Ukraine: Problems Of Investment Attractiveness Of Ukraine

Last Updated: 4 March 2019
Article by Sergiy Benedysiuk
Most Read Contributor in Ukraine, July 2019

Ukraine lags behind in many international business environment rankings. Entrepreneurs complain that the reasons are stringent currency legislation, over-regulation, as well as other factors hindering economic activity. Is this true and what should the business community be ready for in light of announced and introduced changes? «Zakon & Business» addressed these questions to Sergiy Benedysiuk, partner and head of Corporate and M&A practice at Evris law firm.

Sergiy Volodymyrovych, is everything so bad indeed in our legislation? After all, there is good news as well – liberalization of currency legislation has been announced recently.

In fact, Ukrainian legislation is not so bad in general. We are accustomed to complaining of the work of the Verkhovna Rada, imperfect laws, and overall difficult environment for doing business. However, this is not completely true. Real problems are not about the law is worded but rather the law enforcement practice.

As regards the laws. Indeed, there are certain deficiencies and imperfections. But, again, the biggest issue is not the law itself, but its enforcement by the state authorities and courts in particular.

As regards the changes to the currency legislation, this is a long-awaited step. However, liberalization will not be as absolute and comprehensive as it could be. Though it should be noted that there are certain economic preconditions that made the National Bank regulate respective relations in this particular way.

By itself, the currency law is liberal, but it confers the National Bank with discretion to establish certain restrictions by its own regulations. In general, the situation got better compared to that which existed during the period when the Decree of the Cabinet of Ministers «On the Currency Regulation and Currency Control» was in effect. The very fact that the law has been adopted and entered into force – when maintenance of the hryvnia exchange rate is one of the priorities to ensure a sustainable economy – is already a great achievement. I believe that further liberalization will be introduced later on.

In your opinion, what discourage investors from active cooperation with Ukraine? Legislation issues, practice of law enforcement or the security issue?

We regularly communicate with investors, not only at conferences and business events but also in private conversations. And quite often we hear that Ukraine has great investment potential. Unfortunately, an overall environment in the country, particularly in Donbas, is not a main investors' concern.

In general, according to big market players, the probability of a large-scale military conflict is not that high. Moreover, there are many countries where the situation is similar to our country. Look at Cyprus, Moldova or Israel. They have no substantial issues in terms of attracting investments or economic growth.

Currently, the main issue is the lack of fair rules and safety. Foreign partners are absolutely against doing business in «black» or «gray» areas.

For example, I have recently spoken to a Dutch farmer who complained that he only needed 3 days to obtain all business licenses in Georgia, while it took him months to obtain the same in Ukraine. Foreign capital chooses those regions where it is easier to do business, taking into account the level of administrative burden.

It is the issue of applying the law that discourages most of all. This matter is not perfect in any country. The main thing is that there should be a uniform approach of state authorities on how to apply the law, and there should be no corruption. Despite the fact that there has been done a lot, we are still far from the standards acceptable abroad and in the EU in particular.

What are the investors' key complains? Looking at the position in the Doing Business ranking, we can see that Ukraine is gradually moving upward.

Indeed, many procedures have been simplified, but core issues remain problematic. In fact, Ukraine occupies a relatively decent position in the ranking and much has been done to deregulate business processes. If you consider the level of legal regulation, the actual legal framework, as I have said, is not that bad.

In fact, it is not so difficult to start a business. However, it must start functioning well, not to mention that it should be profitable. Law enforcement practice is quite unclear for investors. How could it be that trying to fill the budget tax authorities began to impose additional charges without valid reasons?

Or the situation with raiders attack. We make step by step changes to legislation that seem to be aimed at counteracting this phenomenon, but these have little effect on the real number of such attacks in the country. It is nuisance that the system of law enforcement agencies is so indifferent and helpless, at least in the state that considers itself to be progressive and European. These are the main problems that discourage serious business from investing in Ukraine.

In your opinion, did investors expect large-scale privatization? Have their hopes come true?

Foreigners used that the promises of the first persons of the state are fulfilled. At least in the EU, if any top official makes a statement, it will be performed with 99.9% probability.

Investors have really expected mass privatization, as it had been declared. In fact, following first statements on the matter, there was a great interest of foreign partners, they began to actively inquire into the situation but were forced to stop because of the reluctance of governmental authorities to follow their proclamations. After all, it is obvious that the statements were addressed primarily to the domestic consumer.

In fact, privatization has just begun followed by obstacles and prohibitions. When big business comes, it turns out that there is no willingness to cooperate at the state level. Instead of help, people are accused for the lack of permits and get other «best» of bureaucracy. All this makes overall impression rather unpleasant. If we add statements made by our northeastern neighbor in mass media, the picture of the investment attractiveness of Ukraine becomes not quite good indeed.

Regarding the discussions on launching the land market. What is your view about this step and do you think whether anticipated economic growth may possibly outweigh potential negative implications?

I support cancellation of the moratorium on the sale of land, however not in a short-run and subject to certain conditions. We need a transitional period in order to adjust legislation, fill in the register of property rights, update information in the land cadastre. In fact, cancellation of the moratorium tackles a big range of organizational issues that need to be addressed.

The first one, of course, is data update. A lot of information is stored in land books of records. Places the books of records are stored and their condition are terrible. In fact, even information on the owners of land plots has not been systemized; it is not updated who is alive and who is not. It is good that at least issues of escheat property were addressed due to recent changes in the legislation.

All this needs to be updated and transferred into electronic registries. This is a huge work. Though this work is currently underway, it will take time to complete it.

The second question: what should be done with joint facilities/constructions? It is not only about discrepancies between actual land plots and documents created many years ago. The problems are much deeper. There are several draft laws in respect of cancellation of the moratorium. However, none of them properly address what shall be done with irrigation systems, melioration and other issues of infrastructure.

For example, some of the drafts provide that these objects will be held by local communities. And who will pay for it and control it? Will it be a local tax or anything else? If so, it will be necessary to amend the Tax Code. That is, there should be some comprehensive approach to the drafting and implementation of legal norms.

Some deputies argue that infrastructure issues need to be resolved like in the EU, and to transfer everything into private ownership. Is this a realistic scenario in our environment?

It is unclear under such scenario how the issues of joint ownership should be addressed? Who will be obliged to deal with the maintenance of the respective facilities? This was not an issue in the Soviet Union when they had been built.

Who will be responsible for infrastructural networks running dozens of kilometers? Land law issues are much broader than the norms of effective legislation, and we need to be consistent and careful when applying or changing them.

If, however, such facilities are transferred to a single owner, the owner will obviously try to obtain maximum profit out of them. What restraints will be set up to ensure regular operation and equal conditions for farmers? Who will be responsible for this? There are many things in a real life which are difficult to regulate.

Especially given that a fair volume of business relations does not involve a proper legal culture. I suppose that in the absence of proper rules, we will see a new wave of raider attacks accompanied with burning tires and other things well-known to the agricultural sector.

Agricultural land is one of the main assets, if not the main one. Now I am not talking about human potential. This sector of economy demonstrates continued growth even today. In order to maintain sustainable development and even enhance it, we need to be very careful with any drastic changes. This does not mean that required changes should be postponed for an indefinite period of time like we have been doing this by now. However, we need to be very careful about the cancelation of the moratorium. As far as I understand, it will take another 2-3 years for the land market to start operating properly even after it is launched.

Prior to launching the land market, the new President and the Parliament must elaborate consecutive steps and monitor their implementation. If they fail to do this, we may expect a positive effect [from launching the land market] in a very long-run. But at the beginning we can unleash years of turmoil, meaning that the present cases of illegal takeovers will be peanuts.

Taking into account the foregoing, are there any real foreign investments in our country?

If I am not mistaken, Cyprus is the largest investor in Ukraine. Such a super economy. It is obvious to anyone that all investments of this kind are funds of the Ukrainian business exclusively, which has learned to use norms of international law and understands the peculiarities of doing business in Ukrainian reality.

As for the real investments, there is an inflow, of course. If you are moving at a speed of 1 km/h, you cannot say you are standing in the same place, right? But how long will it take you to reach the goal? Of course, we can continue to do «sophistic exercises», but will they help us?

There are certain investments even in spite of what is happening. Also, I cannot say that no reforms have taken place. The reform of law enforcement agencies and the reform of the judicial system are underway. However, too little has been done so far.

Two main things are required for normal operation of the business — effective courts and effective law enforcement agencies. If they function properly, all other issues mentioned above can be improved, enhanced, and in overall a lot of positive changes can be done. However, if the basic institutions do not work efficiently, any good laws, in particular, aimed at deregulation, will not work properly as well until the rule of law is established.

No matter how good lawmaking process is, it will still not have the desired effect until the ownership rights are properly protected.

Will preferences for foreign investors make Ukraine more attractive?

In fact, we already have such experience. And, as they say, there is nothing new under the Moon. However, such practice proved to be bad. The law was cancelled in order to ensure non-discrimination of all businesses [both local and foreign]. What results will we achieve by introducing such inequality?

I believe this is a wrong track, and I'll explain why. The main thing is that there is no reason to put our business in a more discriminatory position compared to the European one. And, after all, shall we consider it foreign investment funds of the Ukrainian origin previously transferred to Cyprus?

Secondly, we already have agreements on cooperation and mutual protection of investments with many countries. Thirdly, big business tends to remember everything. And even if the state makes such steps, are there any guarantees that they [big business] will trust us again? So, most likely, such preferences, first of all, will be utilized by the Ukrainian business, which eventually has no sense.

We need transparent and clear rules of the game rather than preferences. Even Ukrainian business says – we do not need investments or subsidies, just set up proper rules of the game. Minimize the bureaucracy, provide safeguards — people will develop their own business by themselves.

Does Ukraine need its own PR specialists?

Our state needs to ensure effective work of those structures that have already been established. And the main PR is coherent and seamless cooperation both inside the country and internationally.

For example, we have an investment council, but its staff is not enough to effectively promote Ukraine internationally. Or let us take the business ombudsman. He is effective to a certain extent and helps in many cases. However, as I have heard, his findings are not taken into account in all cases, there are no comprehensive state actions aimed at ensuring proper business environment.

Some say that Ukrainian business escapes abroad as quickly as citizens. How often are you requested to provide and advice on changing business jurisdiction?

Quickly and often — these are deemed things to a certain extent. It depends on what you compare and what sectors of the economy you are talking about. Of course, such sectors as IT change their jurisdiction very easily. It is not as difficult as to transfer a factory. And it's disappointing that they choose the neighboring countries, for example, Poland.

The tax burden there does not different significantly from the Ukrainian tax regulation; so, it is not a low tax jurisdiction, it is not the Baltic states, not Hungary or Cyprus. Poland has a moderate corporate income tax, a standard payroll tax. Above rates do not differ significantly from those in Western European countries. However, there is a better business environment, and government authorities, in contrast with Ukraine, are eager to help, for example, if you want to launch a startup. Secondly, the state provides security guarantees. Accordingly, a business that can easily move or the business which operate in Western Ukraine moves to Poland. Unfortunately, this is a trend.

Again, the thing is not about the taxes, but about conditions and guarantees of protection by the state. Of course, if the business is focused on the European markets, it has certain preferences. But this is not the main thing.

In respect of costs, the operational expenses in Ukraine are much lower. However, if you compare comfort and state guarantees for the business, they are much higher in the European countries. Therefore, despite active business deregulation, Ukraine can hardly compete with Western European countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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