Business and Regulatory Environment

Following the fall of the Soviet Union, Ukraine’s transition to a market economy has been the most challenging of all of the major transitional economies in the former Soviet Union (FSU). According to the World Bank, Ukraine is the second-worst FSU state in Eastern Europe to do business in, behind only Uzbekistan. In Ukraine, state institutions are weak, markets are small and volatile and the business culture has not easily adapted to the change. The transition has been halting, incomplete and dogged by corruption at every turn. Kiev still has not implemented the basic steps that are essential to a free market economy such as transparency, shareholder management, financial accountability and the rule of law, steps that the former Communist states in Central Europe had moved beyond by 1995. The governmental chaos of 2004-2010 only set the process further back. In Ukraine, ownership structures are still sketchy, competition weak, transparency rare and conflicts of interest chronic.

In other FSU states, the country’s capital is the traditional financial center. Not so in Ukraine, where business and industry can be run out of any number of economic hotspots in addition to Kiev, including Donetsk, Dnipropetrovsk, Zaporizhia, Sevastopol and Luhansk.

Of all Eastern European and former Soviet states, Ukraine has the most severe restrictions on foreign equity ownership. This applies to many sectors and is particularly acute in metals, agriculture, media and telecommunications. Some of the newer sectors like IT are less restricted, though there are still limits on equity ownership among those businesses. The World Trade Organization has pressured Ukraine, which became a member in 2008, to lift such restrictions, though such movement has been slow. Most foreign operations in Ukraine require full outside financing, since the vast majority of Ukraine’s banks are attached either to the state or to the country’s oligarchic networks, which consider bank lending to be an exotic income source.

However, there are many reforms under way that have cast the international view of doing business in Ukraine in a more optimistic light. This view has been brightened particularly over the past year, as a more stable government assumed office and the overall political situation began to stabilize. Under President Yanukovich, a bulk reform package has been put in place to overcome these business obstacles, though most businesses have yet to see any tangible progress. Some headway has been made in reducing the minimum capital required to start and run a business, making it easier to obtain construction permits, allowing electronic tax filing and streamlining local and national regulations. However, the planned reforms will take years to be fully implemented (if they are at all) and even longer to become an ingrained, traditional practice.

Meanwhile, the government, still struggling to overcome the chaos following the Orange Revolution, has yet to consider judicial and legal reforms. Ukrainians also have a reputation for changing the rules of the game quickly and frequently, which makes it extremely difficult for foreign businesses and investors to change even minor details in most legal documentation. Complying with all laws is often impossible because many of the regulations are contradictory. There are old Soviet laws, newer Ukrainian laws, regional laws and contradictory regulations from various bureaus and agencies. This has opened the way for bureaucratic corruption and eroded Ukraine’s competitiveness for foreign investment.

The enforcement of investor rights is always sketchy in Ukraine, even in the courts, but paying attention to legal details can help firms avoid most problems. If at all possible, it is recommended that any foreign firm establish a working relationship with a Western law firm already operating in Ukraine as one of the first steps toward beginning its own operations. In Ukraine, unlike other FSU and Eastern European states, Western lawyers are held in unusually high regard and are more effective than most Ukrainian lawyers. The U.S. Embassy in Kiev offers a list of vetted lawyers and consultants to help U.S. businesses in Ukraine.

Another major hurdle to doing business in Ukraine, according to STRATFOR sources and to a World Bank survey, is tax issues. The corporate tax code is confusing, probably on purpose so that the state can manipulate corporations as needed. Taxes for all sectors, both manufacturing and non-manufacturing, do not follow the typical formula of requiring businesses to pay a certain percentage of their income. Among Central and Eastern European states, Ukraine has the highest corporate taxes. Although the official corporate tax rate is only 25 percent, this does not take into account the barrage of other taxes (state, value-added, etc.) that elevate the actual rate to about 55 percent. Proposed reforms would ease the burden on businesses at least in terms of pension, social security and insurance taxes. And electronic tax filing has reduced the time it takes to pay taxes, though it still takes three times longer to pay taxes in Ukraine than in any other Central or Eastern European country. Tax issues in Ukraine will continue to be burdensome for the foreseeable future.

Permits and inspections continue to be another serious barrier in the private sector. Businesses are hindered by excessive government control and an extremely strict system for obtaining permits. It is estimated that in Ukraine, the number of permits needed to operate a business are three to five times the number required in other FSU states. According to the World Bank, companies in Ukraine spend approximately $13 million in labor costs just trying to obtain permits. This is why so many Ukrainian businesses operate unofficially. It is estimated that approximately 25 percent of domestic businesses operate without permits, although foreign enterprises are required to maneuver through these permit hurdles to legally operate in the country. Also, Ukraine has more than 10 times the number of state inspections of businesses than the other FSU states. Many requirements imposed on businesses are outdated, overly complex and too expensive to meet, confusing businesses in determining how to comply. The harshest inspections are carried out by Ukraine’s State Tax Administration, State Fire Safety Inspectorate and State Sanitary and Epidemiological Service. On average, companies in Ukraine lose more than $37 million a year in dealing with such authorities.

With reforms under way, businesses are starting to feel the effects of laws adopted in 2006 that have cut the processing time for permit applications in half. Other reforms under consideration would create one consolidated national list of required permits instead of haphazard regional lists that are continually changing without notice.

Although Ukraine is considered one of the worst countries in which to do business, its IT sector is emerging as one of the most viable and one thatpeople have confidence in as a promising business avenue. During the Soviet era, Ukraine was a major hub of scientific research, particularly regarding the space program, and after the dissolution of the Soviet Union many of the scientists and facilities converted to high-technology fields, including IT. This sector received a significant boost in 2006, when the West began pouring more money into Ukraine after the Orange Revolution, assuming that the country would be Westernizing.

Дата добавления: 2015-11-16