Ukraine. Investment climate.

Ukraine is located in southeastern Europe and is the largest country in Europe among those with entire boundaries within the European continent. The total area of Ukraine is about 603,700 sq. km. It extends 1316 km from west to east, and 893 km north to south, bordered by (clockwise) Romania, Moldova and Hungary on the southwest, Slovak Republic on the west, Poland on the northwest, Belarus on the north, and Russia on the north and on the east, total land boundaries: 4,558 km. Southern coast of Ukraine is washed by the Black and Azov Sea, coast line is 2,782 km. (Seaports: Berdiansk, Illichivsk, Izmayl, Kerch, Kherson, Mariupol, Mykolayiv, Odesa, Pivdenne, Sevastopol, inland port: Kyiv.)

Ukraine is a Republic. As stated in the Constitution: "Ukraine is a sovereign and independent, democratic, social, legal State."

State power in Ukraine is based on the division of authority into legislative, executive, and judicial. The Constitution of Ukraine has the supreme legal force. Laws and other legislative and normative acts are enacted based on the Fundamental Law and must strictly conform to it.

* The President of Ukraine is the Head of State.

* The Verkhovna Rada is the Ukrainian Parliament and the sole legislative authority. It is composed of 450 members.

* Executive power is exercised by the Cabinet of Ministers as the supreme executive authority, and by a system of local bodies of state executive power.

* Judicial power in Ukraine is vested in the courts of law. The Constitutional Court of Ukraine is the sole body of constitutional jurisdiction.

Legal system: Based on civil law system.

* Constitution: Since June 28, 1996.

* The administrative structure of the country includes the Autonomous Republic of the Crimea, 24 regions (oblast) along with the cities of Kyiv and Sevastopol.

The state language is Ukrainian.

The capital of Ukraine is Kiev.

The population of Ukraine is 47.4 million people, with about 80% of them being ethnic Ukrainians. Among ethnic minorities are Russians, Byelorussians, Jews, Poles, Moldavians, Hungarians, Romanians, Bulgarians, Tartars, Germans and others. There are 447 town and 28,800 villages in Ukraine. Kiev - the biggest city in Ukraine - has a population of 2.6 million, Kharkiv, Dnipropetrovsk, Zaporizhzhya, Donetsk and Odesa all have a population of over one million people. Literacy of total population is 98%.

Religion - predominantly Christian: Ukrainian Orthodox and Ukrainian Catholic. Other religions like Islam, Judaism etc. are also professed by some part of the population.

The climate of Ukraine is mostly temperate continental. A subtropical Mediterranean climate is prevalent on the southern portions of the Crimean Peninsula. The average monthly temperature in summer ranges from 17° to 25° C, though in daytime can get up over +35° C, while winter temperatures average from 10° to 2° C, but in northern parts can be lower than -25° C. The Black Sea coast is subject to freezing.

Natural scenery of Ukraine is very picturesque. The most part of the country is in low-lying lands, fertile plains (steppes) with two highland areas: in the South -Crimean Mountains (the highest point: mt. Ramantkosh, 1,545 meters) and in the West - Carpathian Mountains (the highest point: mt. Hoverla, 2,061 meters).

Ukraine has extremely fertile black-earth soils in the central and southern portions, totaling more than a half of the territory. According to the estimates, arable land is 56%, permanent crops: 2%, meadows and pastures: 12%, forest and woodland: 10%, other: 20%.

Mineral resources - iron ore, coal, manganese, natural gas, oil, salt, sulfur, graphite, titanium, magnesium, kaolin, nickel, mercury, gold, timber and arable land.

Recreational landscapes occupy an area of 9.4 million hectares. Forests cover about 14% of Ukraine's territory. Over 70,000 rivers flow through Ukraine. The major rivers are the Dnepr (third longest in Europe), the Dniester, Sourhern Bug, Siverski Donets, Prut, the estuary of the Danube is situated in Ukraine.

There are over 3000 natural lakes and about 22,000 artificial reservoirs in Ukraine, as well as many sources of mineral water and medicinal mud, which are used to treat many diseases. Ukraine has 5 National Parks, 15 National Preserves and a lot of smaller areas (arboretum parks, ancient urban and rural parks) protected by the state. Many places of natural beauty can be found in the Carpathians, the Crimea and Polissia.

It’s hard to overestimate the riches of natural and historic-cultural potential of Ukraine: Black and Azov Seas, Crimea, Carpathians, Dnepr River Side, Podillya and Volyn regions.

Travelers have the possibility to get acquainted with the history and culture of Ukraine from very ancient to modern times. The most famous historical and cultural monuments are in the Autonomous Republic of Crimea, as well as in cities: Kyiv, Lviv, Odesa, Chernigiv, Kamyanets-Podilsky. A great number of archaeological monuments are concentrated in the southern part of Ukraine.

About 500 cities of Ukraine have a history of more than 900 years, 4500 villages of Ukraine are more than 3 centuries old. Capital of Ukraine Kiev is more than 1500 years old. Historical cities and villages are Ukraine’s national riches.

There are 150 thousand of monuments of culture, history, archaeology, city building, architecture, palaces and park building art, as well as 300 museums in Ukraine. 7 national historical and cultural preserves have been created. More values are monuments of Kyiv Rus (IX - XII centuries) epoch - 80 % of monuments of this period are concentrated on the territory of Ukraine. The most remarkable monuments are the Kyyevo-Pecherska Lavra (Kyiv Cave Monastery), the St. Sophia's Cathedral and the historical center of Lviv city. They have been entered into the List of the World Heritage of UNESCO. Very rich historical and cultural heritage is represented by St. Andrew’s and St. Cyril’s Churches in Kyiv, historical monuments, related to the historical and cultural heritage of Zaporizhzhya Cossacks, as well as those from the days of the national liberation struggle of Ukrainian people in 1648 - 1654, and the World War II; architectural and house-holding museums under open sky in Kyiv, Pereyaslav-Khmelnytsky, Lviv, Uzhgorod, Chernivtsi, Galych, art galleries in Kyiv, Odesa, Feodosiya, Lviv, Kharkiv etc. Monuments of defensive architecture - fortresses in Lutsk, Medzhybizh, Kamyanets-Podilsky, Khotyn, Bilgorod-Dnistrovsky, Uzhgorod, Mukacheve; palace complexes in Crimea, in Lviv and Chernigiv regions; monuments of wooden worship and civil architecture in the Carpathians.

Those who wish to visit Ukraine for any purpose shall keep in mind that travelers must declare all cash and jewelry, regardless of value, upon entering Ukraine. Any undeclared items are subject to confiscation. Under customs regulations, travelers may bring up to 10,000 U.S. dollars into Ukraine without special permission. More than 10,000 U.S. dollars requires a written statement by the traveler. There are strict customs regulations and procedures regarding the export of antiquities and items of historical interest. (Additional information can be found HERE)

The dynamics of macroeconomic indicators shows that Ukraine entered a new phase in the transformation of its economy at the outset of the 21st century, which was marked by rather high economic growth rates sustained throughout four years.

The achievement and maintenance of a macroeconomic balance, a sounder budgetary and monetary policy, a market-oriented behavior of privatized enterprises, and expanding domestic demand and the market under favorable foreign economic conditions ensured a more energetic economic activity in most of the sectors of the economy, rising living standards and, on this basis, a high dynamics of growth.

2003-2004 marked a period of high economic activity, making it possible to launch systemic reform practically in every sector of the economy and raise social guarantees for a broad range of citizens.

Ukraine maintains trade relations with 189 countries.

In 2003 Ukrainian export of goods and services increased to 58.4% of GDP, while import dropped to 31% of GDP against 52% of GDP in 2002.

The volume of foreign trade in goods and services during the first six months of the current year was US $31.6 billion, i.e. 38.3% more than in the corresponding period in 2003, including US $17.8 billion export (by 44.3%) and US $13.8 billion import (by 31.2%).

The structure of export of goods improved at the expense of an increase in the share of products with high added value.

In 2003 ferrous and nonferrous metals and products thereof accounted for 36.9% of export value, while the aggregate positive balance of trade in these items was US $.8.5 billion. This is partially reflected by the export of steel pipes and oil products to Russia and the growing export of steel to China. Chemical products and agricultural products accounted for 21.8% of export. The share of mechanical engineering products in the total export of goods during the first six months of 2003 accounted to 13.8%, and this year it increased to 19.1%. The share of mineral products in the total exports dropped from 16.9% during the first six months of 2003 to 12.9% this year.

Imports have retained their optimum structure: in 2004 raw materials and products for industrial and technical purposes accounted for 88.7% (power sources – 36.2%, technical raw materials – 26.2%, mechanical engineering products – 26.3%).

The EU members and CIS countries are Ukraine’s main trading partners. The total volume of foreign trade with the EU after its enlargement accounts for 35%.

Ukraine’s substantial requirements in imports of oil and gas, in particular from Russia and Turkmenistan, determine the trade pattern with the CIS countries. Therefore, the CIS remains the principal supplier of Ukrainian imports that accounted for 50.7% of all imports in 2003. Out of this total imports from Russia alone accounted for 37.6% in 2003.

Investment policy

One of the key factors of economic development of any country is the attraction of foreign capital and its effective use to restructure, modernize and reconstruct the country’s economy as a whole.

To date Ukraine has created a legal environment for investments, which includes such basic laws as On Investment Activity, On the Regime of Foreign Investment, On Eliminating Discrimination in the Taxation of Business Entities Established with the Use of Property and Funds of National Origin.

The regime for foreign investors is similar to the regime applied to domestic ones; in the majority of cases, they are permitted to engage in business on the same terms and conditions as domestic enterprises. Besides, except for excisable goods, the fixed assets foreign investors import into Ukraine as contributions to the authorized funds of Ukrainian legal entities are exempt from VAT and import duty.

Aliens are permitted to own 100% of Ukrainian companies under condition of compliance with restrictions on foreign ownership in certain sectors, like TV and radio broadcasting, audit and news agencies. Ukrainian currency is not yet freely convertible everywhere and income can be repatriated only upon registration of a foreign investment; in this case a tax on reparation at a rate of 15% may be applied, yet contract provisions on avoiding dual taxation may guarantee reduction or abolition of taxes.

Ukrainian legislation provides a broad range of government protection of investments. Foreign investments in Ukraine are not subject to nationalization.

Interstate treaties on promotion and reciprocal protection of investments are important legal documents regulating the interrelations between subjects of investment activity. They serve as guarantees of granting a fair status to investments and protecting them on the territory of other countries. Ukraine has concluded such treaties with 69 countries including the Kingdom of Netherlands and Belgium.

The improved investment climate accounted for the increase in direct foreign investment (DFI). In October 2004 total DFI in Ukraine amounted to US $7.8 billion (US $530 million from The Netherlands).

Almost a half of the foreign investments is used for industrial production. Among the most investment attractive enterprises are those with a rapid payback capacity, such as wholesale trade and commercial mediation accounting for 14% of all investments, as well as the food industry and processing of agricultural products – 14.5%.

Indicators of Ukraine’s investment attractiveness, as determined by international rating agencies, stimulate the interest of foreign investors.

International rating agencies note that Ukraine has made certain achievements in creating a favorable investment climate in the country. On February 27, 2004 Moody’s assigned credit rating “B1” to Ukrainian government bonds issued in March 2004 in the amount of US $600 at an annual interest rate of 6.8% and maturity in March 2011. Standard & Poor’s and Fitch Ratings also assigned to the Ukrainian bonds of 2004 credit rating “B” with positive forecast and “B+” with stable forecast respectively. In early September Moody’s raised the forecast of Ukraine’s rating from “stable” to “positive.” The raised forecast concerns Ukraine’s “B1” rating for bonds in foreign currency, “B1” for medium-term and long-term government bonds in national currency and “B2” for bank deposits in foreign currency. Moody’s explained the improved ratings by the country’s macroeconomic growth recorded during the past few years.

There are 183 banks registered in Ukraine 159 of which were awarded licenses from the National Bank of Ukraine (NBU) for banking transactions; their aggregate authorized capital is UAH 9.8 billion. The overall assets of all of Ukraine’s banks amount to UAH 125.9 billion; balance capital – UAH 15.6 billion; deposit capital received from legal entities – UAH 37 billion, and deposits of individuals – UAH 43.5 billion.

The minimum authorized capital for an interregional bank equals € 5 million; for regional banks – € 3 million; and for corporate banks – € 1 million. A bank’s regulatory capital (i.e. the sum of basic and additional capital) shall not be less than the minimum authorized capital. Today the requirements to regulatory capital for new banks (i.e. banks that exist less than one year) equal € 5 million, € 3 million and € 1 million for interregional banks, regional and cooperative banks respectively. These requirements to the regulatory capital are subject to periodical changes. Since May 2004 the requirements to minimum regulatory capital has been established by the NBU on an annual basis in hryvnias. The minimum regulatory capital of an interregional bank is UAH 36.64 million in 2004 and UAH 39.97 million in 2005. The minimum capital liquidity for existing banks is 10%. These increases may pose problems for banks that are marginally capitalized.

Export-Import Bank and Savings Bank are the two largest state-owned banks in Ukraine

Eighteen banks have a share of foreign capital, while six of them are in complete foreign ownership, for instance ING Bank Ukraine. The share of foreign capital in the overall registered authorized capital of Ukrainian banks comes to 10.9%. Right now foreign banks may only have representative offices or branch banks in Ukraine.

The intrinsic potential of the agrarian sector of economy is rather substantial: Ukraine has at its disposal about one third of black soil and 27% of the total amount of tillable lands in Europe. The area of plough-land per capita in Ukraine is 0.68 hectares, while in Europe the average value of this indicator is 0.25 hectares. Agricultural and climatic conditions are favorable for growing grain-crops, sugar-beet, sunflower, edible roots, vegetable and fruit, as well as for stock farming.

Rural population constitutes about one third of the total number of residents. The portion of persons employed in the agriculture versus the total number engaged in all the sectors of national economy amounts to 23.8%, among these more than 50% are working on their private land plots and farms.

The portion of the gross value added in agriculture in the relevant national indicator amounts to about 15%.

During recent years, implementation of the national policy in agriculture has been concentrated at creating a favorable market environment for agribusiness, introducing market tools of governmental impact on the demand/supply ratio on the agrarian market, efficiently using the land-property resources, and solving social problems of the rural population.

Such processes as privatization of state agricultural facilities, sharing of land and property, and issuing of state land certificates have been practically completed. As of January 1, 2004 almost 7 million citizens acquired the right for a land plot (share) whose average area is 4 hectares. 4.3 million farmers have received property certificates.

Establishment of large farms through leasing of land and property shares of former members of collective farms has become widespread.

At the moment, 3,094,600 hectares of agricultural land are at the farmers' disposal, among them 2,891,100 hectares of plough-land; average land area per farm in Ukraine is 72 and 67 hectares, respectively.

Ukraine belongs to industrially developed countries; it has one of Europe’s largest and structurally diversified industrial complexes. This industrial complex provides one third of the nation’s GDP.

In 2001-2004 amount of industrial output showed 61.9% growth, including 15.8% in 2003, and within the period from January till September 2004, such increase has amounted to 14.4%. These achievements are the highest among CIS and European countries.

Meanwhile, positive qualitative changes are taking place. During the period of 2000-2003, average annual gain of labor productivity in industry amounted to 16.7%, which is almost 4 times higher than a similar indicator for 1987-1990, and within the 1st half of 2004, labor productivity showed another increase by 16.1%. The growth in output amounts has been attained due to increase of the output of competitive products: pipes in ferrous metallurgy; aircraft, vessels, and automobiles in mechanical engineering; nitrogenous fertilizers in chemical and petrochemical sectors; knitted goods in light industry; cardboard and paper in pulp and paper industry.

Certain progress was achieved in the growth of the output of final-consumption products. Leading growth rate was noted in output amounts in the sectors that provide products for domestic market and investment purposes, i.e. food industry and processing of farming products, timber and timber products, pulp and paper, and printing sectors.

Within four years in a row, positive dynamics has been observed in mechanical engineering: during 2001-2004, the output of mechanical engineering products showed more than 2 times growth. During recent four years, its portion in the total amount of industrial output increased by 2.3% (up to 13.8%), and in 2003, amount of exportation of mechanical engineering products increased by 38.3%. It proves that mechanical engineering products of Ukraine are not only in keen demand on the domestic market but also successfully competed on international markets.

Light industry is capable of making and successfully produces the whole range of consumer goods. During recent years, sector facilities have been continuously increasing their capacity, expanding the range of goods, and improving the quality of articles with Ukrainian trademarks. Today, goods made in Ukraine enjoy confidence and demand among residents of Ukraine. Ukrainian goods have already taken up important positions on the international market. Within the period from January till October 2004, exportation of products of the light industry increased by 22.1% as against the relevant period of 2003, and amounted to US$ 695 million.

Ukraine is famous for its powerful metallurgy. Specific weight of sector products in the total amount of industrial output has increased by 8.1% as against 1991, and as of September 1, 2004 amounted to 26.1%.

Split of supplies of Ukrainian metal production to domestic and international markets in 2002 amounted to 14.1% and 85.9% respectively, and was practically the same as in 2001 (13.6% and 86.9%). In 2003, a trend was observed to a growth of the specific weight of the domestic market; the amount of domestic consumption in 2004 is anticipated at the level of 23%.

Transition of economy to the innovation model of development provides creation of breakthrough competitive technologies against the background of high-end production facilities. The existing domestic powerful scientific-and-technical potential has been able to create prerequisites for intensive innovation raise of the economic domain.

Major components of industry development potential comprise:

- substantial production capacities: among the greatest in Europe, capable of implementing modern technologies and fast raising of output volume, including those in investment-sensitive sectors such as mechanical engineering, instrument-making, and space complex;

- large-scale scientific-and-technical system including more than 100 academic institutions, over 150 university research centers, 300 sector-oriented research institutes, engineering and technological organizations with developed infrastructure, capable of meeting the needs of innovation industrial development;

- availability of high-skilled workers, including more than 67,000 research workers, combined with the existing system of personnel renewal;

- natural resources that permit production of structural and functional materials in sufficient amounts to provide self-support for closed production loops in industry.

Useful information:

Trade and economic section of the Embassy; tel. 070 345 48 91; fax 070 361 55 65.