Overseas Business Risk – Ukraine
Our advice to UK business concerning commercial operations in Ukraine has not changed. However, companies should be mindful of the additional potential risk created by the current crisis and pay close attention to the FCO travel advice when planning travel to the region.
Read the latest information for UK companies.
Political and Economic
After the 2010 ruling of the Constitutional Court of Ukraine, which cancelled the 2004 constitutional amendments and re-instated the 1996 Constitution, Ukraine is a presidential-parliamentary republic with a multi-party system. The President is Head of State elected by the citizens of Ukraine for a five-year term. The President controls the executive including law enforcement agencies and appoints the Cabinet of Ministers (Ukrainian Government).
Ukraine’s unicameral Parliament (the Verkhovna Rada) consists of 450 members elected for a five year term. The Rada initiates legislation, ratifies international agreements and approves the budget. In line with the valid law on parliamentary elections (adopted in November 2011), Ukraine returned to a mixed electoral system which had existed prior to 2006 and according to which half of the MPs are elected on party lists and the other half – on an individual basis from single-seat constituencies. The 2011 election law also envisages a 5% electoral threshold for parties and a ban on the participation of blocs of political parties.
Ukraine established a Constitutional Assembly in 2012; it is likely to present a general concept of constitutional changes in the autumn of 2013.
In February 2010, Viktor Yanukovych was elected the fourth President since Ukraine’s independence in 1991.
The most recent parliamentary elections were held on 28 October 2012. As a result of the elections, the ruling Party of Regions won 187 parliamentary seats, (former PM Tymoshenko’s) Fatherland Party 102 seats, (boxing champion) Vitaliy Klitchko’s UDAR Party 40 seats, the right-wing nationalist Freedom Party 38 seats and the Communist Party 32 seats. The Party of Regions and the Communists together with some non-affiliated MPs formed a majority while Fatherland, UDAR and Freedom constitute the opposition.
The next parliamentary elections are scheduled for October 2017. The next presidential elections are scheduled for 25 May 2014.
Closer EU integration and constructive co-operation with Russia are Ukraine’s key foreign policy priorities. Ukraine’s relations with the EU were established in December 1991 and gained fresh impetus after the 2004 Orange Revolution. Ukraine remains a priority partner within the European Neighbourhood Policy (ENP) and was granted access to the opportunities offered by the Eastern Partnership (EaP) launched in Prague in May 2009. Through EaP, the EU offered Ukraine new association opportunities including a Deep and Comprehensive Free Trade Agreement (DCFTA).
The Eastern Partnership Summit in Vilnius in November 2013 was a turning point for Ukraine, as the country was expected to sign the EU Association Agreement. The Ukrainian government unexpectedly suspended preparations to sign the Agreement in late November 2013. This has led to mass street protests throughout the country in early December (the “Euro Maidan” movement), calling for the change of government and impeachment of the President. The street protests continued into early 2014 resulting in violent clashes between the police and the protesters in mid-January and mid-February. As a result, 102 people were killed and over 600 were injured (according to varying media reports). President Yanukovych together with a number of Government Ministers and close associates, fled the country on 22 February. Mr Turchynov, one of the opposition leaders, was elected the new Speaker of the Parliament and temporarily assumed duties of an interim president and the Presidential elections were brought forward to 25 May 2014. An interim government was appointed with Arseniy Yatseniuk as Prime Minister.
The EU and the US Governments recognised the new Ukrainian government as legitimate and have offered financial support and technical assistance to Ukraine, including GBP 10 bln offered by the UK. Ukraine is now holding consultations with the IMF on an urgent USD 15 bln loan (to be confirmed by the end of March, according to open sources).
The new government has resumed negotiations with the EU on the Association agreement (expected to be signed on 21 March). DCFTA negotiations have been resumed as well.
On 16 March 2014 Crimean self-proclaimed government held a referendum on Crimean independence and on accession to Russian Federation. According to the report of the Crimean government, over 90% of the Crimean population voted for joining Russia. The referendum hasn’t been recognised as legitimate by the EU countries and the US.
On 17 March Crimean self-proclaimed authorities have signed the Agreement with Russian Federation to join Russia. Please check with UKTI Ukraine team for most up-to-date information and advice on the business risks in Crimea.
Ukraine has significant economic potential as a result of its well-educated labour force, large domestic market, access to a variety of resources including some of Europe’s best agricultural land, significant coal and some oil and gas reserves, and a strategic location connecting Europe, Russia and Asian markets.
The EU accounts for about 30% of Ukraine’s trade, while CIS countries account for about 40%. Ukraine has a major ferrous metal industry, producing cast iron, steel and steel pipe, and its chemical industry produces coke, mineral fertilisers, and sulphuric acid. World demand for steel and chemicals, which make up about 40% of Ukraine’s exports, dropped sharply in the second half of 2008. Manufactured goods include airplanes, turbines, metallurgical equipment, diesel locomotives and tractors. Ukraine is also a major producer of grain, sunflower seeds, and sugar beet. It has a broad industrial base, including much of the former USSR’s space and rocket industry.
According to the CIA, Ukraine’s GDP per capita in 2012 was $7,600 (in PPP terms), ranked 136 in the world. Nominal GDP (in U.S. dollars, calculated at market exchange rate) was $335.4 billion, ranked 39th in the world. The World Bank ranks Ukraine as a lower middle income country.
In response to the sharp economic downturn in the country in late 2008, the International Monetary Fund (IMF) approved a $16.4 billion Stand-By Arrangement (SBA) in November 2008, conditioned on reforms in the banking sector, as well as adjustments in fiscal and monetary policy. The World Bank has committed more than $5 billion to Ukraine since the country joined the Bank in 1992.
Ukraine is a member of the European Bank for Reconstruction and Development (EBRD) and joined the World Trade Organisation (WTO) in May 2008. As of 31 March 2013 the EBRD had committed over $11 billion through 337 projects in Ukraine.
In 2008 Ukraine and the European Union launched negotiations on a deep and comprehensive free trade agreement (DCFTA). During the 12th EU-Ukraine Summit, held in Paris in September 2008, the EU presented Ukraine with an enhanced association agreement, including chapters on both political and trade relations. Some chapters, including trade, remain under negotiation. Subsequent summits have moved the process forward – albeit slowly.
According to the latest European Bank for Reconstruction and Development (EBRD) , the pace of economic recovery has slowed down. After expanding quickly through much of 2011, Ukraine’s output growth decelerated to 2.5 per cent in the first half of 2012 due to a substantial slow-down in the steel and chemical sectors and machine building, and stagnation of agriculture and construction. More recent data suggest that agriculture and construction have also declined. For much of the year, the contraction of external demand was offset to some extent by buoyant domestic consumption, stimulated by fast growth of public sector wages and social expenditures. The National Bank of Ukraine (NBU) and the government adopted various measures to contain depreciation pressures, which included tightening further the banks’ open currency positions, introducing additional administrative requirements on forex purchases by households, issuing domestic dollar, euro and devaluation-protected hryvnia bonds and removing export tariffs on some grains to stimulate exports.
A return to fast growth experienced before the crisis is unlikely without deep structural reforms. The financial sector is recovering from the crisis and is unlikely to stimulate demand for some time as most banks prefer reducing their balance sheets to further capital injections. The public sector’s future ability to provide a countercyclical boost will be limited by the high gross financing needs. Growth is expected to remain subdued, at around three per cent in 2012-13 as spare capacity left after the crisis is exhausted, the external environment remains difficult and bank lending is limited. Over the longer term, acceleration of growth will primarily depend on external demand, but also the authorities’ ability to credibly stabilise the financial system, pursue countercyclical macroeconomic policies based on a floating exchange rate, and attract significant domestic and foreign investment.
What companies should consider when doing business
Business Man reading newspaper
Ukraine ranks 137 out of 185 countries in the World Bank’s report, up 15 places from 2012. The World Economic Forum ranked Ukraine 73 out of 144 – up 9 places from last year. This rating reflects substantial barriers to doing business including: bureaucracy, lack of clarity and transparency in tax administration, tax burden, lengthy procedure of business registration, slowness and lack of transparency in the judicial system.
The World Bank highlighted three positive changes completed in Ukraine that made doing business easier:
Starting a Business (ranked No 50 in 2013, up from No 116 in 2012) – Ukraine eliminated the minimum capital requirement for company incorporation as well as the requirement to have incorporation documents notarized).
Registering Property – Ukraine made property transfers faster by introducing an effective time limit for processing applications at the land cadastre in Kyiv.
Paying Taxes – Ukraine implemented electronic filing and payment for medium-sized and large enterprises.
However, experts comment that a Ukrainian business has to pay 28 separate taxes. The Doing Business 2013 finds the profits of a Ukrainian business are taxed at a rate of 55.4%, while the European and Central Asian average is about 40.5 %. Consequently, Ukraine’s ranking in the ease of paying taxes remains low, although showing some improvement ( 165, up from No183 in 2012).
The new Customs Code introduced in June 2012 has improved customs clearance, cutting it in theory from one day to four hours. These actions should help speed up the flow of goods at the border, improve supply chain integration and facilitate increased trade.
More deregulation and facilitation of trade, tax and customs policies have been declared by the new Ukrainian government.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
Ukraine is rated 144 (out of 174) on Transparency International’s 2012 Corruption Perceptions index (down from 99th place in 2006). Transparency International also estimates that Ukrainians pay between 10-20% of income on bribes, and that 80% of Ukrainians pay for services they are entitled to receive free of charge (higher than in any other country surveyed).
The new Ukrainian government has declared a commitment to eliminate widespread corruption and is now developing a program of reforms. A new Anti-Corruption committee was formed to help this.
Read the information provided on our Bribery and corruption page.
There is a low threat from terrorism. But British companies should be aware of the risk of indiscriminate terrorist attacks, which could be in public areas, including those frequented by expatriates and foreign travellers.
Read the latest Travel Advice for Ukraine from the Foreign & Commonwealth Office.
Read the information provided on our Terrorism threat page
Protective Security Advice
The Centre for the Protection of National Infrastructure also provides protective security advice to businesses
Crime levels remain low in most cities in Ukraine. However, there are instances of petty crime and confidence tricks targeted at foreigners. Despite the economic downturn and recent civic unrest, however, there remains little evidence of a corresponding upsurge in crime (in Kyiv city centre). Visitors should ensure that they take good care of their personal belongings when out in public, should not carry valuables (including passports) in jackets or coats, and should remain generally vigilant to their surroundings. Visitors are advised to avoid demonstrations and large public gatherings as these can turn dangerous.
Visitors should take care on the roads, whether in a vehicle or as a pedestrian. Driving standards are not high, and awareness of other road users and pedestrians can be somewhat lacking.
Read the information provided on our Protective security advice page
Read the latest Travel Advice for Ukraine from the Foreign & Commonwealth Office.
Read the information provided on our Terrorism threat page
Business people at Café
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, they you should consider registering your IP rights in your export markets.
Ukraine has become a member of WTO in May 2008. In relation to that Ukrainian intellectual property (IP) legislation was marked by harmonisation of Ukrainian Law with international treaties. Most of the introduced amendments comply with WTO’s requirements to protection of IP rights within the framework of the Agreement on Trade-Related Aspects of Intellectual Property Rights (the “TRIPS Agreement”).
Ukraine is a party to the following international treaties: Berne Convention for the Protection of Literary and Artistic Works, 1952 Universal Convention on Copyright which constitute an integral part of Ukrainian legislation, Paris Convention for Protection of Industrial Property; Madrid Agreement concerning International Registration of Marks; International Nice Agreement Concerning the International Classification of Goods and Services; 1994 Trade Mark Law Treaty; Strasbourg Agreement Concerning the International Patent Classification, Locarno Agreement Establishing an International Classification for Industrial Designs.
Ukraine is also a party to the Patent Co-operation Treaty and the Hague Agreement Concerning the International Registration of Industrial Designs. Unlike most European countries, Ukraine is not a party to the European Patent Convention (Munich Convention).
Recently there had been some alarming developments. The US Trade Representative’s annual 2013 Special 301 Special Report named Ukraine a "Priority Foreign Country" for the first time in 11 years due to its severely deteriorating climate for intellectual property rights (IPR) protection and market access. This is the USTR’s rarely used, bottom-tier judgement of how countries around the world are protecting US patents, copyrights and other forms of IPR. US claims that Kiev had failed to fight internet piracy and the use of illegal software, although an action plan was agreed with Kyiv in 2010. According to the acting US Trade Representative Demetrios Marantis, Ukraine has become perceived as a safe haven for online piracy enterprises serving other markets. Ukraine’s designation as a Priority Foreign Country enables Washington to pursue sanctions under Section 301 of the 1974 Trade Act – either directly or through the World Trade Organisation (WTO).
Although organised crime presents a ‘limited direct threat’ to UK businesses in Ukraine, it is worth keeping in mind that Ukraine is a transit country for illegal migration, human trafficking and drug trafficking (cocaine and heroin etc). Ukraine provides a lucrative domestic market for cannabis (mostly home-produced). The Domestic heroin/cocaine market is limited to big cities due to the high price of these drugs. Ukraine is also a country of origin for cybercrime.
In general, widespread corruption makes Ukraine an attractive country for organised criminals.
For general information on safety and security for visitors please visit FCO travel Advice webpage.
Read the information provided on our Organised crime page.
More information is available on overseas business risk in a range of markets.
Trade & Investment Contact:
Deputy Head of Commercial Section
British Embassy Kyiv / UK Trade & Investment
Tel: +380 44 490 36 74
Topics: Getting Started