Chapter 4. Ukraine and the OECD National Treatment instrument1

Ukraine’s legislation embodies the principle of non-discrimination of foreign investment. Ukraine has no institutionalised general screening mechanism for foreign investment but still applies several transectoral and sectoral restrictions on foreign investment which qualify for the list of exceptions to national treatment and measures reported for transparency in the meaning of the OECD Declaration on International Investment and Multinational Enterprises. In particular, Ukraine maintains exceptions to national treatment for established foreign-owned enterprises for access to land and forests and in sectors such as news information agencies, television and radio broadcasting, maritime and air transport, as well as for certain types of investment in privatisations.

  

This chapter examines Ukraine’s investment regime in light of the National Treatment instrument, the first element of the OECD Declaration on International Investment and Multinational Enterprises (Box 4.1). Ukraine’s framework regarding responsible business conduct as covered by the OECD Guidelines for Multinational Enterprises, an integral part of the Declaration, is analysed in Chapter 5.

Box 4.1. The Declaration on International Investment and Multinational Enterprises

Adopted in 1976, the Declaration is a policy commitment by adherents to provide an open and transparent environment for international investment and to encourage the positive contribution multinational enterprises can make to economic and social progress.

The Declaration consists of four elements (each underpinned by a decision of the OECD Council on follow-up procedures):

  • National Treatment: A voluntary undertaking by adherents to accord to foreign-controlled enterprises on their territories treatment no less favourable than that accorded to domestic enterprises in the same situations.

  • The Guidelines for Multinational Enterprises: Recommendations on responsible business conduct addressed by governments to multinational enterprises operating in or from adherents. The Guidelines were updated in 2011.

  • Conflicting requirements: Adherents agree to co-operate so as to avoid or minimise the imposition of conflicting requirements on multinational enterprises.

  • International investment incentives and disincentives: Adherents recognise the need to give due weight to the interest of other adherents affected by laws and practices in this field; they need to strengthen international co-operation in this area and endeavour to make measures as transparent as possible.

All 34 OECD member countries have adhered to the Declaration, as have twelve non‐member countries: Argentina (22 April 1997), Brazil (14 November 1997), Colombia (8 December 2011), Egypt (11 July 2007), Latvia (9 January 2004), Lithuania (20 September 2001), Morocco (23 November 2009), Peru (25 July 2008), Romania (20 April 2005), Tunisia (25 May 2012), Costa Rica (30 September 2013) and Jordan (28 November 2013).

National treatment is the commitment by an adherent to the Declaration on International Investment and Multinational Enterprises to treat enterprises operating on its territory, but controlled by the nationals of another country, no less favourably than domestic enterprises in like circumstances. The National Treatment instrument consists of two elements: a declaration of principle, which forms part of the Declaration, and a procedural OECD Council Decision which obliges adherents to notify their exceptions to national treatment and establishes follow-up procedures in the OECD to deal with such exceptions. The Decision comprises an annex that lists exceptions to national treatment, as notified by each adherent and accepted by the OECD Council. The Investment Committee periodically examines the exceptions. To ensure transparency, adherents to the Declaration also undertake to report any measures that, while not representing exceptions to national treatment, have an impact on it. The lists of these exceptions and measures are published and regularly updated.

National treatment has become a well-established principle among adherents. Exceptions are typically limited to certain sectors, such as mining, transport, fisheries, broadcasting and telecommunications. Exceptions are reduced in scope or eliminated among adherents to the Declaration as a result of unilateral measures by the countries themselves, or as a result of peer reviews.

The aim of this chapter is to assess and present the exceptions to the OECD National Treatment instrument notified by Ukraine and measures notified by Ukraine for transparency as defined by the OECD Declaration on International Investment and Multinational Enterprises. The latter measures include various restrictions based on national security considerations, others measures reported for transparency as well as public and private monopolies and concessions.

Exceptions to the National Treatment instrument

The assessment and presentation of Ukraine’s exceptions to the National Treatment instrument reflects the Ukrainian authorities’ written responses to a general questionnaire and clarification requests, as well as a review of a broad range of domestic laws and regulations documented by the Ukrainian authorities and independent analyses conducted by the Secretariat.

The review also draws on other instruments – in particular Ukraine’s commitments under the Deep and Comprehensive Free Trade Area (DCFTA), the Energy Community Treaty and the Schedule of Specific Commitments on Services within the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO) – as complementary sources of information for discussion with the authorities and validation of Ukraine’s list of exceptions to the OECD National Treatment instrument presented in Annex A. However, the OECD instrument follows a “negative-list approach” to notifying restrictions and discourages listing “precautionary” exceptions (i.e. not reflecting applied restrictions). Therefore, the lists of exceptions under these various instruments are not necessarily the same. Only measures concerning legal entities are reported for the purpose of the OECD National Treatment instrument, and thus any measure that may also apply to natural persons is not reflected, neither in this Chapter nor in the list.

Exceptions at national level

Ukraine maintains exceptions to national treatment at national level for established foreign-owned enterprises regarding access to privatisations; access to agricultural land and forestry; access to public procurement; news agencies; and maritime transportation. An exception to national treatment in the field of international air transport will enter in force in July 2016. In compliance with WTO commitments, Ukraine dismantled restrictions regarding the publishing industry (production and distribution of books, newspapers and magazines) in May 2013.

Investment by established foreign-controlled enterprises

Privatisations

The 1992 privatisation law prohibits investment in the privatisation of state and municipal property by companies that are more than 25% equity-owned by a state,2 including by foreign states. Based on this provision, many top European telecom companies that had to various degrees expressed interest in the fixed-line telecommunication incumbent Ukrtelecom – including Deutsche Telekom and Norway’s Telenor – were barred from participating in bids for privatisation in 2010. There are, however, no restrictions on the resale of privatised shares by residents to non-residents or established foreign-controlled enterprises on the secondary market.

Access to agricultural land and forestry

According to the Land Code, foreign individuals, foreign legal entities and subsidiaries of foreign companies (Ukrainian legal entities with foreign investment) are not allowed to own agricultural land but they may acquire non-agricultural land plots only if they already own, buy or will build real estate on such land (OECD, 2015). For instance, they can own non-agricultural land for purposes related to agriculture, such as agro-processing located further away from the growing area, but only as an adjunct to purchasing non-movable assets located on said land. This discourages investment as the purchase of or building a factory creates a right to own land, and not the other way around. If non-agricultural land plots become agricultural land, foreign legal entities and fully owned subsidiaries of foreign companies would have to sell them within one year.

If foreigners, a foreign legal entity or subsidiaries of foreign companies (joint-ventures with participation of foreigners and foreign legal entities) wish to purchase state-owned non-agricultural land, a complicated process is prescribed in the Land Code3 and requires ultimate consent by the Cabinet of Ministers in addition to prior approval by relevant Ministries (this process does not exist for sales of private non-agricultural land).

Only Ukrainian citizens and legal entities can own forests. Foreign legal entities and subsidiaries of foreign companies (Ukrainian legal entities with foreign investment) are not authorised to own forests. In practice, forests are state-owned: the State Forestry Agency manages 68% of forests, with the remaining 32% spread across approximately 50 public agencies, local municipalities, and educational organisations (OECD, 2015).

Access to government purchasing

Ukraine’s framework regulating public procurement is open to foreign and domestic economic operators on an equal basis, unless bidders are from off-shore zones (e.g. the Bahamas, Belize, the British Islands, the Cayman Islands, etc.), as defined by Ordinance No. 143-p of the Cabinet of Ministers (23 February 2011). Details of the grounds for rejecting foreign companies registered in off-shore zones are provided for in Article 17 of the 2014 Law on Public Procurement. Specifically, according to paragraph 3 of alinea 2 of this Article, participation by firms registered offshore is forbidden. Reportedly, this provision has been enacted for the purpose of targeting companies that in this way avoid taxes and should be deemed as such having outstanding tax liabilities, which prevent them from becoming parties to public contracts. As such, this provision most likely refers to off-shore companies established by Ukrainians; however the way it has been drafted allows for a broader interpretation and rejecting any foreign companies that may be suspected in taking advantage of low taxation countries.

Media and news agencies

The Law “On Television and Radio Broadcasting”4 forbids foreign legal entities, individual entrepreneurs or any non-resident registered in offshore zones (as defined by the Cabinet of Ministers) from setting up or being shareholders or co-founder of TV channels, radio broadcasting companies, or television and radio content providers. The national television and radio broadcasting council of Ukraine ensure that broadcasting organisations comply with legislative requirements, include requirements regarding foreign investments in their share capital.

According to the Law “On news agencies”,5 news agencies can be created only by Ukrainian citizens and Ukrainian legal entities. Foreigners and foreign legal entities can be co-founders of news agencies (with Ukrainian citizens or legal entities), but the share of foreign ownership is limited to 35% of the charter capital. Foreign news agencies can set up representative offices in Ukraine.

There are no ownership restrictions on foreign ownership or investments in the telecoms and internet sectors.

Domestic and international air transportation

Foreign airlines can set up affiliates in Ukraine and operate domestic flights under certain conditions (including reciprocity conditions) defined by the international agreements that Ukraine concluded in the sphere of civil aviation. Several affiliates of foreign airlines have been operating domestic flights in recent years.6 However, a recent regulation of the civil aviation authority stipulates that, as of July 2016, licences for international regular and charter air routes will be reserved to airlines that are directly or indirectly majority-owned (more than 50% of the share capital) by Ukrainian citizens or the Ukrainian state.7 This restriction is not applicable to licenses for international air routes granted by foreign civil aviation authorities under Ukraine’s international civil aviation agreements. According to Ukrainian civil aviation authorities, this restriction is required to harmonise Ukraine’s civil aviation rules with EU Standards, in the perspective of the conclusion of a comprehensive EU-Ukraine aviation agreement. Chaper 3 gives more details on this agreement, which is still being negotiated.

Cabotage

Cabotage transportation (i.e. between Ukrainian ports, including as part of international transportation) is reserved to vessels under the Ukrainian flag.8 However, if there is a permit issued by the State Inspectorate of Safety at Maritime and River Transport, it is possible to sail under the flag of another country. The right to fly the Ukrainian flag belong to ships owned by Ukrainian citizens or Ukrainian legal entities whose shareholders are all Ukrainian citizens. It also belongs to ships that Ukrainian citizens rent under a bareboat charter arrangement.

Measures reported by Ukraine under the National Treatment instrument for transparency

Policies established for safeguarding national security and public order, as well as restrictions in relation to corporate organisation and key personnel must be reported under the OECD National Treatment instrument under transparency measures. Monopolies and concessions must also be reported under transparency measures.

Measures at the level of national government

Measures based on public order and essential security reasons

The OECD Investment Instruments recognise that policies for safeguarding national security and public order are an important part of investment policies in many countries. OECD instruments that grant an exemption from obligations regarding national treatment include the National Treatment instrument and Article 3 of the Codes of Liberalisation of Capital Movements. Countries that adhere to the OECD Declaration on International Investment and Multinational Enterprises nevertheless commit to report their investment policies related to national security. The policies are recorded in the List of measures reported for transparency by country of the National Treatment instrument.

Concerns with national security

Since the last review of Ukraine in 2011, the country has amended its policies in this area or introduced new legislation to address national security concerns in the context of foreign investment. This policy-making activity has been in part driven by a re-evaluation of what national security encompasses and in which ways it can be threatened, as demonstrated by the adoption of a new Strategy of National Security of Ukraine in 2015.9 Pursuant to the strategy, “limitations aimed at preventing the penetration of capital from the Aggressor-state10 in strategic sectors of the economy” are necessary in order to ensure the economic security of Ukraine.11

Ukraine has defined circumstances under which a national security exception can be invoked in its Law “On Fundamentals of National Security of Ukraine”.12Although the list of “potential and real economic threats to the national security of Ukraine” (Article 7) is rather broad, the factors the regulatory or legislative authorities may proceed from to ban or scrutinize foreign investment shed some light on what is to be covered under the Ukrainian concept of threats to national security:

  • An increase in the share of foreign capital in strategic sectors13 of the Ukrainian economy such that it jeopardises Ukraine’s economic independence;

  • Critical dependence of the national economy on the business cycles of international markets and a low rate of expansion of the internal market;

  • A significant reduction in GDP, investments and research activities in key sectors of scientific and technological development;

  • The weakening of state regulation and control regarding the economy;

  • The instability of regulations in the economic sphere, including the government’s fiscal policy as well as the absence of an effective programme for the prevention of financial crises and the increase of credit risks;

  • The critical state of basic production assets in the leading industrial sectors, in the agro-industrial complex and regarding technical maintenance of nuclear power installations;

  • Insufficient economic growth and the structural misbalances in the economy;

  • An exports structure composed mainly of raw materials and containing few high added value products;

  • The high level of internal and external government debt;

  • Inadequate anti-trust policy and inadequate regulation of local monopolies that prevent the creation of a competitive economic environment;

  • The critical situation regarding the population’s supply of food;

  • The ineffective use of fuel and energy resources, an insufficient diversification for their supply and the absence of an effective energy-saving strategy;

  • The “Black” or “Shadow Economy”;

  • A predisposition at the top level of the public service to favour individual, corporate and regional economic interests over national priorities.

Although this list may been seen as giving broad discretion to Ukrainian authorities in deciding whether a particular foreign investment threatens national security, Ukraine has, in general, maintained an open policy towards foreign investment, including in sectors that are often considered as national security sensitive. If some strategic sectors are barred to investment, such prohibition most often applies equally to domestic and foreign investors.14 Furthermore, the 2015 Strategy of National Security of Ukraine,15 while considering that “limitations aimed at preventing the penetration of capital from an “Agressor-state”16 in strategic sectors of the economy” are necessary in order to ensure Ukraine’s economic security, also recognizes “foreign investments in key sectors of the economy, including energy and transports” as a key contribution to it. Contrarily to previous versions, the 2015 Strategy contains no general mention to “foreign investments in strategic sectors” as a potential threat to national security.

National security grounded approaches to foreign investments

Ukraine’s response to national security concerns stemming from foreign investment has taken two distinct forms: partial or total prohibitions of foreign investment in specified sectors and sector-specific licensing provisions.

Total or partial prohibitions of foreign investment in specific sectors

Ukraine retains prohibitions of any foreign investment on national security grounds in the manufacturing of weapons and in space facilities,17 as well as for certain categories of investors in TV and radiobroadcasting. With regards to the latter sector of activities, legal entities and residents, as well Ukrainian legal entities whose shareholders or ultimate beneficiaries are residents from an “Aggressor-State”, are forbidden from setting up or being shareholders of any TV or radio broadcasting company, or of any television and radio content provider.18

As noted above, the 1992 privatisation law also prohibits investment in the privatisation of state and municipal property by companies that are more than 25% equity-owned by a foreign state but there is no indication in the legislation that this restriction aim at managing risks related to national security. However, the government is preparing amendments to the Privatisation Law in order to limit the scope of this restriction to Ukrainian SOEs. If these amendment are adopted, foreign SOEs (or foreign companies where a state owns more than 25% of the share capital) would thus be allowed to take part in privatisations. By contrast, the government introduced a draft law prohibiting legal entities and citizens from the Aggressor-State, as well as Ukrainian legal entities whose shareholders or ultimate beneficiaries are residents from the Aggressor-State, from taking part in the privatisation programme.19

Legal entities and residents, as well Ukrainian legal entities whose shareholders or ultimate beneficiaries are residents from the Aggressor-State, are forbidden from setting up or being shareholders of any TV or radio broadcasting company, or of any television and radio content provider.20

Sector-specific licensing provisions

Under the Law of Ukraine “On Licensing Types of Economic Activity”21 (hereinafter – the “licensing Law”), 30 economic sectors require prior government authorization (i.e. an activity licence), which can be denied on national security grounds. The essence of this approval process can be summarised as follows: entities “under the control of residents from countries undertaking armed aggression against Ukraine and/or creating conditions for armed conflict or use of military force against Ukraine” are not entitled to an activity license in these sectors.22 The licensing authority is usually a government agency in charge of sector-specific regulation (often named “National Commission”). This provision applies to all of the 30 economic activities subject to licensing, except for banking activity and activity in the areas of television and radio broadcasting, production and trade of alcoholic beverages and tobacco products.23 The basis for refusing to grant a license is documentary evidence of control of “residents from countries undertaking armed aggression against Ukraine and/or creating conditions for armed conflict or use of military force against Ukraine” (hereinafter “residents from countries undertaking armed aggression against Ukraine, etc.”), to be established by licensing authorities. The licensing law, under the same provision, also provides the grounds for cancellation of existing licenses held by such entities.

The licensing law gives an extensive but rather vague definition of control, which includes “decisive influence” over a business entity, and does not define a precise shareholding threshold or clarification regarding the exact interpretation of control in the context of the licensing law. As a result, regulatory authorities have applied the law unevenly. For example, on 24 June, 2015 the National Securities and the Stock Market Commission (NSSMC) cancelled the brokering licenses of 7 market participants with Russian capital (among which the banks Sberbank and VTB) on the basis of documentary evidence of control of “residents from countries undertaking armed aggression against Ukraine, etc.”24 It did not however cancel the brokering license of Alfa Bank Ukraine, which belongs to Russian Alfa Group but is formally controlled by a Special Purpose Entity (SPE) based in Cyprus.25 On 6 October 2015, the NCSSM cancelled the license of PFTS, one of the largest stock exchanges in the country; because of documentary evidence of control of “residents from countries undertaking armed aggression against Ukraine, etc.” (Moscow Stock Exchange had a majority stake in PFTS). This suggests that some licensing authorities may have adopted a formal definition of “Aggressor control”, i.e. direct control by a foreign entity or individual.

Other measures

Professional and other services

Ukraine’s legislation imposes a Ukrainian nationality requirement for notary services.26 As this measure concerns natural persons, it is not taken into account in the list of measures qualifying for exceptions to national treatment in the meaning of the OECD Declaration on International Investment and Multinational Enterprises given that the scope of the OECD National Treatment instrument covers legal entities only.

The director of primary and secondary education institutions, both public and private, shall be a citizen of Ukraine, having a degree in Pedagogy and not less than three years of experience in teaching.27 The same requirement applies to all pre-school and non-school education institutions (public or private alike).28 The heads of State or municipal higher education institutions shall be Ukrainian citizens.29

Repatriation of foreign investment

Article 397 of the Economic Code of Ukraine and Article 12 of the Law of Ukraine “On the Foreign Investment Regime” guarantee free transfer of returns, profits and others funds received by foreign investors as a result of foreign investment. In addition, in accordance with Article 5 of the Order of the Cabinet of Ministers of Ukraine “On the system of foreign exchange regulation and foreign exchange control”, there is no obligation to secure authorization in order to repatriate foreign investment, or profits and other funds earned as a result of investment. In addition, in the territory of Ukraine, a foreign investor may invest funds from investment accounts opened with authorized banks both in authorized foreign currencies and in Hryvnia.30

In recent years, as Ukraine faced negative and unpredictable external conditions, the National Bank of Ukraine (NBU) adopted a range of temporary capital control measures to address external imbalances, to tame panic in the foreign exchange market, and to stabilize disorderly market developments. In 2009-10, foreign investors were obliged to route their monetary contribution in foreign currency exclusively through “investment accounts” opened with Ukrainian banks.31 In March 2015, currency controls were tightened by broadening and extending prohibition of certain foreign currency transactions.32 Banks are subject to the obligation to monitor foreign currency purchase transactions on a daily basis and service only those that have an express legal basis. The NBU is granted the right to suspend any transaction suspected by the NBU of being illegal and to request additional documents regarding such transactions. At the same time, in September 2015 and in December 2015, the NBU slightly relaxed some of its previously introduced restrictions, in particular:

  • The cap on daily cash withdrawal from foreign exchange accounts have been raised to UAH 20 000 (about USD 939) from UAH 15 000 (USD 704).

  • The prohibition for Ukrainian banks to purchase foreign exchange funds upon instructions of their clients (other than private individuals) if such clients already hold FX funds in a Ukrainian bank account has been relaxed for certain non-convertible currencies (Egyptian pound, etc.).

  • In December 2015, the NBU relaxed the 75 % mandatory sale (surrender requirement) of foreign currency in the case a resident borrower uses it to fulfil its obligation under an import contract involving a foreign export credit agency.

These changes should not influence significantly the foreign currency market (for a detailed analysis, see UkrSibbank Research, 2015).

Several temporary capital control measures introduced in 2015 directly impact foreign direct investors established in Ukraine, including the prohibition of the following foreign-exchange transactions:

  • Transfers of dividends to foreign investors;

  • Repatriation of the proceeds from the sale of a security, except in the case of a debt security sold on a stock exchange (NBU verifications required in this case) or in the case of government bonds;

  • Repatriation of the proceeds from the sale of corporate rights (other than shares), from the decrease of the charter capital or the withdrawal of a foreign shareholder in a company;

  • Prepayments under foreign loans, including if repayments are shifted to earlier dates.33

The National Bank of Ukraine has been considering further liberalization steps conditional upon sustained improvements on the foreign exchange market and of the general economic situation.34

Sectors subject to public/private/mixed monopolies or concessions

Monopolies and concessions must be reported under the OECD National Treatment instrument under transparency measures. Monopolies can take two forms: i) a public monopoly, run by the state or managed by local governments, and ii) a monopoly exercised under an exclusive licence granted to a private operator.

Monopolies

The Ukrainian legislation defines a natural monopoly as an activity in which the absence of competition is beneficial to the market due to specific features of production, and products cannot be replaced by equivalent substitutes.35 The law classifies the following activities as natural monopolies (Article 5):

  • Transport of oil and oil products by oil pipelines;

  • Transport of natural gas and oil gas by pipelines;

  • Distribution of natural gas by pipelines;

  • Storage of natural gas beyond certain volumes defined by the Ukrainian legislation;

  • Transport of other products by pipelines;

  • Transmission and distribution of electricity;

  • The use of railway lines, dispatcher services, railway stations and other rail infrastructure;

  • Air traffic control;

  • Centralised supply and distribution of water;

  • Centralised heating supply;

  • Specialised services in ports and airports, as determined by the Cabinet of Ministers;

  • Burial of domestic waste.

The law also defines “adjacent markets” as markets closely related to natural monopolies, since market participants directly rely on products produced or sold by natural monopolies for their own activities. The law classifies the following activities as “adjacent markets” (Article 6):

  • Supply of any product transported by pipelines, including natural gas;

  • Domestic and international transport of passengers and cargo by rail, air, sea or rivers;

  • Production and supply of electricity;

  • Processing of domestic waste;

  • Sale of natural gas beyond certain volumes defined by the Ukrainian legislation.

According to the law, natural monopoly can be state-owned or private entities, provided that they comply with applicable regulations.

Natural monopoly activities and activities on “adjacent markets” (as defined above) are subject to licensing. The Licensing authorities can be either National Commissions (sector-specific regulators) or Ministries. In the case of regional or local monopolies, local governments are entitled to regulate them and act as licensing authorities. In practice, one prominent licensing authority is the National Commission for State Regulation of Energy and Utilities, in charge of the regulation of the power sector (electricity, natural gas, heating supply), along with centralised supply and distribution of water and domestic waste.36 The Ministry of infrastructure is the Licensing authority and regulator in the field of transport and transport infrastructure (including ports and airports). According to the law (Articles 8 and 14), licensing authorities of natural monopolies enjoy wide regulatory powers, among which the fixation of tariffs and the regulation of consumer’s access to the products of natural monopoly, and the determination of compulsory quality standards. The law stipulates that regulatory procedures should be transparent and open.

The Antimonopoly Committee of Ukraine maintains an overall record of natural monopolies.37 According to this record, as of January 2016, 6 natural monopolies (all state-owned) operated at the national level:

  • Air traffic control services: state enterprise Ukraerorukh (report to the Ministry of Infrastructure);

  • Railways, dispatcher services, railway stations and other rail infrastructure: state administration of Ukraine’s railway transport Ukrzalinitsya;

  • Transport of natural gas by pipelines: national shareholding company Naftogaz represented by its subsidiary Ukrtransgas;

  • Transport of oil and oil products by major pipelines: national shareholding company Naftogaz represented by the open joint stock company Ukrtransnafta;

  • Transmission of electricity via national and international electricity grids: state enterprise National Energy Company Ukrenergo.

In Ukraine, the production of ethyl alcohol is a state monopoly.38 The State-owned holding Ukrspirt was created in 2010 to reunite 40 state-owned ethyl alcohol factories. Although it is not on the list of the SOEs subject to privatization in 2015,39 the government signalled recently introduced a draft law40 that would allow a partial or total privatisation of Ukrspirt in the future.

According to the Law “On Postal services”,41 the national state-owned operator “Ukrpochta” has an exclusive right to the publication and distribution of stamps and the conveyance of ordinary postcards and ordinary letters up to 50 kilogrammes. The handling of parcels and letters of more than 50 kilogrammes is thus open to the private sector. It is subject to a licensing system and tariff regulation by the National Commission for State Regulation of Communications and Informatisation (NCCIR). This tariff regulation is limited to universal postal service obligations (which extends to letters and parcels up to 10 kilogrammes).42

In addition, a list of “State assets of strategic importance for the economy and national security” sets forth the strategic enterprises under Ukrainian government control. In 2015, under this list, the number of strategic state-owned enterprises was reduced to 309.43 This list is to be updated and might be reduced further in the future. It comprises strategic state-owned enterprises in the energetic sector (such as Naftogaz and Energoatom), transport infrastructures such as the Kyiv International Airport and key commercial ports, aerospace and rocket companies in the defence sector, etc. The Prime Minister announced that these strategic state-owned enterprises would not be part of the privatisation program.

Concessions

Ukraine’s legislation on concessions entails multiple normative acts, which makes the Public private partnerships (PPPs) framework relatively complex. The Law “On Public-Private Partnership” stipulates that foreign investors can participate in public-private partnerships, defined as co-operation between the State of Ukraine and territorial communities and, on the other side, private businesses or individual entrepreneurs.44 Such co-operation can take the form of a concession, production sharing agreement or joint activities. The law defines general principles of PPP projects, in particular a fair allocation of risks and access to land plots. Public private partnership agreements are concluded for a period of five to 50 years. Under the law, PPPs are possible in the following economic sectors:

  • Exploration, prospecting of mineral deposits and production thereof;

  • Heat production, transport and supply, and natural gas distribution and supply;

  • Construction and/or operation of highways, roads, railroads, runways at airports, bridges, overhead roads, tunnels and subways, river and sea ports and infrastructures thereof;

  • Machine building;

  • Water collection, purification and distribution;

  • Health care;

  • Tourism, leisure, recreation, culture and sports;

  • Support of operation of irrigation and land improvement systems;

  • Waste treatment and management;

  • Electric power production, distribution and supply;

  • Property management.

The 1999 law “on Concessions” refers to a narrower definition of PPP as “the transfer for a defined period of time by a public entity (state or territorial) of the right to create or/and operate an object to private investors on the basis of a concession agreement”.45 The Law defines key legal principles applicable to concessions, as well as conditions of and procedure for conducting concession tenders. It stipulates that individuals and business entities, both resident and non-resident, can bid for concessions and establishes the possibility to lease state and municipal property for up to fifty years for the purpose of concession arrangements. In addition to the economic sectors mentioned above,46 state or municipal assets are eligible for concession agreement in the following sectors:

  • Urban public transport and municipal parking services;

  • Telecommunications;

  • Postal services;

  • Public catering;

  • Construction of residential real estate;

  • Funeral services.

The regulatory framework and recent developments of PPPs in Ukraine is detailed further in Chaper 3 (Infrastructures and Financial Sector Development).

Corporate organisation and key personnel

The Ukrainian legal framework contains few corporate organisation requirements. They are applied on a non-discriminatory basis to foreign and domestic investors. For instance, local incorporation is required to provide road (freight and passenger) transport services.

Rules on hiring and employing foreign citizens and stateless persons are broadly in line with international practices.47 While a company established in Ukraine is free to define the number of its staff (Ukrainian and/or foreign individuals) and the qualifications required from them, in the case of a foreign company’s representative office the number of foreign employees must be predetermined in the official registration application and then be included in the registration certificate. Any company wishing to employ a foreign national must obtain a work permit for him/her. To obtain a work permit, an employer should present supporting evidence that there are no local employees able to perform the work proposed to foreigners. The commission considering the applications consists of representatives of the Ministry of Interior, the State Security Service, the State Tax Service and the Ministry of Labour. Work permits are issued by the relevant regional employment centres within 30 calendar days from the date of the submission of the application. State fees for issuing a work permit amount to the equivalent of four minimum monthly wages.

While the formalities necessary to obtain visa, temporary stay and work permits are not mentioned by foreign business as a major barrier to investment in Ukraine, in practice some difficulties persist. Procedures are complex (some 10-12 documents) and administrative officers sometime give different interpretations to registration requirements. This applies in particular to work at the representative offices of banks. Insofar as such offices should be registered with the National Bank of Ukraine (NBU) instead of the MEDT and no legislation exists concerning the procedure of accrediting a foreign national with the NBU, there is uncertainty regarding what concerned staff should do. More generally, registration with the immigration authorities (VGIRFO) and obtaining a temporary residence permit is considered a lengthy and sometime difficult process, despite the 2009 introduction of new electronic entry/exit control database. On 11 February 2015, Resolution No. 42 “On certain business deregulation matters” came into effect. The Resolution has simplified the procedure to issue and renew work permits by 1) extending the list of appropriate and justifiable grounds for recruiting foreign labour;48 2) waiving the 15-day labour market search requirement for additional categories of applicants; 3) changing time limits for renewal filings and reducing the maximum amount of time allowed to issue, or to renew, a Work Permit;49 and 4) establishing that a Work Permit can be prolonged an unlimited number of times.

Following the suspension of the provisions of the 1997 Agreement between the Government of Ukraine and the Government of the Russian Federation on visa free travel for citizens of Ukraine and the Russian Federation, a special regime applies since 1 March 2015. Citizens of the Russian Federation are now able to enter, exit, transit, stay and travel within Ukraine only on the basis of passports valid for international travel. The suspension is introduced for an unlimited period, until the government of Ukraine decides that there is no need to ensure state security, preserve public order or protect the health of citizens anymore.

Rationale for the existing restrictions and plans for phasing them out

The Ukrainian authorities consider some restrictions as necessary to balance the needs and interests of consumers, users and suppliers of public services, guarantee standards of quality, quantity, opportunity, stability and reliability in their provision, enhance cost-oriented tariffs and pricing, and promote local investment projects. Other restrictions seek to endorse the state’s ownership, use and supervision of the national patrimony, including assets of public domain, as well as its right to demand liability from economic activities that have a bearing on matters of public interest.

Lastly, some restrictions are designed to keep certain strategic sectors of economic, social or cultural interest within the scope of the state’s control. While provisions that regulate investment to safeguard national security are a legitimate component of investment policies, they should be designed so as to achieve their goals with the smallest possible impact on investment flows. Ukraine should consider revising its relevant legislation in line with the generally accepted principles of non-discrimination, transparency of policies and predictability of outcomes, proportionality of measures and accountability of implementing authorities. This also means that investment restrictions should be narrowly focused on concerns related to national security. These principles are drawn from the OECD Guidelines for Recipient Country Investment Policies relating to National Security adopted by the OECD Council in May 2009 (see OECD, 2009).

Ukraine’s position under the instrument of the OECD Declaration on Investment Incentives and Disincentives

The instrument on Incentives and Disincentives to Investment is an integral part of the Declaration on International Investment and Multinational Enterprises. It encourages adherents to ensure that incentives as well as disincentives are as transparent as possible, so that their scale and purpose can be easily determined. Secondly, the instrument provides for consultations and review procedures to make co-operation between adherents more effective.

A number of measures aiming at expanding the tax base through elimination of the most ineffective tax exemptions and privileges have been undertaken by Ukraine during the past two years. In February 2015, pursuant to the conditionality attached to the IMF loans, the government further committed to eliminate tax exemptions on the basis of further evaluations of costs and benefits of existing investment incentives. Reforms undertaken in Ukraine have resulted in a simplified and more transparent tax system. Ukraine, in undertaking to pursue its efforts to make its investment regime more transparent and to conduct further evaluation of costs and benefits of existing investment incentives, should be able to fulfil its commitments under this instrument (see sections on Investment incentives and the tax system in Chapter 2).

Ukraine’s position under the instrument of the OECD Declaration on Conflicting Requirements

The instrument on Conflicting Requirements, which is also an integral part of the OECD Declaration on International Investment and Multinational Enterprises, provides that adherents should co-operate with a view to avoiding or minimising the imposition of conflicting requirements on multinational enterprises. By adopting an approach based on co-operation, adherents agree to hold consultations on potential problems and to give due consideration to the interests of other countries in the regulation of their economic affairs.

In undertaking to pursue efforts to make its investment regime more transparent and uniform, the government is committed to address any conflicting requirements stemming from Ukrainian laws and regulations that may be brought to its attention by multinational enterprises.

Ukraine’s FDI Restrictiveness Index

The FDI Restrictiveness Index (FDI Index), developed by the OECD, seeks to gauge the restrictiveness of a country’s FDI rules in 22 sectors taking into account four types of measures: equity restrictions, screening and approval requirements, restrictions on key personnel, and other operational restrictions such as for instance restrictions on branching (see Box 4.2). The FDI Index is currently available for 58 countries, including all OECD and G20 countries, and for eight years: 1997, 2003, 2006-14. It constitutes one component of indicators used for the OECD’s Going for Growth policy recommendations. It is also used on a stand-alone basis to assess the restrictiveness of FDI policies in reviews of candidates for OECD accession and in OECD Investment Policy Reviews, including reviews of new adherent countries to the OECD Declaration on International Investment and Multinational Enterprises.

Box 4.2. Calculating the OECD FDI Regulatory Restrictiveness Index

The OECD FDI Restrictiveness Index covers 22 sectors, including agriculture, mining, electricity, manufacturing and main services (transports, construction, distribution, communications, real estate, financial and professional services).

For each sector, the scoring is based on the following elements:

  1. The level of foreign equity ownership permitted;

  2. The screening and approval procedures applied to inward foreign direct investment;

  3. Restrictions on key foreign personnel; and

  4. Other restrictions such as on land ownership, corporate organisation (e.g. branching).

    Restrictions are evaluated on a 0 to 1 scale: “0” corresponds to the absence of restrictions and “1” indicates a sector totally closed to FDI. The overall restrictiveness index is the weighted average of individual sectoral indexes.

    The measures taken into account by the index are limited to statutory regulatory restrictions on FDI (as reflected in the countries’ lists of exceptions to the National Treatment instrument and measures notified for transparency) without assessing their actual enforcement. The discriminatory nature of measures, i.e. when they apply to foreign investors only, is the central criterion for scoring a measure. State ownership and state monopolies to the extent they are not discriminatory towards foreigners are not scored. Incorporation requirements, as they restrict FDI in the form of branching, are also taken into account although they are not covered and, thereby, listed as an exception in the National Treatment instrument.

    For the latest scores: www.oecd.org/investment/fdiindex.htm and for a presentation of the methodology, see OECD Working Paper on International Investment No. 2010/3 OECD’s FDI Restrictiveness Index: 2010 Update available at www.oecd.org/daf/inv/investment-policy/WP-2010_3.pdf.

The FDI Index does not provide a full measure of a country’s investment climate as it does not score the actual implementation of formal restrictions and does not take into account other aspects of the investment regulatory framework, such as the nature of corporate governance, the extent of state ownership, and institutional and informal restrictions which may also impinge on the FDI climate. Nonetheless, FDI rules are a critical determinant of a country’s attractiveness to foreign investors and the FDI index, used in combination with other indicators measuring various aspects of the FDI climate, contributes to assess countries’ international investment policies and explain variations among countries in attracting FDI.

With the total score of 0.117, Ukraine ranks above the OECD average (0.068) and below the average of non-OECD countries (0.151) (see Figure 4.1 below). Its score reflects the remaining restrictions on the level of foreign equity regarding information agencies and the restrictions on foreign ownership of non‐agricultural land plots outside of settlements. It also reflects a number of operational restrictions, notably in agriculture (agricultural land ownership not allowed for subsidiaries of foreign companies), forestry (subsidiaries of foreign companies cannot own forests) and regarding cabotage (maritime transport). Finally, it takes into account an incorporation requirement concerning road (freight and passenger) transport. In line with the FDI Restrictiveness Index methodology, Ukraine’s current prohibition of foreign investment in unspecified “strategic sectors” (see Annex A) is taken into account and considered as an equivalent of general screening and approval procedures.

Figure 4.1. 2015 FDI Indices by country
The Index reflects regulatory restrictions in Ukraine as of October 2015 (for all other countries, as of December 2014)
picture

Source: OECD, Regulatory Restrictiveness Index (database), www.oecd.org/investment/fdiindex.htm.

 http://dx.doi.org/10.1787/888933355834

Figure 4.2. Ukraine’s regulatory restrictiveness index by sector (2015)
The Index reflects regulatory restrictions in Ukraine as of October 2015 (for all other countries, as of December 2014)
picture

Source: OECD, Regulatory Restrictiveness Index (database), www.oecd.org/investment/fdiindex.htm.

 http://dx.doi.org/10.1787/888933355846

Figure 4.2 above provides the details of Ukraine’s FDI Restrictiveness Index by sector, as well as comparison with the average restrictiveness level by sector in OECD countries and in Russia. This allows a meaningful comparison of the restrictiveness of Ukraine’s FDI regulations across sectors. As compared to OECD countries, the most severe statutory restrictions to FDI in Ukraine pertain to real estate investments (restrictions on the acquisition of non-agricultural land plots outside of settlements by subsidiaries of foreign companies), as well as Agriculture and forestry (agricultural land ownership and forest ownership not allowed for subsidiaries of foreign companies). Except in these two sectors, the FDI Regime in Ukraine is generally less restrictive than in Russia. Restrictions on foreign investments in unspecified “strategic sectors” affect all sectors (considered as an equivalent of general screening and approval procedures).

Since the first Investment Policy Review of Ukraine in 2011, the country dismantled three statutory restrictions to foreign investments. This positively affected the FDI Regulatory Restrictiveness Index, which decreased from 0.144 in 2011 to 0.117 in 2015 (reflecting a lower degree of restrictiveness to foreign investments). Ukraine dismantled the following statutory restrictions:

  • Ukraine lifted a sectorial equity restriction in publishing (wholesale of books, newspapers, magazines) in May 2013. Previously, foreign ownership was limited to 30 % of the charter capital.

  • Ukraine lifted a restriction on branching (incorporation requirement) in insurance services in May 2013, allowing foreign insurances to open branches in the country.

  • Up to July 2012, foreign investors required a special permit from the Cabinet of Minister to take part in privatisations and, in some cases (G group of strategic enterprises), parliamentary approval. This requirement opened room for non-transparent privatisation deals (OECD, 2011, p. 37). In 2012, amendments to the 1992 Law “On Privatisation” ensured equal access of foreign and domestic investors to privatisations tenders. Foreign investors no longer require special permits or approvals to take part in privatisation tenders.

References

OECD (2015), Ukraine’s policy environment for investment in agriculture, OECD Publishing, Forthcoming.

OECD (2011), OECD Investment Policy Reviews: Ukraine 2011, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264113503-en.

OECD (2009), OECD Guidelines for Recipient Country Investment Policies relating to National Security adopted by the OECD Council on 25 May 2009, www.oecd.org/dataoecd/11/35/43384486.pdf.

UkrSibbank Research (2015), Ukrainian capital market weekly (7 September 2015), https://ukrsibbank.com/en/capital-markets/analiticheskie-obzory/september-7-2015/UkrSibbank_070915.pdf.

Notes

← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

← 2. Law No. 2544-XII “On Privatisation of State Property” of 4 March 1992, Article 8.

← 3. Land Code of Ukraine, Article 129.

← 4. Law of Ukraine on Television and Radio Broadcasting No. 3759-12 of 21 December 1993 as amended in October 2015 (Article 12).

← 5. Law No. 74/95-BP “On Information Agencies” (28 February 1995), as amended. Article 9.

← 6. Notably Wizz Air (Hungary), UTair (Russia) and Atlasjet (Turkey).

← 7. See Order No. 686 of the Civil Aviation Authority (Gosaviaslujba), adopted on 24th November 2014 (Registration No. 1440/26217).

← 8. Merchant Marine Code of Ukraine, Article 131 (4 July 2013).

← 9. Strategy of National Security of Ukraine, as approved by Presidential Decree No. 287/2015 (26 May 2015).

← 10. An Aggressor-State is a state that undertook an armed aggression against Ukraine and occupied a part of Ukrainian territory. In January 2015, the Ukrainian Parliament recognized Russia as an Aggressor-state (Parliamentary Resolution No. 129-XIX adopted on 27 January 2015).

← 11. One example of restriction based on the notion of Aggressor-state – although outside the scope of this review – is the Law “On Cinematography”, which forbids the diffusion on any Ukrainian television channel of movies “producedby persons or legal entities from an Aggressor-State” after the 1st of January 2014. In practice, this restriction applies to all Russian movies produced after this date. The law contains restrictions on the diffusion of earlier films from an Aggressor-state based on specific conditions (for instance, if they justify the occupation of Ukrainian territory).

← 12. Law No. 964-IV “On Fundamentals of National Security of Ukraine” (19 June 2003), see Philipp Fluri, Marcin Koziel, and Andrii Yermolaiev (eds.) (2013), The Security Sector Legislation of Ukraine, Second Edition, Center for Army, Conversion and Disarmament Studies, Kyiv, translated by the Geneva Centre for the Democratic Control of Armed Forces.

← 13. There is no such list of “strategic sectors” in the Ukrainian legal framework.

← 14. For example, the Cabinet of Ministers maintains a list of state-owned enterprises “of strategic importance for the economy and national security” (see Sectors subject to public/private/mixed monopolies or concessions below).

← 15. See Strategy of National Security of Ukraine, as established by Order 287/2015 of the President of Ukraine (26 May 2015).

← 16. An Aggressor-State is a state that undertook an armed aggression against Ukraine and occupied a part of Ukrainian territory. In January 2015, the Ukrainian Parliament recognized the Russian Federation as an Aggressor-state (Parliamentary Resolution No. 129-XIX adopted on 27 January 2015).

← 17. This is a consequenceof Parliament Resolution No. 35/1992 “On the property right of specific items”, which forbids foreign legal entities to own weapons, ammunitions and missile or space facilities.

← 18. Article 12 of the Law of Ukraine on Television and Radio Broadcasting No. 3759-XII of 21 December 1993 (as amended).

← 19. Draft Law No. 2319a introduced by the Cabinet of Ministers (registration date 09.07.2015).

← 20. Article 12 of the Law of Ukraine on Television and Radio Broadcasting No. 3759-XII of 21 December 1993 (as amended).

← 21. Law No. 222-VIII “On Licensing of Certain Types of Business Activity” (2 March 2015), Articles 6 and 8.

← 22. The absence of control of “residents from countries undertaking armed aggression against Ukraine and/or creating conditions for armed conflict or use of military force against Ukraine” is a compulsory requirement for license applicants to obtain a license in one of the 30 economic activities subject to licensing. See Law No. 222-VIII, op. cit., Article 6 and 9.

← 23. Separate pieces of legislation are applicable to the licensing of banking activities, television and radio broadcasting and the production and trade of alcoholic beverages and tobacco products. The Law No. 3759-XII “on Television and Radio Broadcasting” also contains ownership restrictions regarding “residents from countries undertaking armed aggression against Ukraine, etc.” (see above).

← 24. The Ukrainian parliamentrecognized Russia as an Aggressor-state in January 2015: Parliamentary Resolution No. 129-XIX “On the recognition of the Russian Federation as an Aggressor state” (27 January 2015).

← 25. Footnote by Turkey: The information in this document with reference to “Cyprus” relates to the Southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

Footnote by all European Union member states of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

← 26. Law No. 3425-XII “On Notariat” (2 September 1993), Article 3.

← 27. Law No. 2628-III “On Pre-School Education” (11 July 2001), Article 31; Law No. 651-XIV “On General Secondary Education” (13 May 1999), Article 24.

← 28. Law No. 1841-III “On Off the School Education” (22 June 2000), Article 21.

← 29. Law No. 1556-VII “On Higher Education” (1 July 2014), Article 42.

← 30. The first group of the Classifier of Foreign Currencies and Banking Metals covers hard currencies widely used for international operations (United States dollar, British pound, euro, Japanese yen etc.).

← 31. Law No. 1533-VI “On Amending Certain Laws of Ukraine to Prevent Negative Consequences of the Financial Crisis” (23 June 2009) and “Amendments to Legal Acts of Ukraine to Stimulate Foreign Investment and Crediting” (27 April 2010).

← 32. NBU Resolution No. 160 “On Regulating the Situation in the Monetary and Foreign Currency Markets of Ukraine” (initially in effect until 3 June 2015, later extended on 4 December 2015 until 4 March 2016 through NBU Resolution No. 863).

← 33. This may affect foreign MNEs established in Ukraine if the parent company abroad extended a loan to itsUkrainian subsidiary.

← 34. See for instance NBU Presentation “Ukraine: Macroeconomic and Policy Outlook” by the NBU Deputy Governor at the American Chamber of Commerce (16 September 2015) and NBU official policy declarations.

← 35. Law No. 1682-III “On Natural Monopolies” (20 April 2000) as amended, Article 1.

← 36. Most of the natural monopolies at the regional level pertain to centralised heating supply, water supply and gas and electricity distribution. Accordingly, the National commission for State Regulation in the Energy and Utilities Sectors has offices in all of Ukraine’s regions.

← 37. The record is accessible on the website of the Antimonopoly Committee, www.amc.gov.ua/amku/control/main/uk/publish/article/94020.

← 38. Law No. 481/95 “On the State Regulation of Production and Circulation of Ethyl Alcohol, Cognac and Fruit Alcohols, Alcoholic Beverages and Tobacco Products” (19 December 1995), Article 2.

← 39. Resolution No. 271 “On Conducting a Transparent and Competitive Privatization in 2015” adopted on 12 May 2015.

← 40. Draft law No. 2519 “On Amending Certain Laws Regarding Assets of the Agro-industrial Complex” (25 August 2015).

← 41. Law No. 2759-III “On Postal service” (4December 2001), Article 15.

← 42. Universal postal service obligations are defined in Resolution No. 295 (11 April 2012) of the Cabinet of Ministers.

← 43. Resolution No. 83/2015 of the Cabinet of Ministers (4 March 2015). The previous list of “state assets of strategic importance for the economy and national security” comprised around 1500 state-owned enterprises.

← 44. Law No. 2404-VI “On Public-Private Partnership” (1 July 2010).

← 45. Law No. 997-XIV “On Concessions” (16 July 1999).

← 46. The list of sectors eligible for PPPs in the laws “On Public-Private Partnership” (Article 4) and “On Concessions” (Article 3) overlap for most sectors, even though the last is more precise and refers to sector-specific pieces of legislation.

← 47. See Resolution No. 322 of 8 April 2009 “On Approval of the Procedure of the Issuance, Extension and Annulment of Work Permits for Foreign Citizens and Stateless Persons”, which came into effect on 14 May 2009.

← 48. According to the Resolution, appropriate and justifiable to hire a foreign national or stateless person who holds a degree from any of the top 100 universities included in any one of the following world rankings: 1) Times Higher Education; 2) Shanghai Jiao Tong University; 3) QS World University Rankings by Faculty; or 4) Webometrics Ranking of World Universities. Also, it will be considered appropriate and justified to employ a company shareholder for amanagerial position, a manager or employee with occupation code 2131.2, 2132.2 or 3121 (such codes include database administrator, software development engineer, or technician programmer) if a company operates in the software industry, or to recruit a foreign national for a job where his/her major role will be to create copyrighted work.

← 49. The Resolution requires that the application for renewal of the Work Permit be filed at least 20 days (compared to 30 days) in advance of the Work Permit’s expiration date. Also, now the employment center is required to take a decision on whether or not to issue/renew the Work Permit within seven business days (compared to 15 business days prior requirement), and to convey its decision, including by email, to the employer within two business days. The employers, in turn, shall submit a copy of the employment agreement or contract with the respective foreign national to the employment centre within seven business days (compared to three business days) from the execution date of such agreement or contract.