Экономические науки/ 4.Инвестиционная деятельность и фондовые рынки

B.Iu.Logvinov, Postgaduate student,

Simon Kuznets Kharkiv National University of Economics

Modern problems of foreign investement in Ukraine

Ukraine, like many other countries in Europe and around the world today,

continues to meet a lot of economic challenges and problems. The majority of this problems appeared during the World’s Economic Crisis in 2008.

Ukraine’s proximity to both the European Union and Russia, the sheer quantity of its consumers (nearly 46 million) and the physical size of the country make it an excellent location for businesses to expand both locally and regionally. Clearly, its

geographic position and natural resources, as well as the human resources and labor force, have all played important roles in investment attractiveness. The 2012 UEFA European Football Championship is a good example of European and local investment, the process that has significantly improved infrastructure roads, railway, and airports.

Free trade agreement with the EU is already signed, but there are a lot of issues that still require discussions and making decision on them. The fact that the agreement is signed clearly increases the attractiveness of Ukraine as an investment destination for the international corporations and private investors. The Ukrainian Government appears committed to improving the country’s performance in the World Bank paying taxes survey, which should also continue to improve Ukraine’s attractiveness as an investment location. But still the situation remains to be unideal.

Foreign investors meet lots of problems after they have decided to invest in Ukrainian economy or companies. Ukrainian governments have found it singularly difficult to liberalize trade and improve the climate for foreign direct investment, in spite of two of Ukraine’s economic policy priorities. Trade and foreign direct investment have greatly contributed to economic growth and increases in standards of living throughout the world, especially in Central Europe. However, in contrast to Central Europe, Ukraine has been slow to open its borders to trade and has had difficulty attracting sizable inflows of FDI. As a result, Ukraine has suffered economically: Its standards of living are currently far below those in Central Europe [3].

Lots of problems for trading and investments still exist in Ukrainian politics and economy. The most important among them are corruption and barriers for trading

Corruption constitutes the single greatest barrier to expanding trade and investment in Ukraine. Grand corruption involves high-level officials with discretionary authority over government policy, the sale of government assets, or large government contracts. Petty corruption involves lower-level officials who make decisions about enforcing (or not enforcing) regulations.

Foreign businesses usually complain most about Ukrainian regulatory and legal hurdles designed to elicit bribes. As in most countries afflicted by corruption, Ukrainian government employees, in hopes of eliciting bribes, deliberately design licensing and registration procedures to be so complex that they may credibly threaten to halt or slow x Encouraging Trade and Foreign Direct Investment in Ukraine trade or a foreign investment. As a consequence, the time and expense of obtaining the requisite permits and licenses to trade or to set up and open a business add substantially to costs, reducing both trade and investment. Rigged privatizations also impede foreign investment.

Ukraine’s contradictory laws and corrupt judges make it difficult for

businesses to enforce contracts, which also discourages investment The most immediate problem facing Ukraine is that it is not yet a member of the World Trade Organization (WTO) despite support for this step from all major political parties. Because Ukraine is not a member of the WTO, Ukrainian firms face discriminatory treatment in most of their export markets. Exporters and importers in Ukraine confront arbitrary changes in domestic policies because the Ukrainian government

is unconstrained by treaty obligations. The most severe impediment to exports in Ukraine is the corruption embedded in the system for providing rebates to exporters for value-added tax (VAT). Government employees encourage companies seeking VAT refunds to hire local law or consulting firms that charge a “fee” of 25 to

30 percent of the refund to expedite reimbursements. Companies that hire these firms have their VAT reimbursed promptly; companies that do not, wait three to 18 months for reimbursement. Smaller companies sometimes receive no refunds at all [1].

The greatest barrier for importers is Ukraine’s complex, corrupt system of certifying imports. The accepted international practice is for importing countries to recognize products certified by accredited bodies in partner states with internationally recognized accreditation procedures as acceptable. In Ukraine, all products subject to mandatory certification—which constitute a very long list—have to be recertified, substantially increasing importers’ costs.

Nothing has undermined Ukraine’s reputation as a responsible trading partner more than the embargoes imposed on grain exports in 2006 and 2007. These embargoes were instigated by Ukrainian commercial interests tied to the government that hoped to obtain export quotas and resell them to legitimate grain exporters, pocketing substantial sums in the process. This policy caused legitimate grain exporters to lose

upwards of $200 million. Additionally, it will have a lasting, depressing effect on the incomes of Ukrainian farmers given that international grain trading companies now shun the Ukrainian market because of the risks of export embargoes and quotas.

Potential investors have great difficulty obtaining satisfactory sites in Ukraine. Potential investors cannot obtain the land they need to build distribution centers and factories. Retailers and restaurateurs complain that municipal governments sell or lease all the best commercial sites to favored individuals. Problems in obtaining titles, construction permits, and operating permits add to costs and complexity. Businesses find that activities mandated by one of these codes sometimes violate provisions of the other. Some Ukrainian businesses exploit these legal discrepancies by selecting the laws they find preferable for their current operations. If disputes arise, they choose courts that favor their choice of applicable laws or judges who are willing to be bribed to do so [2].

Because of deficiencies in the laws pertaining to joint stock companies, shareholders lack key rights of ownership. Majority shareholders can use the legal system and a friendly court to issue new shares and steal assets. Minority shareholders (“raiders”) have used current laws to deprive majority shareholders of their rights and, in a few instances, control of their company.

In contrast to the governments of Central Europe, Ukrainian governments have not extensively used privatization to attract foreign capital and business expertise. With the exception of a very few transparent sales of major assets, privatization has resulted in formerly state-owned enterprises being acquired by Ukrainian businessmen or foreign companies controlled by Ukrainians. In most instances, The Ukrainian government should adopt a two-pronged strategy to remove the worst of these impediments to trade and investment. First, the government should focus on making a few highly visible policy changes that promise results within 100 days. Second, the government should set in motion changes in Ukraine’s institutions that will, with time, reduce corruption and other impediments to trade and investment. These changes should be classified according to whether they are expected to bring results within 100 days or over a longer period.

Therefore, Ukrainian government should do the following to reduce opportunities for government employees to manipulate the regulatory system in order to solicit bribes: Set up a network of regional boards to which businesses and citizens can appeal administrative decisions. The boards should be composed of civil servants, businessmen, and citizens, and should have the authority to stay decisions taken by lower-level civil servants until they can be reviewed by higher-level administrators or administrative courts. Give Inspector Generals the authority to immediately put government employees facing credible accusations of soliciting bribes on administrative leave and to then quickly bring cases to court for resolution.

References:

1. Office of the United States Trade Representative, 2007 National Trade Estimate

Report on Foreign Trade Barriers, Ukraine section, Washington, D.C., April 2007.

As of August 9, 2007

2. European Business Association, Barriers to Investment in Ukraine, 2001, 2004,

2005, and May 2006 editions, Kyiv, Ukraine. As of August 9, 2007

3. Encouraging Trade and Foreign Direct Investment in Ukraine, 2007 Keith Crane, F. Stephen Larrabee, Prepared for the Institute of European and International Studies in Kyiv.