIVE OFFICE IN KIEV. SIX BANKS HAVE 100 PERCENT
FOREIGN CAPITALIZATION: ING BARINGS (NETHERLANDS), CS FIRST BOSTON (SWISS),
SOCIETE GENERALE (FRENCH), CREDIT LYONNAIS (FRENCH), INKOM BANK (RUSSIAN), AND
BANK KREDITOVO-OEPOZITOWIY (POLAND).
41. PROBLEMS STILL PERSIST. ALTHOUGH A NUMBER OF MEASURES WERE INTRODUCED TO
MAKE IT EASIER TO IDENTIFY BAD LOANS AND AVOID POSSIBLE CRISES, MANY BANKS STILL
HAVE A LARGE NUMBER OF BAD LOANS. THEY CONTINUE TO LACK SUFFICIENT RESOURCES TO
PROVIDE CREDIT, AND SO ARE NOT A MAJOR SOURCE OF INVESTMENT FUNDS. LOANS THAT
ARE MADE ARE SHORT-TERM AND AT HIGH INTEREST. UKRAINE IS TRYING TO INTEGRATE
RAPIDLY INTO INTERNATIONAL FINANCIAL MARKETS WHILE ITS OWN FINANCIAL
INFRASTRUCTURE IS STILL UNDERDEVELOPED AND FRAGILE, AND DURING A TIME OF GENERAL
FINANCIAL CONCERN DUE TO THE ASIAN CRISIS AND RUSSIA'S FINANCIAL UNCERTAINTY.
THEREFORE, THERE IS AN INCREASED DANGER OF A SYSTEMIC BANKING CRISIS WHICH COULD
AFFECT GOOD BANKS AS WELL AS BAD, JEOPARDIZING UKRAINE'S EFFORTS TO REFORM ITS
ECONOMY.
42. IN JUNE 1991, THE PARLIAMENT OF THE THEN UKRAINIAN SOVIET SOCIALIST REPUBLIC
APPROVED A LAW ON SECURITIES AND THE STOCK MARKET, WHICH MARKED THE BIRTH OF A
UKRAINIAN CAPITAL MARKET. THE LAW OUTLINED THE EXISTENCE OF THE FOLLOWING TYPES
OF SECURITIES: STOCKS (REGISTERED, BEARER, PREFERRED, AND COMMON), GOVERNMENT
SECURITIES, GENERAL OBLIGATIONS/BONDS, CORPORATE BONDS, SAVINGS CERTIFICATES,
AND PROMISSORY NOTES. LATER DECREES AND AMENDMENTS ADOPTED FROM 1991 TO 1995
ADDED BOND COUPONS, LOAN CERTIFICATES, BANK ORDERS, SAVINGS BOOKS, AND
PRIVATIZATION CERTIFICATES. IN JUNE 1995 THE STATE SECURITIES AND STOCK MARKET
COMMISSION WAS ESTABLISHED, HAVING ADMINISTRATIVE AND DISCIPLINARY POWERS OVER
ISSUERS, INVESTMENT FUNDS, BROKERS AND TRADING ACTIVITIES. VIRTUALLY ALL OF THE
REPORTED SECONDARY MARKET ACTIVITY IS CONDUCTED THROUGH THE NATIONWIDE
ELECTRONIC TRADING SYSTEM FOR THE SELF- REGULATORY ORGANIZATION OF "PFTS"
(UKRAINIAN OVER-THE- COUNTER TRADING SYSTEM). OTHER MARKETS EXIST, INCLUDINQ THE
UKRAINIAN STOCK EXCHANGE AND THE DONETSK EXCHANGE, BUT MOST TRADING (ABOUT 75
PERCENT) IS NOT REPORTED TO ANY LICENSED MARKET (PFTS OR EXCHANGE). 1997 SAW
DRAMATIC GROWTH IN UKRAINE'S STOCK MARKET AS WESTERN PORTFOLIO INVESTMENT FLOWED
TO UKRAINE, MAKING KYIV THE FIFTH LARGEST EMERGING EQUITY MARKET IN EASTERN
EUROPE AND THE CIS. NEVERTHELESS, INVESTORS FACE NUMEROUS PROBLEMS, INCLUDINQ
INCOMPATIBLE ACCOUNTING STANDARDS, LACK OF ACCURATE COMPANY INFORMATION, AND
INADEQUATE PROTECTION OF MINORITY SHAREHOLDERS' RIGHTS.
43. UKRAINE CONTINUES TO REMAIN A CASH ECONOMY, BUT A FEW BANKS HAVE STARTED
ISSUING CREDIT CARDS (MASTERCARD AND VISA). THE NEW UKRCARD SYSTEM IS READY FOR
SPEEDY ELECTRONIC PAYMENT AND PAPERLESS CASHTRANSFERS BUT LACKS THE USD 500
MILLION NEEDED T INSTALL THE NECESSARY STATE-OF-THE-ART EQUIPMENT.
A. 10 POLITICAL VIOLENCE
44. POLITICAL DEMONSTRATIONS AND DISAGREEMENTS IN UKRAINE RARELY INVOLVE
VIOLENCE AND ARE GENERALLY RESOLVED PEACEFULLY.
A. 11 CORRUPTION
45. CORRUPTION PERVADES MUCH OF UKRAINE'S CIVIL SERVICE AND REQULATORY SYSTEM,
ACCORDING TO MANY PRESS ARTICLES AND FOREIGN BUSINESS COMPLAINTS. CONFLICT OF
INTEREST IS A POORLY-DEVELOPED CONCEPT AT THIS POINT, AND MANY BUREAUCRATS
RETAIN THEIR COMMERCIAL INTERESTS WHILE IN POWER. CORRUPTION CAN ALSO BE
INSTITUTIONAL TO THE EXTENT THAT CERTAIN GOVERNMENT ENTITIES MAY OWN OR HAVE
CLOSE TIES TO BUSINESSES THAT COMPETE WITH THOSE THAT THEY REGULATE (I.E.,
CUSTOMS BROKERS, TESTING LABS, ETC.). GOVERNMENT ENTITIES ALSO USE MEANS THAT
ARE OFF THE BALANCE SHEET TO PAY FOR OPERATIONS AND EXPENSES NOT FUNDED BY THE
STATE BUDGET. A COMPLICATED AND NON-TRANSPARENT REGULATORY SYSTEM HAS ALSO
ENCOURAGED PETTY CORRUPTION AT ALL LEVELS OF GOVERNMENT. A PROFESSIONAL
ADMINISTRATIVE CLASS IS DEVELOPING SLOWLY, DUE IN PART TO THE LOW SALARIES OF
SUCH PROFESSIONALS, EVEN AT VERY SENIOR LEVELS. RECOGNIZING THE PROBLEM,
PRESIDENT KUCHMA ISSUED A DECREE IN APRIL 1997 ESTABLISHING A NATIONAL PROGRAM
AGAINST CORRUPTION, BUT ITS RESULTS ARE YET TO BE SEEN.
B. BILATERAL INVESTMENT AGREEMENTS
46. THE BILATERAL INVESTMENT TREATY BETWEEN THE UNITED STATES AND UKRAINE
ENTERED INTO FORCE ON NOVEMBER 16, 1996. THE FOLLOWING COUNTRIES HAVE ALSO
SIGNED BILATERAL INVESTMENT AGREEMENTS WITH UKRAINE: CANADA (1994), PRANCE
(1994), GERMANY (1993), ITALY (1993), BULGARIA (1994), THE CZECH REPUBLIC
(1994), HUNGARY (1995), POLAND (1993), SLOVAKIA (1994), ARMENIA (1994), ESTONIA
(1995), GEORGIA (1995), KAZAKHSTAN (1994), KYRGYZSTAN (1993), LITHUANIA (1994),
MOLDOVA (1995), UZBEKISTAN (1993), THE PEOPLE'S REPUBLIC OF CHINA (1992), CUBA
(1995), EQYPT (1992), GREECE (1994), ISRAEL (1995), AND MONGOLIA (1992). THE
AGREEMENT WITH CHINA HAS A FIVE-YEAR TERM. ALL OF THE OTHERS HAVE A TERM OF TEN
OR MORE YEARS. UKRAINE HAS ALSO ENTERED INTO BILATERAL TREATIES WITH AZERBAIJAN,
BELARUS, RUSSIA, AND TURKMENISTAN. THESE TREATIES COVER CUSTOMS DUTIES, BUT NOT
VAT OR EXCISE TAX, WITH THE EXCEPTION OF THE TREATY WITH BELARUS. IN DECEMBER
1997, RUSSIA AND UKRAINE AGREED TO A MUTUAL EXEMPTION ON VALUE-ADDED TAX.
UKRAINIAN EXPORTS TO RUSSIA ARE EXPECTED TO INCREASE 20-25 PERCENT AS A RESULT.
C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
47. THE U.S. EXPORT-IMPORT BANK IS CURRENTLY OPEN FOR SHORT-TERM AND MEDIUM-TERM
TRANSACTIONS IN UKRAINE. OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) RISK
INSURANCE AND DIRECT FINANCING PROGRAMS ARE ALSO AVAILABLE TO U.S. INVESTORS IN
UKRAINE. THE U.S.- UKRAINE OPIC AGREEMENT WAS SIGNED IN WASHINGTON ON MAY 6,
1992. THE AGREEMENT ENABLES THE U.S. TO PROVIDE INVESTMENT INSURANCE, PROJECT
FINANCING, AND A VARIOUS INVESTOR SERVICES TO PRIVATE U.S. INVESTORS FOR SOUND
BUSINESS PROJECTS IN UKRAINE. SINCE THE SIGNING, OPIC HAS SINCE LEAD SEVERAL
INVESTMENT MISSIONS TO UKRAINE AND HOSTED SEVERAL REVERSE INVESTMENT MISSIONS BY
UKRAINIAN BUSINESS REPRESENTATIVES TO THE UNITED STATES. OPIC RISK INSURANCE AND
DIRECT FINANCING PROGRAMS ARE AVAILABLE TO U.S. INVESTORS IN UKRAINE. SINCE
JANUARY 1994, OPIC HAS APPROVED INVESTMENT INSURANCE TOTALING MORE THAN USD 34
MILLION FOR THREE PROJECTS IN UKRAINE: INCLUDINQ THE RECONSTRUCTION OF THE
RICHARD-CASTLE HOTEL (USD 15.5 MILLION), GENERATION UKRAINE, INC. (OFFICE
BUILDING CONSTRUCTION AND MANAGEMENT - USD 0.4 MILLION), AND ALLIANT
TECHSYSTEMS' DEFENSE CONVERSION EFFORTS (USD 19.2 MILLION). OPIC HAS ALSO
FACILITATED CONFERENCES AND EXCHANGES BETWEEN THE TWO COUNTRIES TO INCREASE
BUSINESS RELATIONS.
48. THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) IS AN INDEPENDENT MEMBER
OF THE WORLD BANK GROUP, WHICH PROVIDES GUARANTEES AGAINST POLITICAL RISK TO
FOREIGN INVESTORS IN CONNECTION WITH NEW INVESTMENT IN MEMBER DEVELOPING
COUNTRIES. FORMS OF INVESTMENT WHICH CAN BE COVERED BY MIGA INCLUDE EQUITY,
LOANS, LOAN GUARANTEES, AND LOANS MADE BY FINANCIAL INSTITUTIONS (AS LONG AS
MIGA IS ALSO INSURING PART OF THE FOREIGN EQUITY IN THE PROJECT ENTERPRISE).
CERTAIN NON-EQUITY DIRECT INVESTMENTS MAY ALSO BE ELIGIBLE, SUCH AS TECHNICAL
AND MANAGEMENT CONTRACTS AND FRANCHISING AND LICENSING AGREEMENTS.
D. LABOR
49. UKRAINE HAS A WELL-EDUCATED AND SKILLED LABOR FORCE, WITH A NEARLY 100
PERCENT LITERACY RATE. ALTHOUGH THE REPORTED UNEMPLOYMENT LEVEL IS LOW (2.9
PERCENT AS OF JUNE 1998), MOST EXPERTS AGREE THAT: (1) REPORTED UNEMPLOYMENT IS
UNDERSTATED, (2) UNDEREMPLOYMENT AT STATE ENTERPRISES CONTINUES, AND (3)
EMPLOYMENT IN THE INFORMAL SECTOR ACCOUNTS FOR A GROWING, BUT DIFFICULT TO
MEASURE, SHARE OF THE TOTAL LABOR FORCE. THE WORLD BANK ESTIMATES THAT THE
INFORMAL ECONOMY ACCOUNTS FOR NEARLY HALF OF ESTIMATED TOTAL COP (OFFICIAL PLUS
UNOFFICIAL ECONOMIES). SOME UKRAINIAN ESTIMATES CLAIM THAT THE INFORMAL SECTOR
ACCOUNTS FOR 60 PERCENT OF UKRAINE'S ECONOMIC ACTIVITY. WAGE ARREARS, OFTEN FOR
SEVERAL MONTHS OR MORE, ARE COMMON THROUGHOUT THE ECONOMY. PLANT MANAGERS
CONTINUE TO SEE EMPLOYMENT OF THEIR WORK FORCE AS A KEY PRIORITY AND FOREIGN
INVESTORS MAY ENCOUNTER RESISTANCE IN TRIMMING A PROJECT'S WORK FORCE TO AN
EFFICIENT LEVEL. A FURTHER COMPLICATION IN BUSINESS ARRANGEMENTS IS THE
UKRAINIAN ENTERPRISE'S CONTINUING RESPONSIBILITY FOR HOUSING AND MUCH OF THE
OTHER SOCIAL INFRASTRUCTURE SUSTAINING THEIR WORKERS. THIS SOCIAL BURDEN CAN
BECOME A REAL ISSUE IN BUSINESS NEGOTIATIONS.
50. UKRAINE'S INDUSTRIAL INHERITANCE FROM THE FORMER SOVIET UNION, PARTICULARLY
ITS MILITARY-INDUSTRIAL COMPLEX, HAS PRODUCED EXCELLENT SPECIALISTS, ENGINEERS,
AND PROGRAMMERS. HOWEVER, THESE SPECIALTIES RARELY WERE COMMERCIALIZED IN THE
SOVIET COMMAND ECONOMY, LEAVING MANY UKRAINIANS POORLY-EQUIPPED FOR THE DEMANDS
OF DYNAMIC, INFORMATION-BASED COMMERCE. HOMO SOVIETICUS, OR SOVIET MAN, HAS LEFT
A DISTINCT IMPRESSION ON UKRAINE'S WORKING-AGE POPULATION. THE SOVIET
COMMAND-ADMINISTRATIVE SYSTEM DISCOURAGED CREATIVITY AND ENTREPRENEURIAL SPIRIT,
INHIBITING THE GROWTH OF BUSINESS IN UKRAINE. UKRAINIAN WORKERS, IN THE
BLUE-COLLAR AND WHITE-COLLAR SECTORS, MORE OFTEN THAN NOT RESPOND TO STOP-DOWNS
MANAGEMENT PRACTICES. INDEED, ONE OF UKRAINE'S MOST IMPORTANT GOALS WILL BE TO
RE-TRAIN ENTIRE GENERATIONS OF ITS WORKERS IN ORDER TO COMPETE IN THE FAST-PACED
WORLD OF HIGH-TECHNOLOGY PRODUCTION AND MODERN MANAGEMENT METHODS AND PRACTICES.
51. INDEPENDENCE AND SUBSEQUENT LACK OF ECONOMIC REFORM HAVE TAKEN ITS TOLL ON
WAGES IN UKRAINE. IN 1990, THE AVERAGE WAGES IN RUSSIA AND UKRAINE WERE
VIRTUALLY EQUAL. BY 1994, THE REAL WAGE IN UKRAINE AMOUNTED TO ONLY 48 PERCENT
OF THAT IN RUSSIA, INCREASING GRADUALLY TO 71 PERCENT BEFORE FALLING BACK TO 60
PERCENT IN 1996-1997. WAGES CONTINUE TO REMAIN VERY LOW BY WESTERN STANDARDS,.
THE NOMINAL AVERAGE WAGE HOVERS AT ABOUT USO 80 PER MONTH AS OF MAY 1998. WHILE
THIS REPRESENTS ABOUT 78 PERCENT OF REAL WAGE EARNINGS COMPARED WITH DECEMBER
1995, WAGES HAVE HELD RELATIVELY STEADY IN REAL TERMS SINCE 1996. MANY
UKRAINIANS ARE FORCED TO WORK SECOND AND THIRD UNOFFICIAL JOBS TO MAKE ENDS
MEET, THEREBY MAKING UP A VAST PORTION OF THE SHADOW ECONOMY. OFFICIAL
UNEMPLOYMENT IS 2.3 PERCENT (AT THE END OF 1997), BUT THE INTERNATIONAL LABOR
ORGANIZATION HAS PLACED THIS FIGURE AS HIGH AS 34 PERCENT WHEN INCLUDING WORKERS
ON UNPAID/INVOLUNTARY LEAVE AND UNREPORTED SEPARATIONS. SLOW MOVEMENT ON
PRIVATIZATION AND AN UNWILLINGNESS OF LARGER ENTERPRISES TO REDUCE STAFF HAS
NEGATIVELY EFFECTED THE LABOR MARKET'S ABILITY TO RESPOND TO NEW MARKET
CONDITIONS. A SIGNIFICANT PART OF THE UKRAINIAN LABOR FORCE HAS MIGRATED TO THE
SHADOW ECONOMY, TAKING UP SERVICE JOBS SUCH AS TAXI DRIVERS, WAITERS, AND
TRADERS -- ANYTHING TO ENSURE ECONOMIC SURVIVAL. THE LAST TWO YEARS HAVE SEEN AN
INCREASE IN WAGE ARREARS, IN SOME CASES BY AS MUCH AS A YEAR AND A HALF.
E. FOREIGN TRADE ZONES/FREE PORTS
52. THE FREE EXPERIMENTAL ECONOMIC ZONE (FEEZ) SYVASH, IN THE KRASNOPEREKOPSK
DISTRICT, IS OPERATING. THE SUPERVISORY COUNCIL UNDER THE CABINET OF MINISTERS
HAS RECEIVED 27 PROJECTS FOR USD 48.4 BILLION, 18 OF WHICH HAVE BEEN APPROVED.
REAL INVESTMENTS ACCOUNT FOR USD 10 MILLION. THE FEEZ HELPED TO STOP THE
INDUSTRIAL DECLINE IN THE KRASNODEREKOPSK DISTRICT, ELIMINATED WAGE ARREARS,
REDUCED PENSION ARREARS TO JUST ONE MONTH IN 1997, AND BROUGHT IN A SURPLUS
DISTRICT BUDGET. THE FEEZ HAS OPENED REPRESENTATION OFFICES IN SYMFEROPOL, KYIV,
AND MOSCOW, WITH ONE SOON TO BE OPENED IN SCANDINAVIA; AND ADDITIONAL OFFICES IN
SEVASTOPOL, ZAPORIZHIA, AND FEODOSIA.
53. PRESIDENT KUCHMA ISSUED TWO DECREES IN JUNE 1998 ON THE CREATION OF TWO
ADDITIONAL ECONOMIC ZONES IN DONETSK AND SLAVUTYCH. IN ADDITION, THE CABINET OF
MINISTERS HAS DETERMINED THE LOCATION OF A FEEZ PLANNED FOR AZOV, TO BE SITUATED
NEAR THE TRADING PORT OF MARIUPOL.
F.L FOREIGN DIRECT INVESTMENT STATISTICS
54. ACCORDING TO UKRAINIAN STATISTICS, CUMULATIVE FOREIGN INVESTMENT THROUGH THE
FIRST QUARTER OF 1998 WAS APPROXIMATELY USD 2.2 BILLION (OF WHICH USD 759.2
MILLION WAS INVESTED IN 1997). THE COUNTRIES WITH THE LARGEST AMOUNTS OF FOREIGN
INVESTMENT IN UKRAINE WERE: THE UNITED STATES (USD 426.2 MILLION OR 19.6
PERCENT), THE NETHERLANDS ( USD 220.2 MILLION OR 10.1 PERCENT), GERMANY (USD
184.2 MILLION OR 8.5 PERCENT), CYPRUS (USD 156.2 MILLION OR 7.2 PERCENT), RUSSIA
(USD 154.9 MILLION OR 7.1 PERCENT), AND GREAT BRITAIN (USD 151.4 MILLION OR 7
PERCENT). THE SECTORS THAT WERE THE MOST ATTRACTIVE FOR INVESTORS INCLUDED THE
FOOD INDUSTRY (USD 460.4 MILLION); DOMESTIC TRADE (USD 358.8 MILLION); CREDIT,
FINANCE, AND INSURANCE (USD 198.8 MILLION); MACHINE BUILDING AND METALWORKING
(USD 172.0 MILLION); AND THE CHEMICAL INDUSTRY (USD 138.0 MILLION), AND
CONSTRUCTION (USD 90.6 MILLION).
F.2 MAJOR FOREIGN INVESTORS
55. AS OF JUNE 1998, THE MAJOR FOREIGN INVESTMENTS MADE IN UKRAINE WERE
CHANNELED INTO: (A) TELECOMMUNICATIONS -- UTEL [A LONG-DISTANCE AND
INTERNATIONAL TELEPHONE SERVICES JOINT VENTURE WITH FOREIGN SHAREHOLDERS AT&T
(USA), PTT TELECOM (NETHERLANDS), AND DEUTSCHE BUNDESPOST TELECOM (GERMANY)] AND
THE UMC JOINT VENTURE [WITH CONTRIBUTIONS FROM PTT TELECOM, DEUTSCHE BUNDESPOST
TELECOM, AND TELECOM DENMARK (DENMARK)]; (B) TOBACCO -- BAT INDUSTRIES, R.J.
REYNOLDS, PHILIP MORRIS, AND REEMSTMA; SOFT DRINKS -- COCA-COLA AND PEPSICO; (D)
FOOD PROCESSING - CARGILL, KRAFT JACOBS SUCHARD; (E) CONSUMER GOODS - PROCTER &
GAMBLE; (F) DETERGENTS - PROCTER & GAMBLE; (Q) ENERGY (OIL & GAS); AND (H) THE
CONSTRUCTION SECTOR.
56. ONE OF THE MAJOR INVESTMENT PROJECTS IN THE UKRAINIAN TELECOMMUNICATIONS IS
UTEL. UTEL'S FOUNDING PARTNERS ARE UKRTELECOM (51 PERCENT), AT&T USA (19.5
PERCENT), DEUTSCHE TELECOM (19.5 PERCENT), AND PTT TELECOM OF THE NETHERLANDS
(10 PERCENT). BY THE END OF 1997, UTEL HAD INVESTED MORE THAN USD 160 MILLION
INTO THE DEVELOPMENT OF COMMUNICATIONS NETWORKS IN UKRAINE. TODAY, UTEL IS A
MAJOR LONG-DISTANCE OPERATOR IN UKRAINE WITH 1,487 EMPLOYEES, 23 AFFILIATE
OFFICES IN THE OBLASTS OF UKRAINE AND THE AUTONOMOUS REPUBLIC OF CRIMEA. UTEL'S
TOTAL REVENUES EXCEEDED USD 312 MILLION IN 1997, WITH A NET PROFIT OF USD 34
MILLION FOR THE YEAR, UP FROM USD 27 MILLION IN 1996. THUS FAR, UTEL HAS
RE-INVESTED ALL PROFITS INTO THE DEVELOPMENT OF UKRAINE'S TELECOMMUNICATIONS
INFRASTRUCTURE.
57. UKRAINIAN MOBILE COMMUNICATIONS (UMC) WAS OFFICIALLY REGISTERED IN UKRAINE
ON NOVEMBER 11, 1992. THE CO-FOUNDERS OF THIS JOINT VENTURE ARE THE MINISTRY OF
COMMUNICATIONS OF UKRAINE, REPRESENTED BY UKRTELECOM (51 PERCENT), PTT TELECOM
OF THE NETHERLANDS (16.33 PERCENT), TELECOM DENMARK (16.33 PERCENT), AND DBP
TELECOM OF GERMANY (16.33 PERCENT). TODAY, UMC CONTROLS 90 PERCENT OF THE
CELLULAR MARKET. UMC IS COMMITTED TO INVESTING UP TO USD 1 BILLION IN A GSM 900
CELLULAR NETWORK THAT WILL OPERATE ACROSS UKRAINE.
58. GOLDEN TELECOM IS A
TRADEMARK OF JV BANKOMZVYAZOK, FOUNDED IN 1996 BY GLOBAL TELESYSTEMS GROUP OF
THE U.S.(49 PERCENT) AND BANKOMSERVICE OF UKRAINE (51 PERCENT). THE COMPANY HAS
INVESTED USO 16 MILLION INTO A MOBILE NETWORK AND PLANS TO INVEST AN ADDITIONAL
USD 50 MILLION TO EXPAND ITS OPERATIONS TO OTHER CITIES. CURRENTLY, GOLDEN
TELECOM PROVIDES ROAMING SERVICES WITH SWITZERLAND AND GREAT BRITAIN. GOLDEN
TELECOM HAS ALSO STARTED OFFERING PREMIUM BUSINESS LONG DISTANCE LINES IN KYIV.
59. TELESYSTEMS OF UKRAINE IS A JOINT VENTURE ESTABLISHED BY QUALCOMM
CORPORATION (49 PERCENT), THE UKRAINIAN COMPANY RHUTA-FARM (41.1 PERCENT), AND
UKRTELECOM (9.9 PERCENT). QUALCOMM HAS COMPLETED FREQUENCY RESEARCH AND
PERFORMED PREPARATORY WORK IN ORDER TO INTRODUCE COMA TECHNOLOGY TO UKRAINE. AS
A RESULT OF THESE ACTIVITIES, THE CABINET OF MINISTERS OF UKRAINE ISSUED A
RESOLUTION BY WHICH COMA WAS ADOPTED AS AN INTERNATIONAL STANDARD FOR THE
DEVELOPMENT OF UKRAINIAN NETWORKS. IN APRIL 1997, THE MINISTRY OF COMMUNICATIONS
AWARDED TELESYSTEMS OF UKRAINE A LICENSE FOR USE OF THE 800 MHZ BAND TO DEPLOY A
CDMA (IS-95) FIXED WIRELESS NETWORK. TELESYSTEMS HAS INVESTED USD 22 MILLION
INTO THE DEVELOPMENT OF THIS NETWORK WITH THE TOTAL COST OF THE PROJECT
ESTIMATED TO BE USD 200 MILLION.
60. UKRAINIAN WAVE IS A JOINT VENTURE ESTABLISHED TO PROVIDE A FIXED AND
PORTABLE WIRELESS NETWORK FOR THE CITY AND OBLAST OF LVIV. WESTERN INVESTORS IN
THE PROJECT ARE COMMUNICATIONS TECHNOLOGIES (U.S.) HELLOTE (GREECE), AND HUGHES
NETWORK SYSTEMS (U.S.). LOCAL INVESTORS ARE LVIVTELECOM (THE STATE-OWNED, LOCAL
WIRELINE OPERATOR), LVIV RAILWAYS (THE STATE-OWNED OPERATOR OF RAILROADS IN
WESTERN UKRAINE), AND A PRIVATE ELECTRICAL ENGINEERING AND DESIGN FIRM CALLED
RENAISSANCE DR. THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD) HAS
AGREED TO PROVIDE DEBT FINANCING FOR THIS PROJECT IN LVIV. AFTER EXPANDING TO
OTHER AREAS OF THE COUNTRY, UKRAINIAN WAVE PLANE TO HAVE A NATION WIDE TDMA
NETWORK WORTH USD 100 MILLION WITHIN FIVE YEARS. THE INITIAL INVESTMENT WILL
AMOUNT TO USD 27 MILLION AND THE COMPANY PLANS TO START INSTALLING THE NETWORK
IN I998.
61. THE ITALIAN COMPANY ELSACOM IS IMPLEMENTING A GLOBAL STAR SATELLITE
COMMUNICATIONS PROJECT IN UKRAINE. A BRAND NEW CENTER FOR SATELLITE
COMMUNICATIONS HAS BEEN BUILT FOR THIS PROJECT NEAR THE CITY OF KYIV.
62. R.J. REYNOLDS (BRITISH-AMERICAN TOBACCO COMPANY) SECURED LOCAL MANUFACTURING
FACILITIES THROUGH THE ESTABLISHMENT OF JOINT VENTURES WITH TWO UKRAINIAN
TOBACCO FACTORIES. RJR TOBACCO-KREMENCHUK WAS OFFICIALLY INAUGURATED IN MAY
1993, WITH RJR TOBACCO- LVIV FOLLOWING SUIT IN NOVEMBER 1993. THE JOINT STOCK
COMPANY R.J. REYNOLDS TOBACCO-KYIV EXCLUSIVELY MANAGES THE SALES OF CIGARETTES
PRODUCED DOMESTICALLY. AS OF MAY 1998, THE COMPANY'S TOTAL INVESTMENT IN UKRAINE
AMOUNTED TO APPROXIMATELY USD 25 MILLION.
63. COCA-COLA AMATIL, A GLOBAL PARTNER OF THE COCA- COLA COMPANY, HAS GAINED
WIDESPREAD ACCEPTANCE OF COCA- COLA PRODUCTS IN UKRAINE SINCE ITS REGISTRATION
IN JULY 1994. IT HAS ENJOYED SUCCESS DUE TO STRONG LOCAL MANUFACTURING AND
MARKETING EFFORTS. COCA-COLA AMATIL HAS BECOME ONE OF THE LARGEST INVESTORS IN
UKRAINE, WITH INVESTMENTS OF USD 200 MILLION. THE COMPANY EMPLOYS 2,000 LOCAL
EMPLOYEES, HAS COMPLETED CONSTRUCTION OF THE COMPANY'S FIRST FACTORY IN THE CITY
OF LVIV, AND A SECOND PRODUCTION FACILITY IN BROVARY (KYIV OBLAST). COCA-COLA
AMATIL CONTINUES TO BE VERY POSITIVE ABOUT FUTURE BUSINESS PROSPECTS IN UKRAINE.
64. A NEW PEPSICO PRODUCTION LINE BEGAN OPERATION IN LATE 1996 AT THE ROSY
BUKOVYNY PLANT IN CHERNIVTSI. PEPSICO HAS PRODUCTION LINES IN 10 CITIES AND
PLANE TO BUILD TWO NEW PLANTS IN OR NEAR THE CITIES OF KYIV AND DNIPROPETROVSK.
CURRENTLY, PEPSICO PRODUCTS HAVE A 20- 22 PERCENT SHARE OF THE UKRAINIAN SOFT
DRINK MARKET.
65. CARGILL (U.S.) HAS MADE A LONG-TERM INVESTMENT COMMITMENT TO UKRAINE'S
AGRICULTURAL SECTOR. CARGILL'S INVESTMENTS TO-DATE ARE APPROXIMATELY USD 100
MILLION. THE INVESTMENTS INCLUDE: THE CONSTRUCTION OF A SUNFLOWER SEED CRUSHING
PLANT, THE CONSTRUCTION OF A GRAIN TERMINAL IN PORT YUZHNY, PRIVATIZATION AND
RECONSTRUCTION OF GRAIN ELEVATORS, PRODUCTION AND DISTRIBUTION OF BLENDED
MINERAL FERTILIZERS, AND AGRICULTURAL PRODUCTION ON THE BASIS OF ADVANCED
TECHNOLOGIES DEVELOPED BY CARQILL WORLDWIDE OVER ITS CENTURY-AND-A-HALF HISTORY.
66. IN AUGUST 1995, KRAFT GENERAL FOODS INTERNATIONAL (USA) PURCHASED AN 88.4
PERCENT STAKE IN THE STATE- OWNED TROSTYANETS-BASED (SUMY OBLAST) UKRAINA
CHOCOLATE FACTORY FOR USD 25 MILLION. THE REMAINING SHARES ARE BEING SOLD TO THE
FACTORY'S EMPLOYEES.
67. MIDNIGHT SUN INC. (SWEDEN) ESTABLISHED THE JOINT VENTURE "SOUTH FOOD INC."
TO PRODUCE KETCHUP AND CANNED VEGETABLES UNDER THE "CHUMAK" BRAND NAME IN JULY
1996. AS OF JANUARY 1998, MIDNIGHT SUN INC. HAS INVESTED USD 4.5 MILLION IN
UKRAINE. CURRENTLY, "CHUMAK" TOMATO SAUCE HAS A 13 PERCENT SHARE OF THE
UKRAINIAN MARKET.
68. IN 1996, SLAVUTYCH ESTABLISHED A JOINT VENTURE WITH BALTIC BEVERAGES AB,
WHICH HOLDS A CONTROLLING STAKE IN SLAVUTYCH AND HAS INVESTED AN ESTIMATED USO
30 MILLION IN THIS VENTURE. IN MAY 1998, SLAVUTYCH STARTED ITS NEW FERMENTING
PLANT, WHICH WILL INCREASE ANNUAL CAPACITY FROM 7 MILLION TO 10 MILLION
DECALITERS. BALTIC BEVERAGES HOLDING AB, FINANCED THE NEW PLANT'S EQUIPMENT
INSTALLATION.
69. PROCTER & GAMBLE (P&G) BEGAN LIMITED OPERATIONS IN UKRAINE IN LATE 1993, AND
RAPIDLY EXPANDED ITS OPERATIONS IN MID-1995. SINCE 1995, P&G HAS INVESTED USD 48
MILLION, LAUNCHED SEVERAL CONSUMER BRANDS, AND CURRENTLY HAS 15 PRODUCTS ON SALE
IN UKRAINE. THE COMPANY HAS ESTABLISHED A WIDE DISTRIBUTOR NETWORK THROUGHOUT
UKRAINE AND OPERATES A WAREHOUSE NEAR KYIV. P&G PLANE TO DOUBLE ITS ANNUAL
UKRAINIAN SALES IN THE NEXT FISCAL YEAR AND WOULD LIKE TO ACHIEVE USD 200
MILLION IN SALES BY THE YEAR 2000. P&G INTENDS TO UPGRADE THE COMPANY'S
TAMBRANDS FACTORY IN BORYSPIL, THE COMPANY'S MAIN PRODUCER OF WOMEN'S HYGIENIC
PRODUCTS FOR EUROPE. INVESTMENTS WILL ALSO BE CHANNELED INTO MANUFACTURING NEW
PRODUCTS AND INCREASING BRAND MARKETING ACTIVITIES. THE COMPANY IS INVESTING
HEAVILY IN ITS DISTRIBUTORS AND IT ANTICIPATES 6-LO REGIONAL DISTRIBUTORS
DELIVERING TO APPROXIMATELY 50,000 STORES AND EMPLOYING 1,200 PEOPLE.
70. THE POLTAVA PETROLEUM COMPANY (PPC), A JOINT VENTURE BETWEEN THE UKRAINIAN
GOVERNMENT (THE STATE PROPERTY FUND AND UKRGASPROM'S SUBSIDIARY POLTAVAGASPROM)
AND JKX OIL & GAS OF U.K. (49 PERCENT), WAS REGISTERED IN JANUARY 1994. IN APRIL
1995, THE EBRD GRANTED PPC A LOAN OF USD 8 MILLION, THE BANK'S FIRST INVESTMENT
IN THE UKRAINIAN ENERGY SECTOR. IN 1997, THE COMPANY PUMPED 340 MILLION CUBIC
METERS OF GAS (NEARLY 2 PERCENT OF UKRAINE'S TOTAL GAS PRODUCTION) TO ITS GAS
DEPOSITORIES. THAT SAME YEAR, PPC'S EXTRACTED 10,655 BARRELS OF OIL A DAY, UP
FROM 7,900 BARRELS IN 1996.
71. THE UKRAINIAN STATE COMPANY CHORNOMORNAFTOGAS (WHOSE SHARES ARE NOW MANAGED
BY THE NEWLY-CREATED NATIONAL JSC NAFTOGAS) AND RUSSIAN JSC GASPROM SIGNED AN
AGREEMENT ESTABLISHING A JOINT VENTURE THAT WILL EXTRACT OIL AND NATURAL GAS ON
THE AZOV AND BLACK SEA SHELVES. THE JOINT VENTURE PLANS TO INCREASE OIL AND GAS
EXTRACTION ON THE AZOV AND BLACK SEA SHELVES BY 300 PERCENT ANNUALLY (FROM 800
MILLION CUBIC METERS OF GAS TO 2.4 BILLION CUBIC METERS AND 80,000 TONS TO
240,000 TONS OF HYDROCARBONS.) ACCORDING TO INDUSTRY SPECIALISTS, THE AZOV-BLACK
SEA REGION DEPOSITS CONTAIN APPROXIMATELY 1.5 BILLION TONE OF CONVENTIONAL FUEL.
72. NORTHLAND POWER, A LEADING CANADIAN PRIVATE POWER DEVELOPER, HAS BEEN
WORKING WITH THE MINISTRY OF ENERGY SINCE 1991 ON MODERNIZING THE DARNYTSIA
POWER AND DISTRICT HEATING PLANT IN KYIV. IN MAY 1997 NORTHLAND POWER (51
PERCENT), THE STATE PROPERTY FUND (35 PERCENT) AND THE DARNYTSIA WORKERS
COLLECTIVELY (14 PERCENT) FORMED A JOINT VENTURE COMPANY, UKR-CAN POWER, TO
UNDERTAKE THE RECONSTRUCTION AND MODERNIZATION OF THE PROJECT AS WELL AS TO
MANAGE AND OPERATE THE FACILITY. UKR-CAN POWER WILL SELL ELECTRICITY ON A
LONG-TERM CONTRACT TO THE ENERGY MARKET, SELL HEAT AND HOT WATER TO RESIDENTIAL
AND COMMERCIAL ORGANIZATIONS, AND STEAM TO SEVERAL INDUSTRIAL USERS. IT WILL
PURCHASE FUEL ON A LONG-TERM CONTRACT FROM THE NATIONAL GAS DISTRIBUTION
COMPANY, UKRGASPROM. AFTER THE RECONSTRUCTION PROJECT IS COMPLETED AND ALL
PROJECT DEBT AND ADEQUATE COMPENSATION REPAID TO THE INVESTOR, NORTHLAND POWER
WILL RELINQUISH ITS INTEREST IN THE JV TO THE UKRAINIAN PARTNERS. THIS IS
PLANNED TO OCCUR 15 YEARS FROM THE DATE OF COMMISSIONING OF THE MODERNIZATION
PROJECT. THE ESTIMATED COST OF THE PROJECT IS USD 150 MILLION.
73. THE U.S.-LED JOINT VENTURE KYIV-ATLANTIC UKRAINE CONSTRUCTED AN INTEGRATED
AGRI-SERVICE CENTER IN MYRONIVKA (KYIV OBLAST). THE PROJECT RECEIVED USD 20
MILLION IN FOREIGN INVESTMENT, INCLUDING A USD 16 MILLION EBRD LOAN. THE CENTER
INCLUDES A MIXED FEED PLANT (50,000 METRIC TONE PER YEAR), AN OIL SEED
PROCESSING PLANT (50,000 METRIC TONS PER YEAR), AND A GRAIN ELEVATOR (50,000
METRIC TONS PER YEAR).
74. MCDONALD'S UKRAINE LTD., WITH 100 PERCENT FOREIGN INVESTMENTS WAS OFFICIALLY
REGISTERED IN DECEMBER 1995. MCDONALD'S OPENED ITS FIRST RESTAURANT ON MAY 24,
1997, AND 10 ADDITIONAL RESTAURANTS SINCE (SEVEN IN KYIV, TWO IN KHARKIV, AND
ONE IN DNIPROPETROVSK). AS OF MAY 1998, MCDONALD'S HAD INVESTED USO 23.5 MILLION
IN UKRAINE AND PLANE TO BUILD 85 RESTAURANTS DURING THE NEXT 5 YEARS, WITH THE
TOTAL INVESTMENT OF MORE THAN USO 100 MILLION.
This report is provided courtesy of the Business Information Service for the
Newly Independent States (BISNIS)