2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report

Openness to Foreign Investment

GOVERNMENT'S ATTITUDE TOWARDS FOREIGN INVESTMENT

Ukraine encourages foreign trade and investment, and President Yanukovych, who was inaugurated in February 2010, prioritizes improving Ukraine's investment climate in his Economic Reform Plan. However, a complex tax code, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts, and corruption have made Ukraine a difficult place to invest. In fact, although the Government of Ukraine has listed improving the investment climate as a top economic policy goal since 2004, the overall investment and business climate remains poor, as evidenced by its low ranking-- 145 out of 183 economies -- in the World Bank's Doing Business Report for 2011 and by anemic figures for Foreign Direct Investment (FDI) in recent years. Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and a high level of corruption in the country, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.

Although Ukraine will see economic growth in 2010, it was hit hard by the global financial and economic crisis. GDP contracted by 15% in 2009, and the government turned to international institutions to help it cope with the crisis. A new IMF loan (following a 2008 loan that went off track in late 2009) was approved in July 2010 and makes $15.2 billion available to Ukraine over 29 months. Implementation of the loan's conditions should help improve Ukraine's macroeconomic situation and the operating environment for businesses. For example, while the non-payment of VAT arrears continues to taint Ukraine's reputation among foreign direct investors, the government has promised to eliminate VAT refund arrears to exporters by the end of 2010. Although this target was missed, the government remains under pressure to meet its commitment.

Ongoing Free Trade Agreement negotiations with the European Union should also move Ukraine toward a more open and transparent trade regime and help improve the investment climate, in particular if a Deep and Comprehensive Free Trade Agreement is agreed in 2011.

Despite the difficult operating environment, some investors are finding opportunities in Ukraine. Ukrainian legislation provides for national treatment of foreign investors, in line with its World Trade Organization (WTO) commitments.

For their part, officials at local levels are increasingly looking to attract investment and create jobs in their regions. In many instances, these local officials have become willing partners for investors in need of land or permits, which frequently are controlled below the national levels. Government officials at all levels have also become more receptive to public-private partnerships to finance and build needed infrastructure, particularly as Ukraine prepares to co-host Euro 2012 Soccer Championship games.

MAJOR LAWS/RULES AFFECTING FOREIGN INVESTMENT

The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment activity in Ukraine. In addition, the following key laws and regulations pertain to foreign investment:

-- Law "On the Foreign Investment Regime" (1996), which provides for equal treatment of foreign and Ukrainian-owned business with some restrictions in broadcasting and weapons manufacturing;

-- Law "On the Protection of Foreign Investment" (1991);

-- Cabinet of Ministers' Resolution "On the Procedure for the State Registration of Foreign Investment" (1996);

- Law of Ukraine “On Production-Sharing Agreements” (the “PSA Law”), which is effective in Ukraine since 1999.

-- The Land Code (2001) provides for private ownership of land, facilitating the privatization of land for agricultural purposes, but also established a moratorium on agricultural land sales. Agricultural land sales are still not possible. The Land Code also prohibits foreign ownership of farmland.

-- National Bank of Ukraine Resolution "On Regulation of Foreign Investing in Ukraine" (2005);

-- Law "On Amending Certain Laws of Ukraine with the Purpose of Overcoming Negative Impacts of the Financial Crisis" (2009).

-- Both a Civil Code and a competing Commercial Code went into effect on January 1, 2004. Lawyers and judges continue to grapple with how to implement the two laws, whose approaches to the regulation of business activities are contradictory. The Commercial Code has a number of provisions considered to be incompatible with market economics, and most experts believe it should be eliminated entirely.

RESTRICTIONS ON FOREIGN INVESTMENT AND REVIEW COMMITTEES

Under Ukrainian law, certain types of business activity may be pursued by state-owned enterprises only. These include some natural monopolies, the rocket industry, the production of bio-ethanol, and the printing of banknotes and blank securities forms.

In addition, Ukrainian law authorizes the government to set limits on foreign participation in "strategically important areas," although the wording is vague and rarely used in practice. Generally, these restrictions limit the maximum permissible percentage of foreign investment into Ukrainian firms in these sectors. For example, the share of foreign investors' participation in a Ukrainian publishing house is limited to 30%. Investments into the energy sector can also be problematic. A company's "strategic status" can be lifted by Parliament, on the recommendation of the Cabinet of Ministers, and foreign entities would then be allowed to participate. Although foreigners are prohibited from founding TV or radio stations, they can invest into already established entities in this area. In addition, foreign entities cannot buy agricultural land.

Ukraine's Anti-Monopoly Committee implements anti-monopoly, competition, and consumer protection legislation under the March 2002 Law "On Protection of Economic Competition." New companies and mergers/acquisitions face strict controls. Most investments, joint ventures with multiple partners, and share acquisitions require the Committee's approval. Those violating fair competition rules may be fined up to 10% of the prior year's turnover. If unfairly gained profit exceeds 10% of income, up to three times the normal penalty can be collected. The applicant, defendant, or a third party may appeal a Committee decision, but the appeal must be filed within two months after the decision is taken.

In April 2010, Ukraine canceled the mandatory registration requirement for foreign investment, which had been in force since November 2009.

PRIVATIZATION

The State Property Fund oversees the privatization process in Ukraine. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers claim, however, that a common abuse of privatization laws is the adjustment of the terms of a privatization contest to fit the characteristics of a certain, pre-selected bidder. Few major, new privatizations have been conducted since the privatization rush of 2004. In 2005, Ukraine revoked the privatization of the Krivorizhstal steel factory, which had been sold to a group of domestic investors for $800 million, and subsequently sold it in a fair tender to Mittal Steel for $4.8 billion, in what is generally viewed as Ukraine's most transparent major privatization to date.

No major privatizations took place in 2009 or 2010. The government has identified Ukrtelekom (Ukraine's state telecommunications operator), a large chemical producer (Odessa Portside Plant), energy generation companies, the Kryvorizhskiy Ore Mining and Processing Plant, and producer of turbines for power plants Turboatom as priorities for future privatization. Attempts at privatization in recent years were often marked by controversy.

CUSTOMS AND DUTIES

Burdensome customs clearance procedures are a disincentive to investment in Ukraine. Imported goods entering Ukraine often must be "cleared" by a number of state bodies, some of which do not operate 24 hours a day, causing extended delays. Corruption in Customs also remains a serious problem, and businesses report that Customs officials frequently demand bribes or special "fees" to expedite clearance. Companies have identified improper customs valuation procedures -- i.e. Customs officers valuing goods well above their true value, thereby raising the customs duties and value added tax owed -- as a major obstacle to doing business in Ukraine.

Import duties are calculated in accordance with the law "On the Customs Tariff of Ukraine." Upon becoming a WTO Member in 2008, Ukraine applied new, lower MFN rates to goods originating from WTO Members, in accordance with Article I of the GATT 1994. Preferential rates are applied to imports from twelve countries with which Ukraine has a Free Trade Agreement (FTA) or other preferential trade agreement, mostly from the CIS.

The customs tariff schedule comprises more than 11,000 tariff lines. Most customs tariffs are levied at ad valorem rates, and only 1.5 percent of tariff line items (down from 5.97 percent prior to WTO accession) are subject to specific or combined rates of duty. These specific and combined rates apply primarily to agricultural goods that are produced in Ukraine, such as grains, sugar, and vegetables like carrots and potatoes. The average applied tariff rate fell in 2010 to 4.76 percent from 4.95 percent after WTO accession. For agricultural goods, the average applied tariff rate is now 8.95 percent down from 9.11 percent last year. For industrial goods the average applied rate is now 3.52 percent down from 3.71 percent last year.

Ukraine introduced grain export quotas on October 18th, 2010 and will restrict grain exports (wheat, corn, barley, rye, and buckwheat) to 4,202,000 MT (metric tons) until at least March 31th, 2011. The quotas and their distribution, which has been non-transparent, raise questions about Ukraine's commitment to the open trading principles of the WTO.

PROCUREMENT

Ukraine's new government procurement law, which came into effect on July 30, 2010, aims to make procurement non-discriminatory and more transparent. The thresholds for applying the public procurement mechanism have been kept at the previously applicable level of UAH 100,000 (US$ 12,500) for purchasing goods and services and UAH 300,000 (US$ 37,500) for public works projects. The new law does allow for certain exemptions to its regulations, such as for EURO 2012, the European Football Championship that Ukraine and Poland are co-hosting and that is expected to cost in the billions of dollars for new stadiums, airports, and other infrastructure improvements.

The Ministry of Economy of Ukraine (the "Ministry of Economics") continues to have the main regulatory and supervisory authority in the field of the public procurement.

The main changes introduced by the law include the following:

  • non-residents of Ukraine will be able to participate in the public procurement procedures on a parity basis with Ukrainian residents;
  • the Anti-Monopoly Committee of Ukraine (the "AMC") will have the power to review disputes arising out of the public procurement procedures (previously the tender participant's appeals would have been addressed to the Ministry of Economy or directly to the tender organizer (i.e. the customer.)) Courts may still review disputes as well;
  • the period for consideration of an appeal has been extended from 20 to 30 business days;
  • tougher qualification requirements of the bid participants or participants of the preliminary qualification have been introduced. For instance, under the new rules, the tender participant must submit bank statements confirming details of any indebtedness;
  • public procurement mechanisms as "reduction" and "bids with limited participation" have been removed. Other public procurement procedures, such as open bids, two-step bids, procurement from the sole participant, have also been modified to make these procedures more transparent;
  • administrative fines imposed for infringement of public procurement laws have been increased to a maximum of UAH 17,000 (US$2,125).

Implementing mechanisms for the new law were not yet fully in place as of the end of 2010, and amendments to the law are pending in Ukraine's legislature. As a result, it is too early to evaluate whether the law will improve the functioning of Ukraine's government procurement system.

In the past, foreign firms have complained of: (1) the lack of public notice of tender rules and requirements; (2) covert preferences in tender awards; (3) the imposition of conditions that were not part of the original tender requirements; and (4) ineffective grievance and dispute resolution mechanisms, which often allow a losing bidder to block the tender after the contract has been awarded.

Ukraine is not yet a signatory to the WTO Agreement on Government Procurement (GPA).

Conversion and Transfer Policies

RESTRICTIONS ON CONVERTING/TRANSFERRING FUNDS

The 1996 Law "On Foreign Investment" guarantees the "unhindered transfer" of profits, revenues, and other proceeds in foreign currency after taxes and other mandatory payments.

While foreign investors may repatriate earnings, companies must obtain a license from the National Bank of Ukraine (NBU) for some operations. For repatriation of hard currency, each transaction over $50,000 must be approved by the NBU. The NBU also charges a fee to review the transaction. Foreign exchange is readily available at market-determined rates. The exchange rate for Ukraine's currency, the hryvnia (UAH) was relatively stable in late 2010, trading at about UAH 8 per one dollar, after a period of high volatility linked to 2008-2009 financial crisis.

A pension fund tax on hard currency purchases was canceled beginning July 1, 2010; however, it will likely be reintroduced in 2011

On April 27, 2010 Ukraine’s parliament reversed almost all amendments, introduced in June 2009 to fight the economic crisis, which had complicated investment procedures. The new legislation canceled the requirement to open investment accounts with local banks, mandatory registration of investments, and requirements for investment transactions in hryvnia only. The law on The Foreign Investment Regime envisages voluntary registration of foreign investment with the Ministry of Economy. However, only registered foreign investment have the right to guarantees and privileges envisaged by the law.

In late 2008, the NBU issued a series of regulations designed to respond to the financial crisis and limit capital flight. These regulations are still in place as of the end of 2010, and include limiting individual residents' and non-residents' monthly transfers of foreign currency to 15,000 hryvnia ($1900) without supporting documentation (e.g., court decision, contract, purchase invoice, etc.) or up to an equivalent of 75,000 hryvnia a month with supporting documentation. Exemptions are allowed for medical expenses abroad or travel related to said expenses; or payments connected with a death in the family abroad; or money transfers made to enforce court or law enforcement decisions; as well as transfers made as part of a permanent departure from Ukraine.

Also since November 2008, short-term foreign currency loans (six months) by foreigners to Ukrainians have been subject to new restrictions. Loans to Ukrainian borrowers can no longer be paid directly to a foreign counterpart without a transfer through the borrowers' bank account, which must be in a Ukraine-based bank (foreign or domestic-owned), absent a special license from the NBU. In addition, interest rates which can be applied to each tranche of a loan to a Ukrainian borrower under a single facility are now capped based on the NBU's rates for loan agreements of similar terms. Previously, the NBU had relaxed the cap on foreign currency loans by foreigners to Ukrainians in an effort to attract foreign lending to Ukraine. However, starting in November 2010, the NBU has obliged non-financial companies, which issue guarantees on foreign loans to obtain NBU licensing to execute such guarantee. The measure is aimed at limiting currency outflow from Ukraine.

Beginning in September 2010, the NBU resumed a 20% reserve requirement on short-term currency loans and deposits obtained by banks from foreigners.

Investors convert their earnings into foreign currency through commercial banks, which purchase foreign currency on the electronic inter-bank currency market. Commercial banks may trade foreign currency in electronic form with other banks through participation in electronic inter-bank currency market, regulated and operated by the NBU. To purchase hard currency, companies must provide their banks with a copy of their foreign trade contracts. Commercial banks must announce their clients' intentions to sell on inter-bank currency market if the transactions exceeded $500,000. The Law "On the Circulation of Promissory Notes" provides an opportunity for payments in foreign currency and issuance and circulation of promissory notes, in accordance with the 1930 Geneva Convention "Providing a Uniform Law for Bills of Exchange and Promissory Notes."

At present, there is no legal parallel market that investors might use to remit returns on their investment such as convertible instruments or foreign currency denominated bonds, although this is an item that the Ministry of Finance and NBU have considered in the past. There is no legal limit on the inflow or outflow of funds for profits, debt service, capital gains, returns on intellectual property, or export/imports.

Direct investors seeking to liquidate and repatriate their investments face stringent documentary requirements, though the NBU has stated its willingness to waive requirements if documents from the original transactions are no longer available. Nonresident investors who wish to convert dividends or divestment income into foreign currency must provide proof of the initial foreign investment.

Expropriation and Compensation

Under the 1996 Law "On the Regime of Foreign Investment," a qualified foreign investor is provided guarantees against nationalization, except in cases of national emergencies, accidents, or epidemics. On November 17, 2009 the Parliament adopted the law on transfer of land plots and property for public needs. The law gives clear definition of public need, defines procedures for such an expropriation, and provides a list of possible reasons for expropriation for public needs.

Expropriation of property is rare, although in 2008, the government abruptly cancelled a Production Sharing Agreement with a U.S. company to explore for oil and gas in the Black Sea, for which a resolution is currently being negotiated, and in 2010 law enforcement officials forcibly removed a U.S.-invested floating restaurant from is moorage on the Kyiv waterfront without providing documentation or further access to the owners. International institutions have recommended that definitions of expropriation and nationalization in the foreign investment law and bilateral treaties be expanded to include indirect and creeping expropriation. Courts have the jurisdiction to determine whether owners of privatized enterprises failed to pay for an enterprise or to implement investment commitments in a privatization sale. Failure to pay or invest allows the GOU, with court permission, to revoke ownership and resell the property.

Dispute Settlement

EXTENT AND NATURE OF INVESTMENT DISPUTES

The Embassy continues to provide advocacy on behalf of U.S. investors. For many years, investment disputes frequently have involved key problems with the investment climate such as the lack of adequate rule of law, fair and impartial dispute resolution mechanisms, and enforcement of domestic court and international arbitration decisions. Another problem is poor corporate governance (inadequate protection for shareholder rights, inadequate disclosure, asset-stripping, and voting fraud). Currently, there is no single point of contact in the Ukrainian government tasked to help resolve business and investment disputes involving foreign companies. Most U.S. businesses have little confidence in Ukrainian courts. Commercial contracts may permit the parties to use international arbitration or specified foreign courts to settle disputes. Though Ukrainian legislation recognizes international arbitration decisions, in practice such decisions can be very difficult to enforce in Ukraine.

Corruption continues to lie at the heart of many investor disputes. Laws and regulations are vague, with considerable room for interpretation, providing officials at every bureaucratic layer ample opportunities for rent seeking.

If a foreign investor is involved in a dispute with the State Tax Administration (STA), the STA will often request that the Ministry of Economic Development and Trade impose sanctions against the foreign company, preventing it from clearing its goods through customs or engaging in financial transactions with entities outside of Ukraine. The State Customs Service has also used the non-tariff barrier of 'quality certification' to impose de-facto bans on exports of selected commodities. Neither practice is codified in Ukrainian law, but both are part of the government's standard procedures.

DESCRIPTION OF UKRAINE'S LEGAL SYSTEM

In the event of a commercial dispute, a foreign investor may seek recourse through a number of institutions. Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided by international treaties. All other disputes involving a foreign investor must be settled in the Ukrainian courts, in courts of arbitration, including international arbitration courts, or other bodies of dispute resolution chosen by the parties to the dispute.

Ukraine's court system consists of the Constitutional Court and the courts of general jurisdiction. The Constitutional Court has exclusive jurisdiction over interpretation of the Constitution and laws of Ukraine and acts as final arbiter on constitutional issues. Courts of general jurisdiction are organized by territory and specialty and include: (i) local courts; (ii) appellate courts; and (iii) Supreme Courts. Local courts are either courts of general jurisdiction (including military courts) or specialized courts (i.e. commercial and administrative courts). Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in disputes connected with legal relations in the area of state government and municipalities (except military disputes).

Since Ukraine is a civil law country, the exercise of judicial power is based solely on the application of statutes. Court decisions do not constitute binding precedents, although Supreme Court and Supreme Commercial Court decisions are summarized, to introduce uniformity to the interpretation and application of the applicable legislation, and are followed by the lower courts on a quasi-mandatory basis.

Commercial courts of Ukraine accept jurisdiction over disputes between legal entities, including foreign legal entities, Ukrainian legal entities and individual entrepreneurs, arising out of the conclusion, modification, termination, and performance of commercial agreements (including privatization). Commercial courts are also in charge of administering bankruptcy cases and certain cases initiated by the Antimonopoly Committee of Ukraine and the Accounting Chamber.

Administrative courts handle tax, customs, and certain antimonopoly disputes.

ENFORCEMENT OF RIGHTS

Investors criticize Ukraine's legal system for its inefficiency, burdensome procedures, unpredictability, corruption, and susceptibility to political interference. Even when they obtain favorable decisions, investors claim the decisions are sometimes not enforced. The enforcement responsibilities fall under the State Enforcement Service, which reports to the Ministry of Justice.

The procedure for recognizing and enforcing foreign court decisions is regulated by Section 8 of the Code of Civil Court Procedures of Ukraine. In accordance with the Code, a foreign court decision is recognized and enforced in Ukraine if such recognition and enforcement is provided for in international treaties, the mandatory nature of which has been endorsed by the parliament, or based on a mutual ad-hoc agreement with a foreign state whose court has rendered a decision that is to be enforced in Ukraine.

The State Enforcement Service implements decisions rendered by foreign courts and arbitration tribunals in accordance with the Law "On Enforcement Proceedings." The Law "On Implementing Decisions and Applying Practices of the European Court of Human Rights" entered into force on March 30, 2006. Along with a subsequent Cabinet of Ministers implementing Resolution, the law obligates the Ministry of Justice to ensure implementation of the Court's decisions.

COMMERCIAL LAW

Competing Civil Code and a Commercial Codes both went into effect on January 1, 2004. Lawyers and judges have since grappled with how to implement the two conflicting laws. Despite heavy criticism of the Commercial Code by businessmen and GOU officials, Parliament has not yet taken action to amend or annul it. The Civil Code ensures protection of the rights of private property, of engaging in contracts, and of entrepreneurial activity. It provides a unified framework for economic regulations.

The Civil Code is generally market-oriented and modern, but the Commercial Code is often contrary to market economy principles and directly contradicts provisions of the Civil Code in numerous instances. The Commercial Code aims to preserve a privileged position for the public sector of the economy and allows for governmental interference in private commercial relations. Further, in both codes, gaps in regulation exist. The existence of these two codes creates uncertainty in planning and structuring transactions, and leaves questions surrounding transactions unanswered. Problems arising from these two codes also surface in the resolution of disputes, as courts are not able to resolve the conflicting provisions of the codes, or are not able to fill in the gaps in regulation that arise as a result of the missing provisions in the codes. Finally, other commercial laws have not been harmonized with these codes.

A 1999 bankruptcy law provides for debtor-led reorganization, a meaningful moratorium on payment and collection of pre-existing debt, and a tax forgiveness provision. Creditors protect their rights under the law by electing a creditors' committee, which is actively involved in the bankruptcy proceedings. Most observers believe the bankruptcy laws should be amended to provide more protection for creditors. Notice provisions, protections for the rights of minority shareholders, and procedures for valuation and the sale of assets to satisfy liabilities are undeveloped.

CORPORATE GOVERNANCE

Problems with corporate governance in Ukraine involve corporate ownership, shareholder rights, transparency, and disclosure. The Law "On Companies" offers scant protection for minority shareholders against insider dealing, asset stripping, profit skimming, and share dilution. Corporate finance is restricted. Some examples of shareholder rights abuses include limited disclosure, capital restructuring without shareholders' consent, and shareholder voting fraud. A new Joint Stock Company law, which came into effect in April 2009, introduced principles of sound corporate practices that meet international standards. The transition to the new rules will be completed by May, 2011.

Corporate governance in Ukrainian companies is usually based on three-tier system and includes a general meeting of shareholders, a supervisory board, and an executive body (either single or collegial). The executive's body activity and financial performance of a company is controlled by a revision commission.

BINDING INTERNATIONAL ARBITRATION

Ukraine enacted an international commercial arbitration law in February 1994, which parallels commercial arbitration laws set forth by the United Nations Commission on International Trade Law. Ukraine is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitration Awards. Some investors have problems enforcing foreign arbitration awards in Ukraine. Foreign arbitral award enforcement procedures in Ukraine are regulated by a number of statutes and regulations, including the Section 8 of the Civil Procedural Code and a law "On Enforcement Proceedings." In early 2000 Ukraine ratified the Washington Convention, providing for use of the International Center for Settlement of Investment Disputes (ICSID), an internationally recognized mechanism for resolving investment disputes between investors and the GOU. The U.S.-Ukraine Bilateral Investment Treaty (BIT), signed in November 1996, recognizes arbitration of investment disputes before the ICSID. One major investment dispute involving a U.S. company was resolved in May 2006 through a combination of direct consultations with the Ukrainian government and international arbitration by ICSID.

Ukraine’s International Ranking:

Table:

Measure Index/Ranking Year

TI Corruption Index 134 2010

Heritage Economic Freedom 162 2010

World Bank Doing Business 145 2011

MCC Govnt Effectiveness -0.40 (23%) FY11

MCC Rule of Law -0.40 (26%) FY11

MCC Control of Corruption -0.51 (19%) FY11

MCC Fiscal Policy -3.8 (26%) FY11

MCC Trade Policy 85.2 (93%) FY11

MCC Regulatory Quality -0.13 (39%) FY11

MCC Business Start Up 0.977 (69%) FY11

MCC Land Rights Access n/a

MCC Natural Resource Mgmt 93.50 (84%) FY11

Performance Requirements/Incentives

PERFORMANCE REQUIREMENTS

There are no current performance requirements or incentives, except for those made part of privatization agreements. In 2010, the GOU claimed Arcelor-Mittal had failed to make required investments in the Kryvy-Rih steel foundry and subsequently attempted to re-nationalize the facility on that basis. However, Ukrainian courts rejected the GOU's argument, and the matter was settled in Arcelor Mittal's favor.

Ukraine eliminated measures that conflict with the WTO Agreement on Trade-Related Investment Measures (TRIMs) in the automobile industry and other sectors in the context of its accession efforts. Currently Ukraine has not notified the WTO of any measures that would be inconsistent with TRIMs requirements or violate TRIMs obligations.

INVESTMENT INCENTIVES

Ukraine modified its foreign investment law of 1996 to provide foreign investors a number of state guarantees, the most important being the unhindered and immediate repatriation of profits and stable regulations for the time of the investment. Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company's charter fund. Some restrictions apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property. There is no current requirement that investors purchase from local sources or export a certain percentage of output, or only have access to foreign exchange in relation to their exports.

There are no official "offset" requirements, whereby major procurements are approved only if the foreign supplier invests in manufacturing, R&D, or service facilities in Ukraine related to the items being procured. With that said, however, the high level of corruption involved in government procurement may result in these sorts of terms being unofficially introduced into investment deals. Regarding government/authority-imposed conditions on permission to invest, there has been a ban, in place since 2003, on foreign investment in sectors considered 'strategic' by the GOU - primary its energy infrastructure and development of its natural energy resources. This ban was partially lifted in late December 2010 with a presidential decree allowing investment in Ukrainian power plants. A ban is also in place on the purchase of agriculturally-zoned land, forcing many investors to use long-term (49-year) leases instead.

U.S. and other foreign firms are able to participate in government/authority financed and/or subsidized research and development programs on a national treatment basis.

VISA/WORK PERMIT REQUIREMENTS

A passport valid for six months beyond the planned date of travel is required for entry. U.S. citizens do not require a visa as long as their length of stay in Ukraine is less than 180 days and their purpose of travel is tourism, private travel, or business. A U.S. citizen must have a valid Ukrainian visa if their planned stay exceeds 180 days or if their purpose of travel is other than tourism, private travel, or business. The Government of Ukraine does not issue visas at its borders or ports of entry. Visas must be obtained in advance by those who need them. U.S. citizens may apply for all types of visas through Ukrainian Embassies and Consulates overseas. Contact details for Ukrainian Embassies and Consulates are available on the Ministry of Foreign Affairs web site at http://www.mfa.gov.ua/mfa/en/305.htm or http://www.mfa.gov.ua/mfa/en/403.htm. Visas may be obtained from the Consular Office of the Embassy of Ukraine in Washington, D.C., or from Ukrainian Consulates General in New York, Chicago, or San Francisco.

Mandatory registration for short-term visits of up to 180 days is completed at the border by border control offices and is valid for a period of 180 days in one year. In other words, a traveler may come to Ukraine as a tourist for a cumulative period of 180 days within a consecutive period of 360 days without a visa. The calculation of the 180-day period begins from the date of the first entry into Ukraine. This regulation applies to all American citizens irrespective of the date of their entry into Ukraine.

Future extensions for stays exceeding 180 days are completed through the Ukrainian Ministry of Internal Affairs' Office of Citizenship, Immigration and Registration (OVIR). Most cities have several OVIR offices. Extensions are not automatic, however, and are valid only for continued presence in the country. It is not possible to depart Ukraine and return on the extension, nor can an adjustment to visa status be made from within Ukraine. Applications for extension of registration should be submitted at least three days before the current registration expires.

All foreigners -- except those with permanent residency status -- are required to have a work permit to work in Ukraine. The Laws of Ukraine "On Population Employment" and "On the Legal Status of Foreigners" define the procedures for obtaining a permit at the State Employment Service. Cabinet of Ministers Resolution #917 from July 11, 2007 introduced some changes to the rules surrounding work permits, although implementation of this new regulation has been unclear and inconsistent.

Resolution #917 states that, if a foreigner intends to travel to Ukraine for employment, the employer in Ukraine must obtain a work permit from the Ministry of Labor. The foreigner should then apply at a Ukrainian Consulate for an IM-1 visa. After the applicant enters Ukraine, he/she should submit his/her passport with the IM-1 visa and work permit to the local Department of Citizenship, Immigration, and Registration, which will provide a passport stamp allowing the person to leave and re-enter Ukraine. For stays longer than one year, the employer must apply to the Ministry of Labor for an extension of the work permit. If a foreigner enters Ukraine without a visa, the employer must apply to the Ministry of Labor for a work permit, and, upon approval, the employee must register with the Department of Citizenship, Immigration, and Registration. Spouses/family members of IM-1 visa holders are not automatically entitled to IM-1 status. However, if they intend to stay in Ukraine for more than 90 days, they must have a visa - most likely a P-1 (private) visa. When the IM-1 visa holder registers his/her work permit at the Department of Citizenship, Immigration, and Registration, he/she should request the same status for family members. Family members will receive a different stamp (most likely a permit for temporary residence) to allow them to stay in Ukraine and travel in/out of the country just like the IM-1 visa holder.

Cabinet of Ministers Instruction No. 892, dated September 12, 2005, extended work permits from one year to the tenure of employment for foreign citizens working in managerial or specialized positions in Ukraine and individuals providing services without their commercial presence in Ukraine. Employers must notify employment centers, police, and the State Committee for Border Protection three days before revoking contracts with foreign nationals.

Right to Private Ownership and Establishment

The Constitution of Ukraine guarantees the right to private ownership, including the right to own land. A new Land Code consistent with the Constitution was adopted on October 25, 2001. The Land Code provides for foreign ownership of non-agricultural land and clarifies the rights of foreign investors.

The major provisions of the Land Code address the right of individuals to own, buy, and sell land. It classifies land into seven categories, based on potential use including agricultural, industrial, and natural reserve lands. The mix of state control and ownership rights varies with each type of land. It is easier to own, buy, sell, and mortgage industrial land than agricultural land.

A longstanding moratorium on the sale of agricultural land remains in effect. The Land Code also prohibits foreigners from owning agricultural land directly. The creation of a legal Ukrainian-registered business to purchase (non-agricultural) and manage (all types) land in Ukraine is not prohibited. The Land Code codifies the state's right to oversee private land transactions via registration, the court system, and dispute mediation, as well as broad government/state rights to "influence" the land market.

Ukraine's Law "On Ownership" recognizes private ownership and includes Ukrainian residents, foreign individuals, and foreign legal entities among those entities able to own property in Ukraine. It permits owners of property (including foreign investors and joint ventures) to use property for commercial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. The Law "On Ownership" is not comprehensive and mechanisms for the transfer of ownership rights are weak. Some difficulties have arisen when foreigners acquire majority control of enterprises, with the government or the current management in some cases continuing to exercise effective control of company decisions.

Protection of Property Rights

MORTGAGES

Since 2000 Ukraine has 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 ($6.6 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. In October 2010 the GOU resolved to increase the SMI’s capital to UAH 2.2 billion (about USD 277 million). SMI’s actions, which were intended to bring liquidity to the market, had limited success. A report released in June 2010 by the Audit Chamber of Ukraine accused the SMI of misusing the UAH 3 billion it borrowed from 2007 to 2009 under state guarantee.

USAID helped create 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.

Mortgage lending more than doubled in 2007, increased by another 56 percent in the first eleven months of 2008 to reach UAH 78 billion (roughly $10 billion). New lending, however, came to a virtual halt in late 2008 as a result of the ongoing financial crisis, as the real estate market experienced a severe correction and the local currency faced a sharp devaluation against the U.S. dollar. As a result of the financial crisis, the estimated volume of non-performing loans peaked at 20% of the total loan portfolio. In an attempt to limit currency risk among mortgages, Ukraine banned new mortgage lending to private persons in foreign currency in November of 2009.

In 2010, the volume of mortgage lending stabilized at UAH 85 billion (roughly USD 10.7 billion). Nearly all mortgage lending is for residential real estate loans. Lack of available lending has caused many construction companies to suspend existing projects and refrain from new investment, slowing down mortgage market development. The construction industry posted a 9% decline in the first ten months of 2010 on top of a 48.2% decline in 2009.

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. Per new cabinet orders, there is a silent consent provision on permit applications in which the permits are automatically approved if there has been no decision made on them after 30 days from the time of submission. Once these cabinet orders are fully implemented, corrupt officials in multiple agencies/ministries will lose their ability to create additional and unnecessary costs and delays for private businesses. The World Bank "Doing Business 2011" report on 183 countries rated Ukraine 118th for ease in starting a business, up from 134th in the 2010 report. "Doing Business 2010" estimates that on average it takes 27 days and approximately $150 (6.1% of GNI per capita) to open a business in Ukraine; OECD averages are 13.8 days and 5.3% 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 provides a list of activities subject to licensing. The October 22, 2010 amendments canceled licensing requirement for 22 types of economic activities. Licensing applies to 56 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 an impediment to commerce in Ukraine. Fees are described as high and compliance time consuming, 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. As of December 23, 2009, the list included printer’s ink, paper with watermarks, optical media production inputs, like optical polycarbonates and optical disc manufacturing equipment, some industrial chemical products, some pharmaceuticals, waxes and shoe polishers, detergents and cleaners, dyes, paints and lacquers, some hygiene and cosmetics products, refrigerators, heat pumps, fire extinguishers, air humidifiers and dryers, arms and personal protection aerosols and ozone-depleting substances.

While the import licenses themselves are granted automatically to applicants, some products require 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. In some cases import permits themselves serve as indirect non-automatic import licenses without Ministry of Economy participation (such as product of animal origin import permits issued by the State Veterinary and Phytosanitary Service). For some goods, product certification is a prerequisite for an import license. Importers can request that a foreign facility be certified as in compliance with Ukraine's technical regulations that apply to imports. The U.S. distilled spirits and fish processing industries reports that this option usually involves a burdensome and costly inspection visit by Ukrainian government officials. If approved, the supplier receives a certificate of conformity valid for 2 years to 3 years and avoids the burden of certifying each shipment and mandatory laboratory testing upon arrival in Ukraine.

RULEMAKING/INSPECTIONS

Proposed draft laws and regulations are available for public review on the official website of Parliament and executive government agencies, but there is no formal procedure for submitting comments and may be posted with little time for review.

Current Ukrainian legislation envisages a mandatory financial inspection of all business entities each year and requires a minimum of 10 days notice. Non-financial inspections (i.e. taxes, fire safety, sanitation, etc.) can be burdensome impediments to doing business in Ukraine.

TECHNICAL REGULATIONS: STANDARDS, TESTING, AND CERTIFICATION

U.S. and other foreign companies have long regarded Ukraine's system of technical regulations as a significant obstacle to trade and investment. Ukraine has passed several new laws and governmental decrees in recent years aimed at bringing Ukrainian practices in this area into line with the WTO Agreement on Technical Barriers to Trade (TBT), but significant problems remain. Based on the old Soviet system, the Ukrainian technical regulations system is characterized by burdensome, ex ante control, and widespread compulsory standards, and it differs markedly from systems in Europe and OECD countries.

Contrary to accepted international practice, standardization in Ukraine is not a voluntary procedure through which manufacturers can ensure specific properties of a process or product, but rather a part of the state regulatory system. Standards are compulsory for virtually all goods, and many services. Mandatory certification is required in Ukraine for over 300 types of goods and services and remains applicable de facto for an even larger number of goods and services (Derzhspozhystandard Order #28 of February 1, 2005 with amendments). Mandatory certification is often required without regard to the products' actual level of risk to the public, or to other types of regulation already applicable. Mandatory certification in Ukraine is applicable both to domestic products and to imported goods in most cases, generally irrespective of whether they already have proof of conformity with applicable international technical regulations. In addition, mandatory certification applies to produced goods rather than to the production process, thus forcing manufacturers to complete certification procedures repeatedly or to submit proof of conformity assessment for each batch of products.

Most current standards were created under the Soviet Union, do not correspond to international standards, and are typically far more restrictive and prescriptive than necessary.

On December 9, 2010 by Presidential Decree #1085 the State Committee for Technical Regulation and Consumer Policy (DerzhSpozhyvStandard), the standardization and certification body in Ukraine, was reorganized into the State Service of Technical Regulation. Before the reorganization Derzhspozhyvstandard was responsible for developing and approving standards, issuing certificates, conducting inspections of producers, and ensuring market surveillance and protection of consumer rights. This confusion of functions, including the bundling together of commercial certification functions with state supervision functions, combined with the fact that the same organization provided certification services and appointed other certification bodies, meant that there were considerable conflicts of interest and excessive discretionary powers. Appropriate resources, such as modern analytical equipment and reactants, were not available in most DerzhSpozhyvStandard laboratories. Depending on the type of product, testing, and applicable certification scheme, the certification process could take from 3 days to 1 month. Experts alleged that government officials responsible for issuing licenses often required businesses to provide documents that were not mandatory, deliberately concealed information in order to confuse a potential licensee, or delayed issuing documents in order to induce licensees to offer a bribe. So far, there is very little information about the functions and responsibilities of the newly established State Service of Technical Regulation that has a different name, but may have similar powers and approaches.

During WTO accession negotiations, Ukraine pledged to continually review the list of products subject to mandatory certification and to reduce the number of products on this list, if the legitimate objectives could be met in a less trade-restrictive manner. In a positive move in September of 2010 Derzhspozhyvstandard removed almost all items from the food certification list with the exception of baby food, tobacco, and alcoholic beverages. An April 2008 amendment to the law "On Standards, Technical Regulations, and Conformity Assessment Procedures" helped to ensure that Ukraine's authorities would accept the results of alternative methods of conformity assessment, including those performed in the United States. Ukraine's National Accreditation Agency is an affiliated member of the International Laboratory Accreditation Cooperation (ILAC), and in 2009 it made a first step toward full membership – signing an Agreement with European Cooperation for Accreditation (EA) about personnel accreditation. Once it becomes an ILAC member, Ukraine should significantly increase the acceptance of test results of laboratories accredited with, and notified by, ILAC member bodies.

SANITARY AND PHYTOSANITARY (SPS) MEASURES

Ukraine applies a range of SPS measures that restrict imports of a number of U.S. agricultural products, among them, pork, beef, and poultry. Industry has repeatedly complained that Ukraine's certification and approval process is lengthy, duplicative, and expensive. Over the past several years, 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.

The following SPS issues may be of particular importance to companies doing business in Ukraine:

Overlapping State Authorities: Ukraine has maintained a complex and nontransparent oversight system for human and animal health measures that involves overlapping authority by the Veterinary and Phytosanitary Service, Sanitary Service of the Ministry of Health, and DerzhSpozhyvStandard (now State Service of Technical Regulation). Several legislative amendments passed as part of the WTO accession process made progress but did not solve entirely the problem of overlapping authority.

Beef, Beef Products, and Pork: A U.S.-Ukraine bilateral agreement reached during WTO negotiations addresses the terms of U.S. exports of beef, beef products, and pork to Ukraine. Although Ukraine has allowed the entry of certified U.S. beef and pork that meets veterinary certificate requirements, the trade remains limited by import permits and custom valuation measures. In 2009, raw animal products, feed additives, livestock feed, and veterinary drugs were made subject to mandatory certification by Ukraine's State Veterinary and Phytosanitary Service.

Biotechnology: Ukraine has not established an approval process for agricultural biotechnology products. The incompleteness of an approval process has resulted in unpredictable sales conditions for corn products, soybeans, and meal. The United States is working with Ukraine to establish procedures governing biotechnology that are supported by science-based risk assessment principles and guidelines, including those of the WTO SPS and TBT Agreements, the Codex Alimentarius, and the International Plant Protection Convention (IPPC). Although Parliament passed a law in 2007 establishing the framework for the creation, testing, and use of products of biotechnology, the necessary implementing regulations to open the market are still under development.

In 2009, Parliament passed laws requiring all food product labels to include information about the presence or absence of biotechnology (GMO) content. Every single food product that appears on the shelf has to be labeled accordingly. The food industry had to absorb the additional costs (GMO-testing, labeling, etc.) and highly opposed the measure. At present, a limited list of food products that will require GMO-testing is being considered. In addition, a number of draft laws that regulate issues of biotechnology are being considered among which are two that call for absolute bans on the import and sale of biotechnology in Ukraine.

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. There are 175 banks registered in Ukraine, including 53 with foreign equity participation, and 20 that are fully foreign owned. The five largest banks control 36% of the market, representing the lowest market concentration level in all of central and Eastern Europe. Foreign capital represents 39.1% of total capital in the banking sector as of December 1, 2010. Ukraine remains a cash economy, but the use of credit cards and ATM machines is on the rise. In absolute terms, however, the banking sector is still fairly small. Total bank assets in Ukraine are about UAH 942 billion, with total loan assets of UAH 758 billion (as of December 2010).

In 2004-2008 Ukraine's banking system expanded rapidly and played an important role in the development and modernization of the economy as a whole, and in providing wider groups of the population with access to credit. However, the reliance of banks on foreign borrowing to fund domestic lending operations made Ukraine's banking system sensitive to international shocks. With the global financial crisis, foreign credit dried up for Ukrainian banks in late 2008 and Ukraine's banking sector came under pressure.

Two IMF stand-by arrangements (November 2008 and July 2010) have helped Ukraine meet its external debt commitments, and have demanded restructuring of the financial system. An audit of the banking system conducted under the IMF identified systemically important banks in need of recapitalization. To streamline recapitalizations, the National Bank of Ukraine (NBU) raised the share of subordinated debt which could be counted as capital from 50% to 100%. Banks used the permission extensively, raising the share of subordinated debt to 25% of the banks’ own capital. In 2009, the state recapitalized three banks, raising the number of state-owned banks to five. The NBU also introduced provisional administrations in banks where solvency problems were most acute. Four banks remained under provisional administration by the National Bank of Ukraine and 19 were undergoing liquidation, as of December, 2010.

The banking crisis virtually froze corporate and consumer lending. Corporate lending grew by only 7% over the first nine months of 2010 and consumer lending fell by 8% over the same period. Non-performing loans are estimated at about 30% of the banking sector's total loan portfolio, and the problem was still surfacing as of the end of 2010. While the NBU's official estimation of non-performing assets is only 11.9% , this official estimate takes into account the overdue part of the problematic loan only, not the full outstanding loan amount. Insufficient foreclosure and bankruptcy procedures prevent fast resolution of bad debt and force banks to accumulate large provisioning to cover possible losses, which limits lending opportunities and slows recovery from the crisis.

In January 2002, the law "On Banks and Banking Activity" eliminated discrimination against foreign-owned banks. It entrusted the NBU with issuing banking licenses and included provisions to prevent money laundering. The NBU sets minimum capital requirements each year to be met by the banks by year-end. Current minimum capital requirements range from EUR 7 million (UAH 75 million) to EUR 15 million (UAH 148.4 million). In December 2010, the NBU announced its intention to raise the minimum capital requirement to about EURO 45 million. However, only 50 Ukrainian banks currently meet the suggested requirement, and the new requirements may not be adopted. Foreign-licensed banks may carry out all activities that domestic banks do and there is no ceiling on their participation in the banking system, including operating via subsidiaries in Ukraine. In November 2006, the Rada approved an amendment to the law "On Banks and Banking Activity" permitting foreign banks to operate via branch offices. Foreign banks have significantly increased their presence in Ukraine's banking sector in recent years, usually through the acquisition of Ukrainian banks.

It is also worth noting that in December, 2009, the PFTS Association, which owns the Ukraine's largest stock exchange, increased its authorized capital and sold the additional shares to the Russian exchange MICEX, giving MICEX a 50% ownership in the PFTS Exchange.

Ukraine's anti-money laundering regime (AML) is established by the Law on Prevention and Counteraction to Legalization (Laundering) of the Proceeds of Crime or Terrorism Financing, with the primary financial monitoring function assigned to the State Committee for Financial Monitoring. In 2010 Ukraine amended its AML regime to increase compliance with FATF recommendations. In October 2010, the Financial Action Task Force (FATF), the primary worldwide body that oversees AML efforts, identified Ukraine among jurisdictions which have strategic deficiencies in its AML regime, but has developed a plan of actions to address them. The evaluation of Ukraine's AML regime by the Council of Europe's Committee of Experts on the Evaluation of AML Measures and the Financing of Terrorism (Moneyval) is expected in March of 2010.

Reacting to the sharp drop in bank deposits in late 2008, the NBU moved to impose restrictions on early withdrawal of deposits and ordered banks to review their existing deposit base and better classify accounts. As the deposit outflow subsided, the NBU canceled the ban on pre-term withdrawal of bank deposits in May, 2009. Deposit guarantees were tripled from UAH 50,000 to UAH 150,000 (although doubled in dollar equivalent from USD 10,000 to USD 20,000).. The government also took steps to implement the bank resolution plan foreseen in the IMF loan agreement.

INSURANCE

With WTO accession in 2008, Ukraine gave foreign companies the right to operate in Ukraine's insurance market. During the 5 year transition period foreigners have the right to provide a limited number of insurance services and are required to open representative offices in Ukraine in order to operate in the country. After the transition period end, foreign companies will be able to operate in Ukraine via affiliates or brokers. Respective amendments to the law “On Insurance” were adopted in November 2006 and May 2007.

CAPITAL MARKETS

Ukraine has ten operational privately-owned stock exchanges. The PFTS is a broker/dealer SRO (self-regulatory organization) and electronic trading system, which is a leader in terms of trade volumes. About 40% of stock trades are conducted at PFTS, followed by the Perspectiva Exchange (28%) and the Ukrainian Exchange (20%). The exchanges operate largely in compliance with international best practices. There is increasing competition in this sector, with plans underway to incorporate "market-maker" capabilities. In practice, however, significant trading continues to be done off-exchange, with some estimates placing this number at 90% of all securities market trading. The remaining exchanges are largely "pocket exchanges" that rely on revenue from sales of state-owned enterprises.

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

Most of these markets are still in a nascent stage. Although the equity market in particular has grown in recent years, it is still very small when compared to stock markets in other emerging markets of central Europe and does not yet act as an important source of capital for Ukrainian companies or investment destination for domestic savings.

There are no legal restrictions on the free flow of financial resources needed to support growth in the product/factor markets. Credit is largely allocated on market terms and foreign investors are able to get credit on the local market, utilizing a variety of credit instruments. However, the market environment lacks transparency, enforcement of key laws and regulations remains weak, and investors (domestic and foreign) continue to face significant uncertainty. This includes low market confidence (hurt further by the 2008 global financial crisis), 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. Rulings of the Securities and Stock Market State Commission (SSMSC) and Financial Services Regulator (FSR) have insufficient enforcement power and are not always followed by the courts. The SSMSC and FSR also face problems with budgetary and political independence, which they are actively seeking to address.

In 2008, the NBU and a group of Ukraine's largest banks founded the All Ukrainian Securities Depository (AUSD). The new entity is expected to end the disputes between the market-owned securities depository MFS and the state-owned National Depository of Ukraine (NDU). Since October 2009, the AUSD was registered as successor of the MFS and owner of 97% of its shares. Depository operations by AUSD are largely in line with G-30 requirements. The AUSD services 90% of new emissions in Ukraine, provides clearing for all Ukraine’s exchanges. The state-owned NDU remains in existence, but has little practical function. Over 344 licensed registrars continue to operate in Ukraine. Many are seen as "pocket registrars" and have been used in the past to disguise or eliminate ownership records.

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), law "On Joint Stock Companies" (2008), a Presidential Decree "On Investment Funds and Investment Companies" (1994), the law "On State Regulation of Securities Markets" (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 new law "On Joint Stock Companies" (2008) represents a major improvement over the law "On Business Associations" which was vague and did not support basic shareholders rights and facilitated a large number of corporate governance abuses (including share dilution, asset stripping, and dubious transfer pricing). The new law aims to define critical conditions and standards for establishing, governing and closing joint stock companies, while also significantly improving legal protections for minority shareholders and filling numerous loopholes in the legal framework. It is largely in compliance with EU Directives on corporate governance and incorporates OECD Principles for Corporate Governance.

The 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 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 legal framework and regulatory system for portfolio investment does therefore exist, although substantial work remains to insure it is properly applied and enforced.

Competition from State-Owned Enterprises (SOEs)

The vast majority of Ukraine's state-sector was privatized in the 1990s and early 2000s, and the state sector is now estimated to comprise less than 10% of Ukraine's economy. Nonetheless, the state sector, according to Ukraine's Ministry of Economy, is one of the largest in Europe in terms of size and contains more than 5,000 business entities. The sector is rather inefficient and often loss-making. However, the stated goal of the Yanukovych administration is to divest itself of unprofitable SOEs through aggressive privatization efforts.

In general, private enterprises, including foreign firms, compete on equal terms with public enterprises. In reality, the majority of SOEs rely on GOU subsidies to function, and cannot directly compete with private firms. Most of the SOEs capable of making a profit have already been privatized, leaving mainly inefficient firms in government hands. Private firms, however, are barred, under Ukrainian law, from engaging in certain types of business, including in the areas of certain natural monopolies, the rocket industry, and the production of bio-ethanol. The GOU has had to heavily subsidize its state-owned enterprises (especially in the energy sector) to keep them operating. However, one of the conditions of the 2010 IMF stand-by arrangement is that the budget of the state-owned energy monopoly, Naftohaz, must be balanced through increases in the prices charged to customers, so the situation may improve in 2011. Fixed land telecommunications systems and energy transit networks, including the transmission of electricity, have not yet been opened to private competition.

Regarding their structure, SOE senior management reports directly to the relevant ministry, which has the authority to appoint the firm's management. Ukrainian law specifies that the ministries are not permitted to interfere with the day-to-day economic activities of an SOE, but anecdotal reports indicate that, in practice, this restriction is often ignored. Ministries have the power to decide on the creation, reorganization and liquidation of SOEs; adopt and enforce SOE charters; conclude and cancel contracts with SOE executives; grant permission to the State Property Fund to create joint ventures with state property; and prepare proposals to divide state property between the national and municipal levels.

Ukraine does not maintain or operate a sovereign wealth fund.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility is still a new concept in Ukraine that has not yet taken hold in the mind of the consumer and is just beginning to gain ground amongst producers in the country. International companies continue to be the strongest proponents of CSR within Ukraine and have made efforts to transfer the idea of CSR over to their Ukrainian affiliates. With help from The American Chamber of Commerce, The East Europe Foundation, the U.N. Global Compact Initiative, and other NGOs, Ukrainian companies have been made aware of the potential long-term benefits of CSR as they relate to positive exposure for a company in relation to its philanthropic projects or programs.

The main obstacle facing the advancement of CSR initiatives is the unwillingness of the Parliament to pass legislation that will offer tax exemptions to companies that participate in CSR activities. On November 1, 2009, the first public hearing was held on CSR by the Parliamentary Committee on Regulating Policy and Entrepreneurship. To date, the only bill that has been passed but not signed is a green bill that will allow companies that display efficient waste management practices the option to sell reprocessed waste products within Ukraine. Apart from this one incentive, any Ukrainian or international company must be willing to undertake CSR projects without tax or legislative assistance. The American Chamber of Commerce remains engaged with Members of Parliament regarding the advancement of CSR through introducing tax-beneficial drafts, albeit unsuccessfully to date.

From the perspective of consumers, CSR initiatives are seen as positive outreach by companies but are more viewed as the exception rather than as the rule. Consumers do not expect companies to develop, finance, or complete projects that do not directly affect growth or profit. Aside from a "Go Green" ad campaign led by the U.N. Global Compact Initiative, which asks individual citizens to do their part by conserving water and electricity and which promotes recycling, there is little in the way of social responsibility by consumers.

Foreign firms that work inside of Ukraine do not need to follow CSR principles but generally follow and are judged by NGO's on the following standards: AccountAbility's AA1000 standard, Global Reporting Initiative's Sustainability Reporting Guidelines, Verite's Monitoring Guidelines, Social Accountability International's SA8000 standard, and the ISO 14000 Environmental Management Standard. The Centre for CSR Development Ukraine, which was founded by the East Europe Foundation, has become an active proponent of CSR and holds numerous events throughout the year to promote, advertise, and recognize CSR initiatives and successes. Per reporting by the Global Compact Initiative (GCI), there are 89 companies within Ukraine which are currently members of GCI and of these, 61 companies have submitted their annual CSR reports, making Ukraine competitive in CSR reporting efficiency amongst European countries.

Political Violence

Ukraine is largely free of significant civil unrest or any organized anti-American domestic political movements. Occasionally, peaceful mass demonstrations occur in larger cities, such as Kyiv, and are usually sponsored by individual political organizations.

There also have been decreasing incidents of racially-motivated violence; groups of "skinheads" and neo-Nazis do, however, sometimes target people of Asian, African, or other non-European descent, as well as religious minorities, in Kyiv and throughout Ukraine.

Corruption

Corruption, which pervades all levels of society and government and all spheres of economic activity in Ukraine, is a major obstacle to foreign investment. Ukraine ranking improved slightly in Transparency International's Year 2010 Corruption Perception Index (CPI). The country moved up from 146th place in 2009, to 134th place. In 2010, Transparency International rated Ukraine at 2.4 points on the CPI's 10-point scale.

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.

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 for retribution in political vendettas. In January 2006, then-President Yushchenko signed a decree committing 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 directed 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 2009, then President Yushchenko signed into law a package of anti-corruption legislation that was to come into effect in January 2011. However, it was annulled by the Parliament in December 2010. A new law proposed by President Yanukovych, which draws heavily on the annulled package’s contents, though with some important exceptions, was under consideration in the Parliament as of December 2010.

In 2010 the State Department funded a new Resident Legal Advisor from the United States Department of Justice to follow up on the Millennium Challenge Corporation's project which focused on ethics, asset declaration and internal investigative units.

Although government action is still limited and uncoordinated, fundamental changes have taken place in the GOU's attitude towards corruption. 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.

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), Bosnia and Herzegovina (2002) Bulgaria (1994), Brunei (2006), Canada (1994), Chile (1995), China (1992), Cuba (1995), Croatia (1997), the Czech Republic (1994, amended in 2010), Denmark (1992), Equatorial Guinea (2005), Egypt (1992), Estonia (1995), Finland (2005), France (1994), Gambia (2006), Georgia (1995), Germany (1993), Great Britain and Ireland (1993), Greece (1994), India (2001), Indonesia (1996), Iran (1996), Israel (1995), Italy (1995), Jordan (2005), Hungary (1995), Kazakhstan (1994), Congo (2010), Korea (1996), Kuwait (2002), Kyrgyzstan (1993), Latvia (1997), Lebanon (1996), Libya (2001), Lithuania (1994), Macedonia (1998), Morocco (2001), Moldova (1995), Mongolia (1992), Nigeria (2010), the Netherlands (1994), OAE (2003), Oman (2002), Panama (2005), Poland (1993), Portugal (2003), Russia (1998), San-Marino (2006), Saudi Arabia (2009), Singapore (2006), Syria (2002), Slovakia (1994), Slovenia (1999), South Korea (1996), Spain (1998), Sweden (1995), Switzerland (1995), Tajikistan (2001), Turkmenistan (1998), Turkey (1996), UK (1993), Uzbekistan (1993), Vietnam (1994), Yugoslavia (2001), Yemen (2002).

The United States and Ukraine signed a Trade and Investment Cooperation Agreement (TICA) on April 1, 2008. The TICA established a joint U.S.-Ukraine Council on Trade and Investment, which is working to increase commercial and investment opportunities by identifying and removing impediments to bilateral trade and investment flows.

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 resolved a long-standing dispute in December 2009, and restored its programs in Ukraine after an almost ten-year hiatus.

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).

In June 2010 OPIC concluded an agreement enabling the Ukrainian Development Network (UDN) to serve as an originator for a growing alliance with the private sector designed to support small and medium-sized enterprises expanding into emerging markets overseas.

Labor

LABOR AVAILABILITY

Ukraine has a well-educated and skilled labor force (about 20.24 million people) with nearly a 100 percent literacy rate. As of October 1, 2010, unemployment (ILO methodology) averaged 9.2 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. The Government of Ukraine, which counts only those officially registered to receive unemployment benefits, claims employment was only 1.5% as of October 1, 2010.

WAGES

Wages in Ukraine remain low by Western standards. During the first nine months of 2010, the nominal average monthly wage increased by 21.9% year-on-year to UAH 2,439 (about $307), while the real average wage increased by 9.8% year-on-year during the same period. The highest wages are in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers.

MINIMUM WAGE

The minimum monthly wage increased to UAH 888 on July 1 (approximately $112), and to UAH 907 (approximately $114) on October 1. The 2010 state budget calls for a further minimum wage increase to UAH 922 ($116) by the end of 2010. According to the law, the minimum monthly wage equals the monthly subsistence level.

The exchange rate has been relatively stable throughout 2010 at approximately UAH 8 per USD, following a 40% devaluation in 2009. Ukrainian government policy aims to maintain the stability of the local currency against the U.S. dollar, although the GOU has agreed with the IMF to introduce more exchange rate flexibility. . Gross international reserves at Ukraine's central bank amounted to $34.7 billion at the end of September, a level sufficient to cover 5.8 months of imports. This level of reserves and high external debt roll-over should allow the exchange rate to remain in the range of UAH 7.9-8.0 per USD through 2011.

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 Pillar I, retirement payouts are determined on the basis of the individual's labor records and contributions. The system follows "pay as you go" principles, meaning the contributions of today's workers fund today's pensioners. Despite major reform, the Pillar I system remains financially unsustainable. Major systemic issues, such as the need to increase the retirement age, provisions for early retirement, and the level of the minimum pension payments, still need to be resolved. At 18 % of GDP, Ukraine spends the highest amount on pensions in the region, and with a declining and rapidly aging population, costs continue to rise rapidly. Employer contributions at 33.2% of wages exacerbate shortfalls in financing by encouraging substantial underreporting of income to evade high pension contributions. A significant percentage of workers in the gray economy, particularly in the agrarian sector, do not contribute to the pension fund but have accrued entitlement to these same resources. The result is growing pressure to subsidize basic pensions using revenues from the general government budget. The estimated deficit of the Pension Fund currently exceeds UAH 26 billion (about $3.3 billion).

Pillar II, the Mandatory Accumulation System, is not yet enacted in Ukraine, although the draft legislation passed the first reading in April 2007. The 2003 law on Mandatory Pension Insurance includes preconditions for the operation of the Mandatory Accumulation System and the Cabinet of Ministers recently pushed back the likely commencement date of the system until 2014 when it is felt these preconditions may be met. Once enacted, the law will mandate that each Ukrainian worker contribute to an individual retirement account. The law is designed to pre-fund a part of the public pension to relieve pressure on the current "pay as you go" system. The success of Pillar II will depend on achieving long-run fiscal sustainability of the first pillar and establishing the necessary operational systems. When implemented, Pillar II will generate substantial domestic long-term savings to finance economic growth. Depending upon who participates in the system when the scheme starts, contributions could be between $US 60 to 145 million each year.

Pillar III, voluntary private pension funds, began operations at the end of 2004. These funds are the only effective, tax-favored method workers have to supplement their retirement income through voluntary savings. Since 2004 the number of private pension funds has grown rapidly, but they still remain a minor financial actor. The financial crisis has impacted the industry and some rationalization has occurred with perhaps more in the future. In an economy with over 16 million workers, 50 active funds (out of 102 registered) service about half a million participants and have assets of under $130 million. Moreover, Ukraine's underdeveloped capital markets do not provide private pension funds with sufficient sound, long-term investment opportunities. At the end of September 2010 38% of assets were invested in bank deposits, 16.4% was invested in Ukrainian corporate bonds, 14.7% in Ukrainian Government Bonds and 8.3% in Ukrainian equities. The legal framework required to support successful private pension funds is still weak and regulatory oversight is even weaker. Various international donor initiatives are supporting the Ukrainian government's efforts to strengthen the legal framework and effectiveness of regulatory oversight. Due to weaknesses in market structure, non-transparency, lack of public trust, and low income, however, private pension funds are not likely to be a major source of investment funds in the near future.

Finally, as a condition of receiving a loan from the International Monetary Fund, Ukraine committed to reform its pension system, in particular by increasing the retirement age for women to 60 years over the next 10 years to match the retirement age of men, whose life expectancy is lower than women.

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 Labor Code with assistance, but Parliament is still considering the draft legislation. Independent trade unions maintain that the draft Labor Code will not allow workers to associate freely and could damage the viability of independent unions.

INTELLECTUAL PROPERTY RIGHTS (IPR)

Ukraine was listed on the Watch List in the 2010 Special 301 report. Key concerns cited in the report included weak enforcement, widespread retail piracy, the transshipment of pirated and counterfeit goods, Internet piracy, and the continued government use of illegal software. The improved protection of intellectual property was a major theme of the U.S.-Ukraine 2010 Trade and Investment Council meeting, during which the two sides agreed to an IPR Action Plan. Among other provisions, the Plan addresses public awareness, strengthened enforcement, needed legislative improvements, and measures to transition government ministries to legal software. The Government of Ukraine agreed to implement the IPR Action Plan beginning in 2011 following the completion of its interagency approval process.

Overall, Ukraine has made some progress in recent years, in part to meet its WTO accession requirements as well as to fulfill expectations as it negotiates a free trade agreement with the European Union. Ukraine's IPR-related legal base is now almost fully in compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international norms. The large-scale illegal production of pirated and counterfeit goods, in particular CDs, has been halted. On April 24, 2008, the Office of the United States Trade Representative lowered Ukraine's designation in its Special 301 Report from Priority Watch List to Watch List.

If fully implemented, the IPR Action Plan agreed to at the 2010 Trade and Investment Council would considerably improve IPR protection and enforcement in the country.

Optical Media

Despite the significant reduction of illegal production of optical discs, pirated discs remain widely available, particularly in large open-air markets throughout the country's larger cities; the Petrivka market in Kyiv is the most notorious. Industry representatives estimate piracy levels for music and video at more than 60%, and for computer software at 85%. The transshipment of pirated and counterfeit goods, particularly optical discs produced in Russia, remains a serious problem, as does government procurement and use of unlicensed software. The use of optical media is beginning to decline, as smugglers and retailers begin to switch to Flash memory cards, which are physically smaller and have greater storage capacity than optical discs.

Internet Piracy

Internet piracy is a nascent and growing problem in Ukraine. Many Ukraine-based websites offer pirated material for download with the full knowledge of their Internet Service Providers (ISPs). Software company representatives have also complained that Local Area Networks (LAN), some of which cover entire Ukrainian cities, allow for widespread software piracy. On-line mail order sites also distribute pirated material.

Ministry of Internal Affairs officials have pointed to some successes in stopping mail order piracy, but admit that file sharing and downloading is much more difficult to combat. GOU representatives have argued that Ukrainian law does not give law enforcement officials clear authority to shut down websites, although sometimes ISPs can be persuaded to do so voluntarily. Because they are most often shut down without going through the courts, however, these sites can easily reappear on a new ISP or in a modified format. The U.S. Government works with the Ministry of Internal Affairs and trains law enforcement officers to combat internet piracy.

Royalty Collecting Societies

Rights holders have complained that some royalty collecting societies collect fees for the public use of copyrighted material without authorization and do not properly return royalty payments to rights holders, and that the overall level of royalty payments in Ukraine remains low. To address these industry concerns, a draft amendment to the Copyright Law has been registered in Ukraine's parliament and is awaiting consideration. This law also specifically defines camcording in cinemas as a violation of the law and allows the Government of Ukraine to hold ISPs liable for illegal content if they fail to remove it in a timely manner.

Data Protection

Ukraine has improved its protection of undisclosed test data, such as that from drug trials, from unfair commercial use (TRIPS Article 39.3). In 2006, Parliament passed amendments to the law "On Medicinal Drugs," introducing a five-year period for the protection of undisclosed information in the course of registration of medical drugs, and to the law "On Pesticides and Agrochemicals," introducing a ten-year protection period for agricultural chemical products. Local representatives of large international pharmaceutical companies continue to complain of a lack of transparency by GOU bodies responsible for granting market approval for generic drugs, of discriminatory practices by GOU bodies regarding the quality control of imported drugs, and by unjustified classification changes of drugs by the Ukrainian Customs Service.

The Ukrainian Ministry of Health does not routinely check the validity of patents when it grants marketing approval in Ukraine.

Geographical Indications

Parliament passed a legal amendment in April 2008 to bring Ukraine's treatment of geographical indications (GIs) in line with WTO rules (TRIPS Articles 16, 17, 22, 24), and to meet certain requests made by the European Union. Ukraine and EU continue to discuss this issue in the framework of FTA negotiations.

Patent and Trademark

Trademarked and copyrighted goods must be registered for a fee in the Customs Service's rights holder database in order to be guaranteed protection. Counterfeit goods, including products that contain protected trademarks, remain readily available in Ukraine. Counterfeit apparel products are particularly common. Most counterfeit goods are not produced in Ukraine, although industry has reported instances of the production of counterfeit cigarettes. There has also been growth in the amount of counterfeit pesticides on the market, which, according to industry, accounts for about 30% of the market. Ukraine does not have the technical capability to destroy some forms of counterfeit pesticides, complicating enforcement efforts. Government of Ukraine officials recently seized large quantities of counterfeit pesticides, but industry representatives have raised concerns that the pesticides will not be disposed of properly.

To prevent counterfeit products from reaching the market, industry suggests that Ukraine should amend and streamline crop protection products' registration procedures with the Ministry of Environment.

Judicial System for IPR Protection

Civil IPR lawsuits remain rare because of a general lack of confidence in Ukraine's legal system, and because there are few judges properly trained in IPR law. Law enforcement officials and industry also complain that too many IPR cases result in small fines only, which do not serve as deterrents against illegal activity.

Foreign Trade Zones/ Free Ports

Ukraine has in the past maintained special or free economic zones (SEZs-FEZs), but in 2005 the government canceled all tax exemptions (i.e., from land tax, corporate income tax, import duty, and VAT on imports) to investors in SEZs-FEZs to stop the large-scale misuse of these zones for tax evasion and smuggling. While this cancelation of exemptions remains in effect, Prime Minister Azarov has expressed support for their restoration.

Foreign Direct Investment Statistics

FOREIGN DIRECT INVESTMENT

According to Ukraine's State Statistics Committee, as of October 2010 the total stock of FDI in Ukraine was $42.5 billion (about 31% of GDP), or $930 per capita. This was a 1% increase from October 2009, when the total stock of FDI stood at $38.6 billion, or $838 per capita. -a slowdown from over 20% annual growth in the FDI inflow demonstrated prior to 2008.

FDI BY COUNTRY

As of October 1, 2010 Ukraine's major investors included: Cyprus (22.5% of total FDI), Germany (16.5%), the Netherlands (9.6%), Russia (7%), Austria (6.3%), the United Kingdom (5.4%), France (4.1%), and Sweden (4.1%). Investment from the United States made 2.9% of FDI. Cyprus remains a popular offshore destination for Ukrainian and Russian enterprises through which to channel investments.

FDI BY INDUSTRY SECTOR DESTINATION

The largest portion of cumulative investment went to the financial sector – 32.2%, steel production – 14%, trade and repairs – 10.8%, real estate and engineering – 10.6%, food processing – 4.4%, and machine-building – 2.7%.

FDI FROM UKRAINE

As of October 1, 2010, Ukraine's FDI to other countries stood at USD 6.85 billion (5% of GDP). 93% of the investment from Ukraine or USD 6.4 billion went to Cyprus. Cyprus is a popular destination for Ukrainian capital due to a lucrative double taxation agreement between Ukraine and Cyprus concluded back in 1982. The second largest destination of FDI from Ukraine is Russia, which received 2.4% of Ukraine's FDI or USD 164.5 million.

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