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08KYIV101, UKRAINE: 2008 INVESTMENT CLIMATE STATEMENT, PART

January 17, 2008

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Reference ID Created Released Classification Origin
08KYIV101 2008-01-17 07:20 2011-08-30 01:44 UNCLASSIFIED Embassy Kyiv

VZCZCXYZ0001
RR RUEHWEB

DE RUEHKV #0101/01 0170720
ZNR UUUUU ZZH
R 170720Z JAN 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 4734
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC

UNCLAS KYIV 000101 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA (JNHATCHER) AND EUR/UMB 
STATE PLEASE PASS TO USTR FOR PBURKEAD 
USDOC FOR 4201/DOC/ITA/MAC/BISNIS 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYCK 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD KTDB OPIC USTR UP
SUBJECT: UKRAINE: 2008 INVESTMENT CLIMATE STATEMENT, PART 
II 
 
REF: A) KYIV 99 
     B) 2007 STATE 158802 
 
1. Ref A contained part one of the 2008 Investment Climate 
Statement (ICS) for Ukraine.  Part two of the ICS continues 
below. 
 
Begin Text of Part II: 
 
A.7. Protection of Property Rights 
 
MORTGAGES 
 
During the last few years, Ukraine's policymakers have 
launched several initiatives to develop a mortgage market, 
which have resulted in a strong increase in the number of 
mortgages and laid the legislative and administrative 
groundwork for a functioning mortgage market.  Adoption of 
the Law "On Withholding Land Shares in Kind" in 2002 and 
the Law "On Mortgages" in 2003 was particularly important. 
The GOU created the State Mortgage Institution (SMI) in 
October 2004 with authorized capital of UAH 50 million ($10 
million) as a liquidity facility largely aimed at putting 
downward pressure on lending rates by allocating capital 
efficiently.  The SMI began issuing corporate securities 
during the first quarter of 2007.  The use of mortgages in 
Ukraine to secure ownership in property is growing ? 
apartments, houses, office buildings, other types of 
buildings, and summer house (dacha) plots have secured 
mortgages.  Development of the secondary mortgage market is 
underway -- enabled by passage of the Covered Bond Law in 
late 2005.  To test the law, USAID assisted a local bank in 
the spring of 2007 to issue a pilot mortgage covered bond 
to demonstrate how residential mortgages can be traded as 
securities.  The pilot issue identified a number of 
deficiencies in the law and resulted in a package of 
amendments now being considered by the government.  Their 
passage is likely to result in rapid development of the 
secondary market and securitization of nearly $10 billion 
in residential mortgages -- an increase of $9.5 billion 
since the beginning of 2005.  USAID helped create of a 
pledge registry, the first of its kind in the former Soviet 
Union, which applies to individuals' obligations with 
regard to movable property and tax liens.  Though 
rudimentary, the registry is nationwide, providing a more 
transparent lending market for personal property. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) 
 
The United States withdrew Ukraine's benefits under the 
Generalized System of Preferences (GSP) program in 2001 and 
imposed trade sanctions and elevated Ukraine to the Special 
301 Priority Watch List in 2002 as a result of Ukraine's 
failure to adequately protect intellectual property, 
particularly copyrighted music.  The United States lifted 
sanctions in August 2005, after the Ukrainian government 
made significant improvements to IPR protection over a 
number of years, culminating in the passing of amendments 
to the Law "On Laser-Readable Disks" in July 2005.  In 
January 2006, the United States reinstated GSP benefits for 
Ukraine and lowered Ukraine's designation under Special 301 
from Priority Foreign Country to Priority Watch List.  Also 
in January 2006, the GOU agreed to work with the U.S. 
Government and with U.S. and domestic industry to monitor 
the progress of future enforcement efforts through the IPR 
Enforcement Cooperation Group.  This bilateral group has 
conducted a series of successful dialogues, meeting roughly 
once every four months.  The GOU has also agreed to meet 
biannually with European Commission officials as part of an 
EU-Ukraine IP Dialogue.  Despite these positive 
developments, Ukraine remains a trans-shipment point, 
storage location, and market for pirated and counterfeit 
goods produced in Russia and elsewhere. 
 
Ukraine is an active member of the World Intellectual 
Property Organization and a signatory to a number of IPR- 
related international agreements and conventions.  As part 
of its ongoing efforts to negotiate accession to the WTO, 
Ukraine has adopted a series of laws to bring its IPR 
regime into compliance with the WTO Agreement on Trade- 
Related Aspects of Intellectual Property Rights (TRIPS). 
Parliament passed amendments to its Customs Code in 
November 2006 that provide customs officials the ability to 
use ex officio authority to seize suspected pirated or 
counterfeit goods.  In May 2007, Parliament passed a law 
 
amending the Civil and Criminal Codes of Ukraine in order 
to provide for the seizure and destruction of IPR- 
infringing goods and equipment, in line with Article 46 of 
TRIPS. 
 
Ukraine amended its Law "On Medicinal Drugs" in November 
2006 to provide a five-year period for the protection of 
pharmaceutical test data that is submitted to government 
authorities to obtain marketing approval.  In September 
2007, the Ministry of Health issued a regulatory act to 
ensure implementation of this law and to clarify some 
procedures.  Pharmaceutical industry representatives 
complain that implementation of the law remains a problem, 
however.  Parliament also passed an amendment to the Law 
"On Pesticides
and Agrochemicals" in November 2006 that 
provides a ten-year period of protection for agricultural 
chemicals.  In September, the Cabinet of Ministers issued a 
regulation to abolish discriminatory fees on the testing 
and registration of plant varieties. 
 
The State Department of Intellectual Property (SDIP) is 
responsible for the formulation and implementation of 
Ukraine's intellectual property policy.  In order to 
improve IPR enforcement, the Ministry of Internal Affairs 
and the State Customs Service have also set up units to 
deal exclusively with IPR violations.  These under-staffed 
units have difficulty dealing with the large number of IPR 
infringements.  Amendments to the Criminal Code of Ukraine 
passed in February 2006 lowered thresholds, so that 
violations with smaller amounts of damage to rights holders 
can also be prosecuted as IPR infringement.  As a result, 
prosecutions and convictions of IPR-related crimes have 
increased significantly in recent years.  However, in many 
cases, the rights holder must actively engage with the 
Ministry of Internal Affairs or the State Customs Service 
to obtain enforcement.  Judges too often dismiss cases for 
improper reasons, or hand down minimal sentences. 
Generally speaking, the number of judges trained in IPR law 
remains low. 
 
Trademarked and copyrighted goods must be registered for a 
fee ($400 for the first good for the first year) in 
Customs' rights holder database in order to be guaranteed 
protection.  Generally low confidence in the Ukrainian 
judicial system has meant few enterprises have brought 
private lawsuits to protect intellectual property rights, 
although there was a landmark ruling in September 2007 by 
Ukraine's High Commercial Court against an illegal music 
download website.  Legal experts and government officials 
have called for the formation of a special patent court in 
Ukraine to adjudicate patent cases, but to date there has 
been no concrete action towards this end. 
 
A.8. Transparency of the Regulatory System 
 
BUREAUCRATIC REGULATORY PROCEDURES 
 
The number of regulations, required certificates, and 
inspection regimes in Ukraine imposes a significant 
regulatory burden on private enterprise.  While the time 
and costs related to business registration have been 
reduced, the GOU still requires enterprises to obtain 
numerous permits to conduct business.  The Law "On Permits 
System in Economic Activity," which entered into force in 
January 2006, canceled more than half of the required 
permits and increased the number of locations for obtaining 
permits six fold.  The government also tried to expand 
"One-stop Registration Shops" that allow new businesses to 
be registered within two to three days, instead of a month, 
as in the past.  The World Bank "Doing Business" database 
rated Ukraine 109th in 2008 for ease in starting a 
business, down from 105th in 2007.  "Doing Business 2008" 
estimates that on average it takes 27 days and $152.10 
(7.8% of GNI per capita) to open a business in Ukraine; 
OECD averages are 14.9 days and 5.1% of GNI per capita. 
 
LICENSING 
 
Ukraine applies both activity and import licensing regimes. 
The Law "On Licensing Certain Types of Economic Activities" 
of June 2000 (and amended on January 17, 2002) provides a 
list of activities subject to licensing.  Licensing applies 
to nearly 60 economic activities and is meant for 
protection of human, animal or plant health, the 
environment, public morals, and national security, or for 
 
prudential regulation of the financial sector. 
Businesspeople continue to cite burdensome activity 
licensing requirements as major impediments to commerce in 
Ukraine.  Fees are described as high and compliance 
burdensome, particularly for telecommunications equipment. 
 
Import licenses are required for some goods.  The list of 
goods covered by the licensing regime and the license terms 
are decided annually by the Cabinet of Ministers.  In 2007 
the list included pesticides, alcohol products, optical 
media production inputs, some industrial chemical products 
and equipment containing them, official foreign postage 
stamps, excise marks, officially stamped/headed paper, 
checks and securities, some goods that contain sensitive 
encryption technologies, and ozone-depleting substances. 
For some products an importer is required to receive prior 
approval, which may or may not be automatic, from the 
relevant administrative agency before receiving the 
necessary import license from the Ministry of Economy.  For 
some goods, product certification is a prerequisite for an 
import license.  Importers can certify the compliance of a 
foreign facility to Ukraine's technical regulations applied 
to imports.  The U.S. distilled spirits industry reports 
that this option usually involves a burdensome visit and 
costly inspection by Ukrainian government officials.  If 
approved, however, the supplier receives a certificate of 
conformity valid for two to three years, which avoids the 
burden of certifying each shipment and subjecting goods to 
mandatory laboratory tests upon arrival in Ukraine. 
 
RULEMAKING/INSPECTIONS 
 
Proposed draft laws and regulations are available on 
Parliament's website for public review, but there is no 
formal procedure for submitting comments. 
 
Current Ukrainian legislation envisages a mandatory 
financial inspection of a business entity per year and 
requires a minimum of 10 days notice.  Non-financial 
inspections (i.e. taxes, fire safety, sanitation, etc.) can 
be burdensome and impediments to doing business in Ukraine. 
 
CERTIFICATION/HEALTH AND SAFETY POLICIES 
 
Technical standards and certification requirements are 
imposed on many imports.  The certification body is the 
State Committee of Ukraine for Technical Regulation and 
Consumer Policy ("DerzhSpozhyvStandard").  Although Ukraine 
belongs to several international standardization bodies, 
such as the International Organization for Standardization 
(ISO), for many years it generally had not recognized 
foreign product certificates, even if they are issued in 
line with international standards, unless recognition is 
mandated through an international treaty signed by Ukraine. 
Standardization procedures can be lengthy, burdensome, and 
expensive; standards can be vague, inflexible, and subject 
to frequent changes.  Product standards are compulsory for 
a larger percentage of goods and services than in most of 
the world.  According to a 2007 survey by the International 
Finance Corporation, over 60% of Ukrainian businesses have 
to comply with compulsory standards and/or technical 
specifications. 
 
DerzhSpozhyvStandard is responsible simultaneously for 
development and approval of standards, issuing 
certificates, conducting inspections of producers, and 
ensuring market surveillance and protection of consumer 
rights, which some experts consider a conflict of interest. 
DerzhSpozhyvStandard has a network of 114 accredited 
product certifying bodies, including 60 accredited 
certifying bodies for quality management systems, as well 
as about 780 testing laboratories throughout Ukraine, 170 
of whic
h are accredited by the National Accreditation 
Agency as complying with international standards. 
Depending on the type of product, testing and applicable 
certification scheme, the certification process can take 
from three days to one month.  Companies seeking testing 
should contact DerzhSpozhyvStandard. 
 
Importers can apply for three types of technical standard 
certificates: a certificate for a single batch of goods; a 
certificate for one year, which is valid for all imported 
goods during that year with one or two additional selective 
tests (this type of certification is the most common in 
Ukraine); and a certificate for five years, which requires 
 
inspection of production facilities. 
 
Some certification agencies do much of their regulatory 
work with little or no coordination with other Ukrainian 
bodies performing similar tests.  Many products require 
multiple certificates from different agencies, with local, 
regional, and municipal authorities often requesting 
additional documentation beyond that required by central 
bodies.  Experts allege that government officials 
responsible for issuing licenses often require businesses 
to provide documents that are not mandatory, deliberately 
conceal information in order to confuse a potential 
licensee, or delay issuing documents in order to induce 
licensees to offer a bribe. 
 
These issues are being addressed during Ukraine's WTO 
accession negotiations, and, as recently as September 2007, 
Ukraine has reduced the number of products subject to 
mandatory certification.  Upon WTO accession, Ukraine will 
be obliged to apply such mandatory requirements only in 
conformity with WTO provisions on technical regulations 
(i.e., only in defense of human, animal, and plant health 
and safety), and only based on sound science.  A May 2007 
amendment to the Law "On Standards, Technical Regulations 
and Conformity Assessment Procedures" helped to guarantee 
precedence of international over regional standards and 
introduced provisions related to conformity assessment 
recognition, although further amendments may be needed to 
ensure that Ukrainian authorities will accept the results 
of conformity assessment procedures performed in the United 
States.  Ukraine's National Accreditation Agency is taking 
steps to become a member of the International Laboratory 
Accreditation Cooperation (ILAC), anticipated in 2009. 
Once an ILAC member, Ukraine should significantly increase 
the acceptance of test results of laboratories accredited 
with, and notified by, ILAC member bodies. 
 
In addition, Ukraine has, in the past, applied a range of 
sanitary and phytosanitary (SPS) measures that restrict 
imports of a number of U.S. agricultural products, among 
them, pork, beef, and poultry.  Ukraine's certification and 
approval process is lengthy, duplicative, and expensive. 
Ukraine maintains a complex and non-transparent system for 
overseeing human and animal health measures that involves 
overlapping authority by the Veterinary Service, Sanitary 
Service, and DerzhSpozhyvStandard.  Over the past few 
years, however, Ukraine has passed amendments to several 
laws and regulations, most importantly to the Law "On 
Veterinary Medicine" and the Law "Quality and Safety of 
Food Products and Food Raw Materials," to bring its 
legislative and regulatory framework into compliance with 
requirements of the WTO SPS Agreement. 
 
Ukraine's biotechnology approval process has been 
inoperative for some time.  This has resulted in 
unpredictable sales conditions for corn products, soybeans, 
and meal. The United States is working with Ukraine to 
establish procedures regarding biotechnology that are based 
on modern, science-based risk assessment principles and 
guidelines, including those of the WTO SPS and Technical 
Barriers to Trade (TBT) Agreements, the Codex Alimentarius, 
and the International Plant Protection Convention (IPPC). 
In May 2007, Parliament passed a new law establishing a 
framework for the creation, testing, and use of products of 
biotechnology.  The government still needs to issue 
implementing regulations for the law to take practical 
effect, however. 
 
For many years, Ukraine has worked to bring its 
standardization system into conformity with the European 
Standards System.  The law "On Assurance of Conformity" is 
replacing mandatory certification for many types of 
products with assessment procedures in conformance with 
international standards and the "New Approach" directives 
of the European Union, including the principle of 
"presumption of conformity to standards."  On August 1, 
2002, the National Accreditation Body started operations to 
ensure the use of standards and procedures consistent with 
European Cooperation for Accreditation (ECA) policy. 
 
A.9. Efficient Capital Markets and Portfolio Investment 
 
BANKING 
 
The Ukrainian banking system consists of the National Bank 
 
of Ukraine (NBU) and commercial banks.  The NBU is 
responsible for monetary policy, licensing of commercial 
banks, and oversight of their activities. 
 
Ukraine's banking sector is modernizing and growing 
rapidly, and is playing a growing role in Ukraine's 
economy.  Bank capital is about 10% of GDP.  Total bank 
assets in Ukraine are about UAH 510 billion, with total 
loan assets of UAH 370 billion (as of October 2007).  Money 
lending and deposits grew at a fast 56% and 36% 
respectively in January-October, 2007.  Bank deposits 
account for 40% of GDP.  Interest rates continued to 
decline from 15.0% in 2006 to 13.8% in 2007, making credit 
more accessible.  There are 154 banks operating in Ukraine, 
but a handful of banks dominate the market.  The top 
fifteen banks control 64% of the loans outstanding and own 
45% of the total capital of the system.  As the volume of 
consumer lending grew by over 70% in January-October, 2007, 
the share of loans exceeding one year stood at 44% of the 
total loan portfolio of the banking system, up from 43% 
last year.  Non-performing loans were registered at 2% of 
the total lending portfolio in 2006, the latest data 
available.  Foreign borrowing by Ukrainian banks has grown 
rapidly in recent years, from $7.8 billion at the beginning 
of 2006 to $25.7 billion after nine months of 2007. 
Greater reliance of banks on foreign borrowing to fund 
domestic lending operations raised concerns about the 
sensitivity of Ukraine's banking sector to international 
shocks.  Borrowing rates for Ukrainian banks on 
international markets rose substantially as a result of the 
summer 2007 sub-prime crisis and credit crunch, yet as of 
December 2007 banks were still able to raise funds abroad, 
in part because several larger banks are now owned by 
foreign banks and can rely on their parent bank.  Borrowing 
by Ukrainian banks from other banks grew by over 70% in 
2007. 
 
In January 2002, the Law "On Banks and Banking Activity" 
eliminated discrimination against foreign banks.  It 
entrusted the NBU with issuing banking licenses and 
includes provisions to prevent money laundering.  The NBU 
sets minimum capital requirements each year to be met by 

the banks by the year-end.  Current minimum capital 
requirements range from UAH 20.04 million ($4 million) to 
UAH 133.3 million ($26.3 million). Foreign licensed banks 
may carry out all the same activities as domestic banks and 
there is no ceiling on their participation in the banking 
system.  Foreign banks can operate via subsidiaries in 
Ukraine.  In November 2006, Parliament approved an 
amendment to the law "On Banks and Banking Activity" 
permitting foreign banks to operate via branch offices. 
The law anticipates a transition period of five years and 
sets requirements for branches of foreign banks, including 
cooperation with the Financial Action Task Force and UAH 
68.8 million ($13.6 million or EUR 10 million) minimum 
capital of the branch.  Foreign banks have significantly 
increased their presence in Ukraine's banking sector in 
recent years, usually through the acquisition of Ukrainian 
banks.  Foreign banks now account for approximately 31% of 
bank capital in Ukraine. 
 
Ukraine remains a cash economy, but the use of credit cards 
is on the rise.  From January through September 2007, the 
use of credit cards increased by 13% and use of ATM cards 
increased by 51%, despite widespread credit/ATM card fraud 
in Ukraine. 
 
INSURANCE 
 
Currently, based on the 1996 Law "On Insurance," only 
insurance companies registered in Ukraine may carry out 
insurance operations.  There is a lower minimum capital 
 
requirement for domestic insurance companies than insurance 
companies with foreign shareholders.  Foreign insurance 
companies can invest in local companies, but to operate 
locally they are required to open branch offices. 
Parliament adopted amendments to the Law "On Insurance" in 
November 2006 and May 2007, however, that give foreign 
companies the right to operate in Ukraine through 
affiliates five years after Ukraine accedes to the WTO. 
 
CAPITAL MARKETS 
 
The legal and regulatory framework, as well as financial 
disclosure systems for the securities market, continues to 
 
lag behind international standards.  Basic market 
infrastructure exists as does a competent regulator, but 
the legislative basis for capital market operations is 
weak.  Rulings of the Securities and Stock Market State 
Commission (SSMSC) have insufficient enforcement power and 
are not always followed by the courts.  Investors continue 
to face low market confidence, transitional accounting 
standards, a lack of accurate company information, 
inadequate protection of minority shareholders' rights, and 
a macroeconomic environment that, despite marked growth and 
economic modernization in recent years, remains volatile. 
Deficiencies in regulations governing operation of 
registrars led to frequent cases of double registration of 
shares, resulting in low protection of shareholders' 
rights. 
 
Ukrainian law allows for the following types of securities: 
* share securities (shares, investment certificates); 
* debt securities (bonds of enterprises, state bonds of 
Ukraine, bonds of local loans, treasury obligations of 
Ukraine, savings (depository) certificates, bills of 
exchange); 
* mortgage securities (mortgage bonds, mortgage 
certificates, mortgages, certificates of funds of 
operations with real estate); 
* privatization securities; 
* derivative securities; 
* title securities 
 
According to the SSMSC, 29 collective investment 
institutions, 757 securities traders, 186 custodians, 2 
depositories, 361 registrars, and 11 self-regulatory 
organizations (six of which are associations) operated in 
Ukraine last year.  Seven stock exchanges were registered 
in Ukraine.  A Ukrainian securities industry broker/dealer 
self-regulatory organization (SRO) and its nationwide 
electronic trading system (PFTS) are the largest stock 
exchange with about 94.8% of secondary onshore trading. 
PFTS Stock Exchange market capitalization was UAH 565 
billion (USD 112 billion) in late 2007.  The Ukrainian 
government is currently considering options to consolidate 
the remaining, mostly dormant stock exchanges to enhance 
price transparency, and improve stock exchanges listing 
standards to establish corporate governance and information 
disclosure based on international norms. 
 
The absence of a central securities depository complicates 
transparent and efficient transfer of ownership records, 
protection of ownership rights and clearance and settlement 
of trades.  Although a state-owned National Depository was 
created in 1999, the market-owned MFS Depository has been 
operating commercially as the Ukrainian Depository since 
1997 in line with current international practice.  The 
Ukrainian government is currently considering reform 
options to establish a predominately privately owned 
Ukrainian Central Depository through the merging of the two 
institutions. 
 
Principal laws, decrees, and regulations governing 
Ukraine's capital markets include: the Law "On Securities 
and Stock Exchanges" (1991), replaced in May 2006 by the 
Law "On Securities and the Stock Market" (2006), the Law 
"On Business Associations" (1991), a Presidential Decree 
"On Investment Funds and Investment Companies" (1994), the 
Law "On State Regulation of Securities Markets" (1996), 
Amendments to the Law "On Business Associations" (1996), 
the Law "On the National Depository System" (1997), the Law 
"On Accounting and Financial Reporting" (1999), the Law "On 
Bankruptcy" (1992), the Law "On Collective Investment 
Institutions" (2001), and the Law "On Financial Services" 
(2001). 
 
The Law "On Collective Investment Institutions" encourages 
the creation of mutual funds, introduces the idea of a 
licensed asset manager, regulates the establishment and 
operation of subjects of mutual investment, provides 
guarantees of ownership rights to securities, and protects 
rights of exchange market participants.  The Law "On the 
Circulation of Promissory Notes" (2001) provides a 
framework for the circulation of promissory notes in 
accordance with the Geneva Convention of 1930. 
 
The new Law "On Securities and Stock Market" (2006) 
represents a major improvement over the prior Law "On 
Securities and Stock Exchanges" (1991), especially 
 
regarding internationally compliant disclosure requirements 
for listed companies, issues of transparency of ownership, 
and the new rules for insider information and insider 
trading. 
 
The Law "On Business Associations" is vague and does not 
support basic shareholders rights and facilitates a large 
number of corporate governance abuses (including share 
dilution, asset stripping, and dubious transfer pricing). 
The law is widely recognized to be inadequate and in need 
of reform. 
 
A.10. Political Violence 
 
Ukraine is largely free of significant civil unrest or 
disorders.  However, occasionally, mass demonstrations 
occur in larger cities, such as Kyiv, usually sponsored by 
individual political forces.  Pre-term parliamentary 
elections took place in September 2007 without any 
significant disruptions or violence.  The likelihood of 
future widespread, politically inspired violence that would &#x000
A;affect foreign property interests remains relatively low. 
 
A.11. Corruption 
 
Corruption pervades all levels of society and government 
and all spheres of economic activity in Ukraine and is a 
major obstacle to foreign investment.  President Yushchenko 
has made combating corruption a top priority, although much 
remains to be accomplished.  Ukraine worsened in 
Transparency International's Year 2007 Corruption 
Perception Index (CPI), which was published in September 
2007.  The country moved down to 105th place in 2007 on the 
list of 180 countries, from 99th place out of 163 countries 
in 2006.  In 2007, Transparency International rated Ukraine 
at 2.7 points on the CPI's 10-point scale, a decline from 
the 2006 rating of 2.8 points. 
 
Corruption stems from a number of factors, such as a lack 
of institutional traditions of transparent decision-making 
and low societal understanding of the importance of 
corporate governance and transparency.  Low public sector 
salaries fuel corruption in local administrative bodies 
such as the highway police, the health system, the tax 
administration, and the education system.  Corruption 
within the Customs Service often makes it more difficult 
and more costly for businesses to import/export goods. 
High-level corruption ranges from misuse of government 
resources and tax evasion to non-transparent privatization 
and procurement procedures.  In short, corruption impacts 
the daily lives of Ukraine's citizens and important 
decisions taken at the state level. 
 
Ukraine's prosecution of corruption is based on the Law "On 
Combating Corruption," which was passed in October 1995. 
The law is rarely enforced, and on the rare occasions it is 
enforced, it is normally aimed at lower-level state 
employees or used retributively in political vendettas.  In 
January 2006, the President Yushchenko signed a decree 
requiring Ukraine to honor its obligations to the Council 
of Europe, which include several anti-corruption 
provisions.  In September 2006, the President signed a 
separate decree adopting a national anti-corruption 
strategy that directs all branches of government to support 
these efforts, and the Government of Ukraine followed up by 
adopting an Action Plan to implement this strategy.  In 
October 2006, the President submitted to parliament a 
package of draft laws on anti-corruption and ratification 
instruments for the Council of Europe Criminal Law 
Convention on Corruption and the UN Convention against 
Corruption.  In August 2007 the President announced a list 
of several "anti-corruption initiatives" that includes the 
setting up of a single anti-corruption agency that would 
develop a comprehensive anti-corruption policy and 
implement various anti-corruption measures. 
 
In 2006 the U.S. Millennium Challenge Corporation funded 
Ukraine's proposal for a Threshold Country Program aimed at 
reducing corruption.  This two-year program is providing 
about $45 million in assistance to reform the judiciary, 
streamline regulatory procedures, institute internal assets 
declaration and inspector generals, enhance civil society 
and media monitoring of corruption, and reduce corruption 
in higher education admissions through standardized 
testing. 
 
 
Although government action is still limited and 
uncoordinated, fundamental changes have taken place in the 
GOU's attitude towards corruption.  Gone are the days when 
GOU officials refused to admit that corruption existed in 
Ukraine.  Government and parliamentary officials now openly 
discuss the problem of corruption with USG contacts and 
with the press and public at large.  In March 2005, Ukraine 
ratified the Council of Europe Civil Law Convention on 
Corruption and became a member of the Council of Europe's 
Group of States Against Corruption (GRECO).  GRECO has 
concluded its Joint First and Second Rounds of Evaluation 
of Ukraine and published its report in October 2007. 
Parliament has passed laws to ratify the Council of Europe 
Criminal Law Convention on Corruption, signed in January 
1999, and the UN Anticorruption Convention, signed in 
December 2003.  However, ratification of these Conventions 
will come into effect only when additional implementing 
legislation is adopted.  Ukraine is not party to the OECD 
Convention on Combating Bribery of Foreign Public Officials 
in International Business Transactions. 
 
A.12.  Bilateral Investment Agreements 
 
BILATERAL INVESTMENT AGREEMENTS 
 
The Bilateral Investment Treaty between the United States 
and Ukraine came into force on November 16, 1996.  The 
following countries have also signed bilateral investment 
agreements with Ukraine: Albania (2004), Austria (1996), 
Argentina (1995), Armenia (1994), Azerbaijan (1997), 
Belarus (1995), Belgium (2001), Bulgaria (1994), Brunei 
(2006), Canada (1994), Chile (1995), China (1992), Cuba 
(1995), Croatia (1997), the Czech Republic (1994), Denmark 
(1992), Egypt (1992), Estonia (1995), Finland (1992), 
France (1994), Gambia (2006), Georgia (1995), Germany 
(1993), Greece (1994), Indonesia (1996), Iran (1996), 
Israel (1995), Italy (1993), Hungary (1995), Kazakhstan 
(1994), Korea (1996), Kyrgyzstan (1993), Latvia (1997), 
Lebanon (1996), Lithuania (1994), Macedonia (1998), Moldova 
(1995), Mongolia (1992), the Netherlands (1994), Panama 
(2005), Poland (1993), Portugal (2003), Russia (1998), 
Saudi Arabia (2003), Slovakia (1994), Slovenia (1999), 
South Korea (1996), Spain (1998), Sweden (1995), 
Switzerland (1995), Turkmenistan (1998), Turkey (1996), UK 
(1993), Uzbekistan (1993), Vietnam (1994), Yugoslavia 
(2001), Yemen (2002). 
 
A.13.  OPIC and Other Investment Insurance Programs 
 
The U.S.-Ukraine Overseas Private Investment Corporation 
(OPIC) Agreement was signed in Washington on May 6, 1992. 
OPIC halted support for projects in Ukraine in 1999, 
however, after the government of Ukraine failed to 
reimburse OPIC for OPIC's payment of a claim by a U.S. 
business whose investment had been expropriated.  The 
government is now actively working to find a resolution to 
this dispute so that OPIC can resume its activities in 
Ukraine. 
 
In July 2002, the Board of the U.S. Export-Import bank 
opened facilities for short and medium-term (up to seven 
years) lending for commercial, and sub-sovereign projects. 
Ukraine is a member of the Multilateral Investment 
Guarantee Agency (MIGA). 
 
A.14.  Labor 
 
LABOR AVAILABILITY 
 
Ukraine has a well-educated and skilled labor force with 
nearly a 100 percent literacy rate.  As of September 2007, 
unemployment (ILO methodology) stood at 6.2 percent, 
although unemployment in some regions, particularly in 
western Ukraine, was significantly higher. 
 
WAGES 
 
Wages in Ukraine are very low by Western standards but 
continue to grow steadily.  As of October 2007, the nominal 
average monthly wage in Ukraine was UAH 1475 ($292), up 
35.6% from UAH 1088 ($215) in October 2006.  Real wages 
grew 12.6% between January and October 2007, compared to 
the same period in 2006.  The highest wages are in the 
financial and aviation sec
tors while the lowest wages are 
 
paid to agricultural and public health workers. 
 
MINIMUM WAGE 
 
The minimum monthly wage was increased on January 1, 2008 
to UAH 515 ($102).  Regular increases of the minimum wage 
are planned. 
 
PENSIONS 
 
In 2004 Ukraine began a comprehensive pension reform 
program, based on international standards, which envisaged 
a three-pillar system: Pillar I, a solidarity system, 
Pillar II, a mandatory accumulation system, and Pillar III, 
a voluntary private pension system. 
 
For the solidarity system, Pillar I, retirement payouts are 
determined on the basis of the individual's labor records 
and contributions.  Despite the major reform, the Pillar I 
system is complex with low retirement ages (60 for men and 
55 for woman), full retirement benefits based on 20 years 
of service for woman and 25 years of service for men, and 
many special early retirement provisions. 
 
Pillar II, the Mandatory Accumulation System, is to be 
funded by pension contributions made by individuals.  The 
conditions for the introduction of Pillar II have been met, 
but new legislation is required.  The draft law to 
introduce Pillar II was submitted to Parliament in December 
2006 and passed the first reading in April 2007.  The draft 
law provides for a gradual phase-in of employee 
contributions to the Accumulation Fund starting with 2% in 
2009 and increasing by 1% per year to 7% in 2014. 
 
Pillar III, voluntary private pension funds, began actual 
operations at the end of 2004.  The development of private 
pension funds was positive in 2006, with an almost three- 
fold increase in assets and a 46 percent increase in the 
number of funds (from 54 private pension funds to 79). 
 
According to the financial services regulator, private 
pension fund assets have increased by an average 35 percent 
per fiscal quarter since becoming available in 2004.  In Q1 
2005, assets under management of Private Pension Funds were 
$2.53 million, in Q4 2006 - $27.20 million, and in Q3 2007 
- $44.85 million.  However, Ukraine's capital markets 
remain underdeveloped and do not provide these funds with 
enough sound, long-term investment opportunities in the 
equity, debt and real estate markets.  As a result, assets 
of private pension funds continue to be invested primarily 
in bank deposits, which do not meet the long-term portfolio 
needs of these funds.  The ongoing weakness of the market 
regulatory structure compounds the problem.  If the 
situation continues, the risk will grow that private 
pension funds will fail to perform in line with the overall 
growth of the economy in the future. Various international 
donor initiatives are supporting the Ukrainian government's 
efforts to strengthen the breadth, liquidity and regulatory 
framework of the country's markets with the goal of 
creating the conditions for sustainable long term 
investment opportunities. 
 
LABOR/MANAGEMENT RELATIONS 
 
Ukrainian workers are generally accustomed to "top-down" 
management practices and therefore tend not to demonstrate 
initiative.  A younger, more independent-minded generation 
is slowly moving into the workforce, and it is becoming 
easier to find professional personnel who function 
independently. 
 
Although investors may encounter government resistance to 
trimming the work force to an efficient level, across-the- 
board demands to maintain employment levels are 
disappearing.  Ukrainian enterprises often still maintain 
much of the social infrastructure of their immediate 
community (schools for local children, cafeterias, and 
medical facilities).  While many local officials are 
willing to work with businesses to identify social services 
that an enterprise must support, such arrangements should 
be clearly spelled out before investments are started. 
 
Ukraine's Labor Code remains outdated and inappropriate for 
a market economy.  The government has drafted a new, more 
modern Labor Code, but it failed to move forward in 
 
Parliament in 2007 due to a protracted political crisis in 
the country. 
 
A.15.  Foreign Trade Zones/ Free Ports 
 
Ukraine has in the past maintained two forms of special 
economic zones (SEZs): Free Economic Zones (FEZs) and 
Priority Development Territories (PDTs).  In April 2005, 
Ukraine canceled all tax exemptions (i.e., from land tax, 
corporate income tax, import duty, and VAT on imports) to 
investors in all SEZs to stop large-scale misuse of these 
zones for tax evasion and smuggling.  While the step 
reduced corruption and expanded the tax base, the abrupt 
cancellation of privileges and lack of compensatory 
provisions caused losses to some legitimate investors.  At 
the end of 2006, the Ukrainian government announced its 
intention to renew tax privileges granted to businesses 
operating in some SEZs and to introduce a compensation 
mechanism for investors, but a draft law on the subject 
never went forward.  At least one SEZ had retained tax 
privileges due to a court ruling, but those and all other 
privileges were again annulled by the new Ukrainian 
government in December 2007.  In November 2005, the 
Parliament adopted legislation to create technology parks, 
providing for some government financial support, targeted 
subsidies, and tax privileges for a list of 16 technoparks 
based on existing scientific and research institutes. 
 
A.16. Foreign Direct Investment Statistics 
 
FOREIGN DIRECT INVESTMENT 
 
According to Ukraine's State Statistics Committee, as of 
October 2007 the total stock of FDI in Ukraine was $26.9 
billion, or $576 per capita.  This was a 35.2% increase 
from October 2006, when the total stock of FDI stood at 
$19.9 billion, or $424 per capita. 
 
Mittal Steel's October 2005 purchase of the Kryvorizhstal 
Steel Mill represented a major inflow of FDI, at $4.8 
billion, into Ukraine.  Purchases of Ukrainian banks by 
European banks have represented another major inflow of 
foreign direct investment in recent years: Raiffeisen 
International acquired Bank Aval for $1.0 billion in 2005; 
BNP Paribas acquired Ukrsibbank for $360 million in 2005; 
UniCredit Group acquired Ukrsotsbank for $2.1 billion in 
2007; Swedbank acquired TAS-Kommerzbank for $735 million in 
2007; and Commerzbank acquired Forum Bank for $600 million 
in 2007.  Also in 2007, PepsiAmericas and PepsiCo jointly 
purchased 100% of the leading Ukrainian juice producer 
Sandora for a total of $679 million. 
 
FDI BY COUNTRY 
 
As of October 1, 2007 Ukraine's major investors included: 
Germany (21.4% of total FDI), Cyprus (18.5%), the 
Netherlands (8.1%), Austria (7.5%), the United Kingdom 
(6.8%), the United States (5.3%), and Russia (5.0%). 
Cyprus remains a popular offshore destination for Ukrainian 
and Russian enterprises through which to channel 
investments. 
 
FDI BY INDUSTRY SECTOR DESTINATION 
 
Over the first 9 months of 2007, 15.7% of new FDI went to 
the financial sector, 8.5% -- to domestic trade, 8.4% -- to 
real estate, 5.7 % -- to the metallurgy sector, 5.6% -- to 
food, beverages, and tobacco production, 5.2% -- to 
construction
, and 3.8% -- to machine building. 
 
End Text. 
 
TAYLOR

Wikileaks

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