Identifier
Created
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Origin
06KIEV384
2006-01-30 15:11:00
UNCLASSIFIED
Embassy Kyiv
Cable title:  

UKRAINE: INVESTMENT CLIMATE STATEMENT 2006

Tags:  EINV EFIN ETRD ELAB KTDB PGOV UP 
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UNCLAS SECTION 01 OF 16 KIEV 000384 

SIPDIS

DEPT PLEASE PASS TO USTR FOR KLEIN/MOLNAR
TREASURY FOR GAERTNER
USDOC FOR 4201/DOC/ITA/MAC/BISNIS
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYCK

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV UP
SUBJECT: UKRAINE: INVESTMENT CLIMATE STATEMENT 2006

REF: 2005 STATE 202943

UNCLAS SECTION 01 OF 16 KIEV 000384

SIPDIS

DEPT PLEASE PASS TO USTR FOR KLEIN/MOLNAR
TREASURY FOR GAERTNER
USDOC FOR 4201/DOC/ITA/MAC/BISNIS
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYCK

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV UP
SUBJECT: UKRAINE: INVESTMENT CLIMATE STATEMENT 2006

REF: 2005 STATE 202943


1. Below is text requested reftel of the 2006 Investment
Climate Statement for Ukraine.

Begin Text:
Investment Climate Statement 2006 -- Ukraine

A.1. Openness to Foreign Investment

GOVERNMENT'S ATTITUDE TOWARDS FOREIGN INVESTMENT

When President Yushchenko took office in January 2005, he
made improving the investment climate one of his top
economic policy goals. This led to a number of new
government initiatives, such as creation a State agency
for investment and innovation and a number of investor
councils chaired by the President. International
investment companies rushed to take advantage of the
improved mood and held several large-scale Ukrainian
investment conferences in early 2005 both in Ukraine and
abroad. The President and other high-level GOU officials
spoke at many of these conferences, including the World
Economic Forum's "Mini-Davos" roundtable held in Kiev in
June 2005. In general, foreign investors reported
increased GOU receptiveness to and understanding of
investor concerns but few concrete improvements over the
year. Government re-privatization plans and closure of
the Special Economic Zones (discussed later) also made
investors wary.

After eight years of decline following independence, the
Ukrainian economy has been growing steadily since late
1999 but with declining rates of growth at the end of

2005. Ukraine's GDP grew 12.1% in 2004 and approximately
2.5% in 2005. Growth is expected to rebound somewhat in

2006. Over the past few years, Ukraine has liberalized
its markets, reduced regulation, eliminated most
licensing requirements, eliminated most restrictions on
foreign exchange and begun the transformation of the
agricultural sector from state-run farms to private
agriculture. After years of hyperinflation and
plummeting currency values, the national currency, the
hryvnia, has been stable against the U.S. dollar for over
four years. The National Bank allowed it to appreciate

about 5% in early 2005 under pressure from international
financial institutions, which claimed the currency was
undervalued. Much remains to be done to achieve full
economic liberalization. Ukraine's economy is still
shackled by corruption, poorly developed rule of law,
over-regulation and excessive government interference in
what should be private business decisions.

Ukraine was not able to achieve its goal of entering the
WTO in 2005. Yet, over the past year Ukraine made strong
progress in its WTO accession, passing over a dozen
pieces of important legislation to modernize its trade
regime and signing 10 bilateral market access agreements.
The legislation dealt with intellectual property rights
for optical media, agricultural tariffs, insurance
branching, auditing requirements, age-limits on imported
buses and trucks, local content in automobile production,
sunflower seed export duties, sanitary and phytosanitary
measures, and technical barriers in trade. The GOU has
not yet enacted legislation on export, restrictions on
scrap metal and hides/skins, sugar quotas, product
safety, bank branching, attorney's citizenship
requirements and foreign ownership in broadcasting
companies, despite repeated attempts to secure approval
of the legislation.

Foreign investors continued to express little confidence
in the Ukrainian court system. For many years, Ukrainian
courts have tended to strike down or ignore contractual
provisions for international arbitration or that assign
legal responsibility for dispute resolution to a foreign
court. The greatest number of investor complaints over
the years have involved the State Tax Administration's
(STA) selective enforcement of tax policy. Businesses
have claimed that STA local and regional branches use
investigative authority to advance political or business
interests. New leadership appointed by the government of
President Yushchenko and anti-corruption efforts seem to
have paid off in 2005, however, as the number of such
complaints have dropped. Exporters have also been harmed
in the past by the STA's failure to refund VAT payments
on inputs in a timely fashion, but the STA improved its
performance and settled most outstanding arrears in late

2005.

MAJOR LAWS/RULES AFFECTING FOREIGN INVESTMENT
Ukraine's law "On The Foreign Investment Regime" (1996)
provides for equal treatment of foreign and Ukrainian-
owned business with some restrictions in publishing and
broadcasting. Foreigners are prohibited from
participating in the manufacture of weapons or alcoholic
spirits. A February 2000 law "On Removal of
Discrimination in Taxation of Business Entities Founded
with the Participation of Domestic Property and Funding"
cancelled privileges granted to joint ventures by
Ukrainian legislation with retroactive force. A January
2002 law "On Amending Certain Laws to Avoid Tax Evasion
by Enterprises Founded with the Participation of Foreign
Investors" cancelled all government and court decisions
providing certain privileges to JVs (also with
retroactive force). A January 29, 2002 Constitutional
Court decision and a May 14, 2002 State Tax
Administration letter caused the two laws to go into
force and confirmed that tax privileges for joint
ventures with foreign participation had been cancelled.

In early 2005, Ukraine lifted all tax and tariff
exemptions to investors in Special Economic Zones (SEZ)
in order to stop large-scale misuse of the zones.
Investors who suffered from the cancellation criticized
the abrupt cancellation of the privileges and the absence
of any compensatory provisions, and they said these
actions destabilized the investment climate. The GOU
states it is developing a compensation mechanism for
investors, but as of the end of 2005 has not announced
one. U.S. investors both with planned and existing
investment in the SEZs faced substantial losses from the
elimination of customs and tax privileges.

Both a new Civil Code and a competing and incompatible
new Commercial Code went into effect on January 1, 2004.
Lawyers and judges continue to grapple with how to
implement the two conflicting laws. Existing legislation
is also not fully compliant with the codes. In 2005, the
Ukrainian government proposed to annul the Commercial
Code, but has not yet provided corresponding draft
legislation to the parliament.

On October 25, 2001, the Ukrainian Parliament passed a
Land Code. The Land Code provides for private ownership
of land, facilitating the privatization of land for
agricultural purposes, but also provides for a moratorium
on agricultural land sale until January 1, 2008.
Individuals will not be able to sell more than a total of
100 hectares of land between 2008-2015. The Land Code
includes a 20-year moratorium on agricultural land sales
to foreigners, though foreigners may own land plots on
which company facilities have been built. Efforts to
cancel the moratorium have failed in the Parliament
(Rada),Ukraine's parliament. Such restrictions may
delay the development of a functioning land market, but
the overall picture is not entirely negative. There is
an active market in land leasing. A July 2002, law "On
Grain and the Grain Market in Ukraine," established
investment, credit, tax and custom policies favorable for
the grain market.

A new Customs Code went into effect January 1, 2004,
codifying uniform customs procedures for all goods,
specifying elements of customs procedures, and creating a
mechanism for submitting a preliminary declaration for
customs clearance for those who declare items on a
regular basis. The Code widens the powers of the State
Customs Service (SCS),granting its staff free access to
the companies' premises where commodities subject to
customs clearing are stored. It gives the SCS the power
to review foreign trade companies' financial and economic
performance. December 2005 amendments to the Customs
Code and Single Customs Tariff brought Ukraine's customs
regime almost fully into compliance with the WTO Customs
Valuation and Rules of Origin Agreements.

On July 1, 2001 the law "On the Customs Tariff of
Ukraine" took effect. Under this law only the Rada can
introduce or change tariffs. The import tariff system of
Ukraine has 21 sections, encompasses 97 groups of goods,
and lists over 10,000 import duty rates. Between March
and July 2005, the parliament passed three packages of
amendments to the Customs Code of Ukraine to decrease
tariff rates. These measures brought the normal average
tariff rate down to 6.5 percent, or more specifically to
13.8 percent (down from 19.7 percent) for agricultural
goods and 4.4 percent (down from 8.3 percent) for
industrial goods.

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. The
law requires that the Committee obtain a court order
before entering private property. Those violating fair
competition rules may be fined up to 10% of the prior
year's turnover. If illegally gained profit exceeds 10%
of income, up to three times the normal penalty can be
collected. Legal experts have expressed concern over
restrictions on who may appeal a Committee decision.

PRIVATIZATION AND FOREIGN PARTICIPATION

A transparent privatization law provides for the cash
sale of majority shareholdings in state enterprises, open
bidding procedures, and the use of independent financial
advisers to assist Ukraine's State Property Fund (SPF).
In practice, however, privatizations conducted between
early 2000 and 2004 were non-transparent and arbitrary --
and were marked by heavy behind-the-scenes political
interference. In the months leading to the 2004
presidential elections, the pace of privatization
accelerated, including the highly controversial sale in
May 2004 of Ukraine's largest steel mill, Kryvorizhstal,
at the bargain price of USD 800 million. The tender
requirements were written in such a way as to ensure the
victory of Ukrainian businessmen close to then-President
Leonid Kuchma, including his son-in-law, despite bids
from a foreign investor of over double the amount paid.

In 2005, the new government of President Viktor
Yushchenko undertook a review of such presumably corrupt
past privatizations. After court decisions invalidated
the 2004 sale of Kryvorizhstal, the GOU conducted a new
transparent tender open to international participation
and resold the enterprise to Mittal Steel in October 2005
for USD 4.8 billion. Thanks to this sale, which made up
97% of the USD 4.92 billion in privatization receipts
through November 2005, these proceeds far surpassed the
record USD 1.7 billion banked in 2004.

Despite this one success, the Government did not
articulate a cogent policy for much of 2005 regarding
other suspicious past privatizations, creating
uncertainty among business owners and prospective
investors. Various GOU officials floated contradictory
proposals on the number of firms that might be re-
privatized and the method for addressing previous
questionable privatizations. Most outside observers
believe the absence of a clear policy damaged the
business climate and diminished investment. By the end
of the year the GOU sought to repair the damage by
calling for a new law that would respect property rights
and giving amnesty to current owners who reach an
amicable agreement with the Government to "pay up" the
difference between the amount paid initially and the
market value of the enterprise. Although the government
launched no concrete policy initiatives, President
Yushchenko declared in November that Kryvorizhstal would
be the last repeat privatization. Courts, however, also
declared in 2005 that the past privatization of a
majority stake in another metallurgical concern, Nikopol
Ferroalloy, was illegal. Nikopol Ferroalloy had been
purchased by a consortium controlled by the son-in-law of
then-President Kuchma. In January 2006, the Supreme
Court upheld the decision of the lower courts that the
past privatization was illegal. No shares had yet been
transferred to the state, as the consortium continued
with tactics to block the decision, including announcing
in late January its intention to appeal to the European
Court in Strasbourg.

Ukrainian law limits foreign participation in
privatization of certain "strategic" enterprises (radio,
television, energy, and insurance). Foreign shares of TV
and radio broadcasting and publishing companies generally
may not exceed 30%. Legislation that would increase this
share to 35% -- a part of Ukraine's WTO accession efforts
-- failed in the Rada. The Rada has authority to lift
legislative restrictions on foreign ownership in specific
instances and has done so on occasion.

PROCUREMENT
Ukraine is not a signatory to the WTO Agreement on
Government Procurement but is negotiating WTO accession.
A March 2000 government procurement law favors Ukrainian
bidders on contracts to sell goods and services,
affording a 10% differential to domestic bidders over
foreigners in certain cases. Foreign investors also
complain about a lack of advance notice of rules and
requirements for tenders, covert preferences in tender
awards, hidden conditions on awards that are not defined
in tender announcements, partiality towards domestic
investors, and an inability to resolve grievances and
disputes. For example, a U.S. company reported it
planned to sue Ukraine's Ministry of Foreign Affairs
after alleged irregularities in a December 2005 tender
for a public relations contract, which a local company
won. The American Chamber of Commerce in Kiev has
reported that many firms are reluctant to pursue GOU
procurement opportunities out of concern they will be
unable to collect payment.

A law "On Production Sharing Agreements" (PSA),effective
October 1999, provides a legal framework guaranteeing
that the terms of agreements between foreign investors
and the GOU for natural resources development cannot be
changed once an investment is made. However, additional
enabling legislation is needed in order to harmonize
Ukrainian laws with the PSA's joint exploration and
production license. Also needed are Cabinet of Ministers
resolutions to establish special tax benefits envisioned
by the PSA law, such as the amount of profit tax revenue
the government will receive from the PSA producer.

A.2. Conversion and Transfer Policies

RESTRICTIONS ON CONVERTING/TRANSFERRING FUNDS

The April 1996 "Foreign Investment Law" guaranteed the
"unhindered transfer" of profits, revenues, and other
proceeds in foreign currency after taxes and other
mandatory payments. By intervening in exchange markets,
the National Bank of Ukraine (NBU) maintains a de facto
peg of Ukraine's currency, the hryvnia, to the dollar.
As of January 2006, the hryvnia traded against the U.S.
dollar at UAH 5.05 to the dollar, 5% stronger than last
year's 5.32 average, after the NBU decided to allow the
appreciation and temporarily suspended its defense of the
old rate.

While foreign investors may repatriate earnings,
companies must obtain a license from the 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. In
December 2005, the NBU announced its plans to replace the
licensing system with registration and reserve
requirements on transactions with hard currency. In view
of increased hard currency inflows, the NBU on March 31,
2005, canceled its 1998 surrender requirement that
exporters convert half of their hard currency revenues
into hryvnias. Foreign exchange is readily available at
market-determined rates, which generally do not vary
greatly from the daily official exchange rate. In
February 2005, the NBU lifted the 2% limitation on
deviation of bank exchange rates from the official
exchange rate, which had been in effect since October

2004. A pension fund tax is levied on transactions to
purchase hard currency. In December the GOU reduced that
tax from 1.5% to 1.2% of the amount of the transaction,
effective January 1, 2006.

Foreign investors have complained of cumbersome NBU
regulations (NBU 2005 Resolutions 280 and 281) requiring
them to open both hard currency and hryvnia accounts in
Ukrainian banks in order to bring money into or out of
the country. Past investors seeking to liquidate and
repatriate their investments must provide current
documents from the financial institution that handled the
original transaction confirming the provenance of the
original funds. In cases where these financial
institutions have since closed, investors have difficulty
repatriating their money legally out of Ukraine. In an
effort to discourage the inflow of short-term money, NBU
resolution 291 in 2005 mandated that Ukrainian banks hold
in reserve 20% of any loans from foreign lenders that
have a maturity of 180 days or less. In response to
complaints by investors, the NBU has formed a working
group to revise these regulations.

Investors convert their earnings into foreign currency
through commercial banks, which purchase foreign currency
on the interbank market. Commercial banks may trade
foreign currency in electronic form with other banks or
participate in electronic currency trading at the
Ukrainian Interbank Currency Exchange (UICEX). To
purchase hard currency, companies must provide their
banks with a copy of their foreign trade contracts. In
an attempt to expedite purchases of hard currency, in
March, 2005 the National Bank of Ukraine cancelled the
requirement that companies obtain State Tax
Administration permission to purchase hard currency.
Commercial banks must announce their clients' intentions
to sell on UICEX if the transactions exceeded USD
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." Residents may transfer up to USD 600
abroad without opening a bank account. Illegal trade of
hard currency is not a criminal matter but brings
administrative penalties.

A.3. 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. 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 can
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. The government's
contradictory statements about what businesses might be
subject to a review of past privatization (discussed in
section A.1) had foreign investors concerned their
property could be re-nationalized.

In the context of Ukraine's WTO accession, the GOU in
2005 eliminated less favorable treatment of enterprises
with foreign investment with regard to the use of
vouchers for VAT payments, and abolished local content
requirements in the automobile industry.

A.4. 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, 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). Dispute
settlement remains weak. Most U.S. businesses consider
the local and national court systems unpredictable and
try to avoid them. Commercial contracts may permit the
parties to use international arbitration courts to settle
disputes. Though Ukrainian legislation recognizes
international arbitration decisions, in practice such
decisions are 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
corruption. Foreign investors are often seen as
competitors to local firms and their government
"sponsors."

DESCRIPTION OF UKRAINE'S LEGAL SYSTEM

Ukraine has a civil law system relying on codes and
separate legislative acts. The court system comprises
the constitutional court, which interprets the
Constitution and laws of Ukraine, and a system of courts
of general jurisdiction. The courts of general
jurisdiction are further divided into general courts,
which handle civil, criminal, and administrative matters,
and specialized commercial courts, which review business
disputes, bankruptcy, and anti-monopoly cases. Both the
general and commercial court systems feature a hierarchy
of local and/or regional courts and appeals courts. The
Supreme Court of Ukraine is the highest court in the
system of courts of general jurisdiction.

The law "On the Judiciary," in force as of June 2002
creates four levels of courts -- local courts, courts of
appeal, courts of cassation (higher specialized courts)
and the Supreme Court. This law also establishes an
independent judicial department, the State Judicial
Administration, to manage the court system, with the
exception of the Supreme Court, which is self
administered. The law did increase the independence of
the judiciary; but it also in some cases increased the
powers of the President over the judiciary. While the
law envisioned the creation of a separate system of
Administrative courts, this system is only now being set
up. The Supreme Administrative Court started its work
only in the fall of 2005. The Parliament adopted
legislation in 2004, as well as an Administrative
Procedural Code adopted by Parliament on July 8, 2005,
that should govern the organization and work of the lower
administrative courts when they are created.

Currently, there are ongoing discussions within the
parliament and the executive branch of government on how
to strengthen rule of law and the independence of the
judiciary. The newly created National Commission on
Democracy and the Rule of Law has prepared the draft
Concept of improvement of the judicial system and
securing access to justice and the draft Recommendations
for implementing a judicial reform in 2006.

ENFORCEMENT OF RIGHTS

Investors criticize Ukraine's legal system for continuing
problems of burdensome procedures, unpredictability,
political interference, corruption, and inefficiency.
Even when they obtain favorable decisions, investors
claim the decisions are rarely enforced. The enforcement
responsibilities fall under the State Enforcement
Service, which reports to the Ministry of Justice, but
whose head is appointed by the Cabinet of Ministers.

As of September 2005, the procedure for recognizing and
enforcing foreign court decisions is regulated by Section
8 of the Code of Civil Court Procedures of Ukraine, which
replaced the 2001 law "On Acknowledgment and Execution in
Ukraine of Decisions of Foreign Courts." 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 Rada, or based
on 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." A
draft law "On Implementing Decisions and Applying
Practices of the European Court for Human Rights" passed
its first reading in the Rada on December 20, 2005. The
second reading is expected for 2006. These measures show
an encouraging trend toward conforming Ukraine's legal
system to international norms.

COMMERCIAL LAW

A new Civil Code and a competing and incompatible
Commercial Code both went into effect on January 1, 2004.
Lawyers and judges are now grappling with how to
implement the two conflicting laws. Despite heavy
criticism of the Commercial Code by many GOU officials
over the year, the Rada has as yet taken no action to
amend or annul it. The government again announced in
late 2005 that it planned to seek repeal of the
Commercial Code. The Civil Code addresses private
ownership protection and freedom of contract and
entrepreneurship. It provides a unified framework for
economic regulations alongside legal reforms such as the
Land Code, a newly passed law "On Mortgages," a law "On
Mortgage Backed Securities," a law "On Financial Leasing"
and a law allowing for the establishment of Credit
Information Bureaus, together with a draft Joint Stock
Company Law (which has not yet been adopted). It also
establishes rules for property relationships, including
intellectual property, and creates a level playing field
for entry and operation of business entities.

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. The 1999 law provided thousands of heavily
indebted industrial enterprises with an alternative to
liquidation that did not exist under Ukraine's original
1992 bankruptcy law. Since then, many firms have reached
amicable settlements with their creditors and established
a workable schedule of debt forgiveness and repayment.
Creditors protect their rights under the law by electing
a creditors' committee, which is actively involved in the
bankruptcy proceedings.

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. Nevertheless, a Company
Register that was established in 2004 improved
transparency. A new "Joint Stock Company" law was first
drafted in 1998 to remedy the pitfalls of the current law
by introducing sound corporate practices that meet
international standards. It has failed repeatedly in
parliament, despite increasing interest in the business
community. In October 2005 the Cabinet of Ministers
submitted a new version of the draft law on Joint Stock
Companies. However, this draft has little support in the
present Rada, because it eliminates the closed form of
Joint Stock Company. This form of ownership allows many
so-called "Red Directors" to control their companies as
minority shareholders. It is likely that the new Rada
will consider the October 2005 Joint Stock Company draft
after the March 2006 parliamentary elections.

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.

A.5. Performance Requirements/Incentives

PERFORMANCE REQUIREMENTS

There are no known cases of performance requirements
imposed on foreign investors other than those clearly
spelled out in privatizations conducted via open tender.
Ukraine has eliminated measures that conflicted with the
WTO Agreement on Trade-Related Investment Measures
(TRIMs) in the automobile industry and other sectors in
the context of its accession efforts. Some potentially
conflicting practices remain in the agricultural sector
and in legal services, for example. Restrictions on
imported raw cane sugar and minimum price regulation on
domestic sugar beets and refined sugar may provide
preferential treatment to the domestic sugar market. The
law "On Auditing" was amended in July 2005 to remove
nationality requirements for auditing services in
Ukraine. Similar amendments to the law "On the Bar" to
lift a nationality restriction in legal services failed
repeatedly in the Rada.
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.

VISA/WORK PERMIT REQUIREMENTS

According to Ukrainian Presidential Decree No. 1008 dated
June 30, 2005 (with amendment dated August 18, 2005),
U.S. citizens traveling to Ukraine on short-term tourist,
business or private travel do not need a visa to enter
Ukraine. Visas are still required of other categories of
travelers including those who intend to study, reside, or
work in Ukraine. Short-term travelers entering Ukraine
under the auspices of this decree can stay in Ukraine up
to 90 days. Any requests for extension of stay due to
extenuating circumstances should be directed to the
Ministry of Interior's Department of Citizenship,
Immigration and Registration (formerly known as OVIR).
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. U.S. citizens do not have to return to the U.S.
to renew their visas -- they may apply for and pick up a
visa at any Ukrainian Embassy outside of Ukraine. Most
go to neighboring Poland, Germany, or the Czech Republic.
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. There is one exception: the Law "On Production
Sharing Agreements," allows foreigners under such
agreements to be hired without permits.

The 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.

Foreigners residing in Ukraine must register with the
government. Effective July 1, 2002, foreigners entering
Ukraine are registered automatically by the State
Committee on Safeguarding Ukraine's Border at border
checkpoints. Foreigners legally coming to Ukraine for
short periods no longer need to register at Internal
Affairs Ministry Offices.

A.6. 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.
The Code forbids the sale of agricultural land until
2008, and restricts the land ownership of any one legal
entity (Ukrainian citizen or Ukrainian-based business) to
no more than 100 hectares until 2015. The Land Code
prohibits foreigners from owning agricultural land. The
creation of a legal Ukrainian-registered business to
purchase and manage 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 and broad government/state
rights to "influence" the land market. On June 5, 2003
the Rada adopted a new law on mortgages. The law allows
the use of agricultural land as collateral and spells out
foreclosure and eviction procedures. Implementation of
the law may take several years. The U.S. Government via
USAID sponsors a land titling initiative aimed at
providing technical assistance both to reduce the cost of
agricultural land titling and to provide direct support
for the issuance of land titles. On December 23, 2004
the Rada adopted the law "On Warehouse Receipts" to
expand lending to agriculture concerns using receipts as
a collateral.

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.

A.7. Protection of Property Rights

MORTGAGE

During the last few years, Ukraine's policymakers have
launched many initiatives to develop a mortgage market,
which has resulted in a strong increase in the number of
mortgages and laid the legislative and administrative
groundwork for a functioning mortgage market. In late
2002 Ukraine adopted a law on "Withholding Land Shares in
Kind." In June 2003, a law "On Mortgages" was adopted.
The GOU created the State Mortgage Institution (SMI) in
October 2004 with authorized capital of UAH 50 million
(USD 200 million),a liquidity facility largely aimed at
putting downward pressure on lending rates by allocating
capital efficiently. The 2006 budget allocated UAH 1
billion to issue state guarantees on loans to SMI. It is
planned that the SMI will issue its first securities
early in 2006. The use of mortgages in Ukraine still
remains limited by the scarcity of issued titles and
limits on lending activity. However, apartments, houses,
office buildings, other types of buildings, and dacha
plots have secured mortgages. USAID helped create of a
pledge registry, the first of its kind in the former
Soviet Union, which applies to individuals' obligations
with regard to movable property and tax liens. Though
rudimentary, the registry is nationwide, providing a more
transparent lending market for personal property.

INTELLECTUAL PROPERTY RIGHTS

Ukraine was the only country named a Priority Foreign
Country in the 2002, 2003, 2004 and 2005 Special 301
reviews conducted by USTR. The United States withdrew
Ukraine's benefits under the Generalized System of
Preferences (GSP) program in August 2001 and imposed $75
million worth of sanctions on Ukrainian imports on
January 23, 2002. These latter sanctions, which affected
a number of Ukrainian products, including metal,
footwear, and chemicals, were lifted on August 30, 2005
after the Ukrainian Government secured passage of
important amendments to the Optical Disc Licensing Law,
which went into effect on August 2, 2005. USTR also
announced in August 2005 that it would conduct an Out-of-
Cycle Review (OCR) of Ukraine to assess Ukraine's
implementation of the new amendments and its overall
trend of enforcement since the time that sanctions were
imposed. The OCR will determine whether Ukraine's
Special 301 status should be upgraded from "Priority
Foreign Country" and subsequently consider whether
Ukraine's eligibility for Generalized System of
Preferences (GSP) benefits should be reinstated.
Enforcement has been improving and the new amendments
enhanced law enforcement's role and lowered the threshold
for imposing penalties and sanctions. However, Ukraine
remains a major trans-shipment point, storage location,
and market for illegal optical media produced in Russia
and elsewhere, however, and needs to significantly
improve its customs border enforcement to deal with these
continuing problems.

Ukraine is an active member of the World International
Property Organization and a signatory to a number of
international agreements and conventions. As part of its
ongoing efforts to negotiate accession to the WTO,
Ukraine has adopted legislation, including a May 2003
Omnibus package, to bring its laws into compliance with
the WTO Agreement on Trade- Related Aspects of
Intellectual Property Rights (TRIPS). Some possible
issues remain with Ukraine's treatment of foreign
geographical indicators and test trial data. Ukraine is
in the process of strengthening its legal protections for
pharmaceutical test data that pharmaceutical companies
must submit to government authorities to obtain marketing
approval. Patent and trademark violations are common in
Ukraine, and U.S. industries have reported widespread
counterfeiting of pharmaceuticals and consumer products.
The Ukrainian Ministry of Health reportedly does not
check the validity of patents when it permits
pharmaceutical sales in Ukraine. In one case, the
Ministry of Health allowed a European company to register
the same drug for which a U.S. company held a valid
patent.

The State Department of Intellectual Property (SDIP) is
responsible for the formulation and implementation of
Ukraine's intellectual property policy. In order to
increase IPR enforcement, the Ministry of Internal
Affairs and the State Customs Service have also set up
units to deal exclusively with IPR violations. These
under-staffed units have difficulty dealing with the
large number of IPR infringements. In many cases, the
rights holder must actively engage with the Ministry of
Internal Affairs or the State Customs Service to obtain
enforcement. Trademarked and copyrighted goods must be
registered for a fee (USD 400 for the first good for the
first year) in Customs' rights holder database in order
to be guaranteed protection. Optical discs, however,
also receive protection under the import-licensing
regime, so few recording or motion pictures companies
bother to register. Generally low confidence in the
Ukrainian judicial system has meant few enterprises have
brought private lawsuits. Legal experts and government
officials have called for the formation of a special
patent court in Ukraine to adjudicate patent cases, but
to date there has been no concrete action towards this
end.

A.8. Transparency of the Regulatory System

TRANSPARENCY OF REGULATORY POLICIES

While there has been progress on deregulation, the number
of regulations, required certificates, and inspection
regimes in Ukraine still impose a significant regulatory
burden on private enterprise. In response to new
presidential decrees No. 799 dated May 12, 2005 "On
Liberalization of Business Activity and State Support of
Entrepreneurship" and No. 901 dated June 1, 2005 "On Some
Measures to Ensure Enforcement of State Regulatory
Policy," the State Committee for Regulatory Policy and
Entrepreneurial Activity (SCRPEA) undertook a review of
regulatory acts. By the end of 2005 the Committee had
reviewed 9340 regulatory acts, 52.8% of which it decided
to cancel.

BUREAUCRATIC PROCEDURES

While the time and costs related to business registration
have been reduced, the GOU still requires enterprises to
obtain numerous permits to conduct business. On January
5, 2006 the law "On Permits' System in Economic Activity"
entered into force. As a result of this law, more than a
half of required permits have been cancelled and the
number of locations for obtaining permits has increased
six fold. The Yushchenko government also streamlined
business registration procedures and now one can register
business within two to three days instead of two to three
weeks, as in the past. "One-stop Registration Shops"
have been expanded nationwide. President Yushchenko also
introduced a new "Single Window" for customs registration
procedures.

LICENSING

Ukraine applies both activity and import licensing
regimes. A Law "On Licensing Certain Types of Economic
Activities" of June 2000 (and amended on January 17,
2002) provides which activities are subject to licensing.
Licensing applies to nearly 60 goods and services and is
meant for protection of human, animal or plant health,
the environment, public morals, national security, or for
prudential regulation of the financial sector.
Businesspeople continue to cite burdensome activity
licensing requirements as major impediments to commerce
in Ukraine. Fees are described as high and compliance
burdensome, particularly for telecommunications
equipment. Import licenses are required for some goods,
primarily pesticides, alcohol products, optical media
production inputs, some industrial chemical products and
equipment containing them, official foreign postage
stamps, excise marks, officially stamped/headed paper,
and checks and securities.

RULEMAKING/INSPECTIONS

Proposed draft laws and regulations are available on the
Rada website for public review, but there is no formal
procedure for submitting comments.

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

CERTIFICATION/HEALTH AND SAFETY POLICIES

Technical standards and certification requirements are
imposed on many imports. The certification body is the
State Committee of Ukraine for Technical Regulation and
Consumer Policy ("DerzhSpozhyvStandard"). Although
Ukraine belongs to several international standardization
bodies, such as the International Organization for
Standardization (ISO),for many years it generally had
not recognized foreign product certificates, even if they
are issued in line with international standards, unless
recognition is mandated through an international treaty
signed by Ukraine. Standardization procedures can be
lengthy, burdensome, and expensive;standards can be
vague, inflexible, and subject to frequent changes.

Numerous certification bodies continue to operate
independently without coordination or oversight. Local,
regional, and municipal authorities often require
additional documentation beyond that required by
certification bodies. As of November 2005,
DerzhSpozhyvStandard had a network of 109 accredited
product certifying bodies for quality management systems,
as well as about 780 testing laboratories throughout
Ukraine. Moreover, appropriate resources, such as modern
analytical equipment and reactants, are not available in
most laboratories. Quality management systems are also
needed to ensure testing is done within an acceptable
margin of error. DerzhSpozhynStandard's system includes
28 state centers for standardization, systematizing
weights and measures, certification and 27 territorial
departments for consumer protection. Companies seeking
testing should first contact DerzhSpozhyvStandard.

Importers can apply for three types of certificates: a
certificate for a single batch of goods; a certificate
for one year, which is valid for all imported goods
during that year with one or two additional selective
tests (this type of certification is the most common in
Ukraine, covering 70% of issued certificates); and a
certificate for 5 years, for which mandates inspection of
production facilities.

Ukraine applies a range of sanitary and phytosanitary
(SPS) measures, many of which do not appear to be
consistent with an international, science-based approach
to regulation. The certification and approval process is
lengthy, duplicative, and expensive, with politics and
corruption still often behind arbitrary application of
regulations. Amendments to the law "On Quality and
Safety of Food Products and Food Raw Materials," the law
"On Veterinary Medicine" and to other laws, to bring
Ukrainian legislation in compliance with requirements of
the WTO Agreement On Sanitary and Phyto-sanitary
Measures, passed at the end of 2005. Amendments to the
law "On Plant Quarantine" remain outstanding.

For many years, Ukraine has worked to bring its
standardization system into conformity with the European
Standards System. The law "On Assurance of Conformity"
is replacing mandatory certification for many types of
products with assessment procedures in conformance with
international standards and the "New Approach" directives
of the European Union, including the principle of
"presumption of conformity to standards." On August 1,
2002, the National Accreditation Body started operations
to ensure the use of standards and procedures consistent
with European Cooperation for Accreditation (ECA) policy.

A.9. Efficient Capital Markets and Portfolio Investment

BANKING

The Ukrainian banking system consists of the National
Bank of Ukraine (NBU) and commercial banks. The NBU is
responsible for monetary circulation, registration of
commercial banks, and oversight of their activities.

The banking sector plays a minor role in Ukraine's
economy. Bank capital is just over 6% of GDP. Total bank
assets in Ukraine are about UAH 212.4 billion, with total
loan assets of UAH 152.4 billion. Money lending and
deposits grew at a fast 57% and 56% respectively in
January-November, 2005. Despite rapid growth, bank
deposits account for 28% of GDP, putting Ukraine in the
'poor' category in the standard rankings of deposits.
Interest rates continued to decline from 17.9% in 2004 to
16.1% in 2005 making credit more accessible. On December
1, 2005, Rada amended the "Consumer Rights Protection"
law in favor of borrowers that lifted the limitation on
early loan repayment. Most banks have a high cost
structure and as high net interest margins versus low
operating profits. There are 164 banks operating in
Ukraine, but a handful of banks dominate the market. The
top ten banks control 58% of the loans outstanding and
own 45% of the total capital of the system. As the
volume of consumer lending doubled during 2005, the share
of loans exceeding one year increased to 53% of the total
loan portfolio of the banking system, up from 46% last
year. Non-performing loans were registered at 2.3% of
the total lending portfolio.

In January 2002, the law "On Banks and Banking Activity"
eliminated discrimination against foreign banks. It
entrusted the NBU with issuing banking licenses, and
includes provisions to prevent money laundering. The NBU
sets minimum capital requirements each year to be met by
the banks by the year-end. Current minimum capital
requirements range from UAH 14.4 million to UAH 57.74
million. Foreign licensed banks may carry out all the
same activities as domestic banks, and there is no
ceiling on their participation in the banking system.
Foreign banks can operate via subsidiaries in Ukraine.
The decision to allow foreign banks to operate via branch
offices is pending before the Rada. Foreign banks
increased their presence in Ukraine's banking sector
during 2005 as the largest Ukrainian bank, "Aval," was
purchased by the Austrian Raiffeisen bank in October and
medium-size UkrSibbank by French BNP Paribas in December

2005.

In May 2002, most provisions of the law "On Systems of
Payment and Money Transfer in Ukraine" came into effect,
making payments more flexible and modern, including the
use of electronic signatures. In July 2002, a law was
passed which established legal principles for the
provision of financial services and performance of
regulatory and supervisory functions. Ukraine remains a
cash economy, but the use of credit cards is on the rise.
From January through September 2005, the use of credit
cards increased by 84% and use of ATM cards increased
over 30%. Scams to bilk ATM users of their money are
common, so the Embassy advises visitors not to use ATMs.

INSURANCE
Only insurance companies registered in Ukraine may carry
out insurance operations. There is a lower minimum
capital requirement for domestic insurance companies than
insurance companies with foreign shareholders. Foreign
insurance companies can invest in local companies, but to
operate locally they are required to open branch offices.
July 2005 amendments to insurance laws will give foreign
companies the right to operate in Ukraine through
affiliates five years after Ukraine accedes to the WTO.

CAPITAL MARKETS

Legal, regulatory, and financial disclosure systems for
the securities market continue to lag behind
international standards. Basic market infrastructure
exists as does a competent regulator, but the legislative
basis for capital market operations is weak. Rulings of
the Securities and Stock Market Commission (SSMC) are
advisory only and are not always followed by the courts.
Investors continue to face low market confidence, high
macroeconomic risk, transitional accounting standards, a
lack of accurate company information, and inadequate
protection of minority shareholders' rights. Deficiencies
in regulations governing operation of registrars led to
frequent cases of double registration of shares,
resulting in low protection of shareholders' rights.

Ukrainian law allows for the following types of
securities: stocks (registered, bearer, preferred, and
common),government and municipal securities, general
obligation bonds, corporate bonds, savings certificates,
depository certificates of the National Bank promissory
notes, bond coupons, loan certificates, bank orders and
savings accounts.

According to the SSMC, last year there were 130
collective investment institutions, 780,863 securities
traders, 138 custodians, 362 registrars, and 12 self-
regulatory organizations (six of which are associations).
Eight stock exchange offices were registered in Ukraine.
A Ukrainian securities industry broker/dealer self-
regulatory organization (SRO) and its nationwide
electronic trading system (PFTS) is the largest
marketplace with 86.23% of secondary onshore trading.
Market capitalization was UAH 74 billion (USD 14.06
billion) in early 2005.

Principle laws, decrees, and regulations governing
Ukraine's financial markets include: "Law on Securities
and Stock Exchanges" (1991),law "On Business
Associations" (1991),"Presidential Decree on Investment
Funds and Investment Companies" (1994),"Law on State
Regulation of Securities Markets" (1995),"Amendments to
Law on Business Associations" (1996),law "On National
Depository System" (1997),"Law on Accounting and
Financial Reporting" (1999),"Bankruptcy Law" (1999) law
"On Collective Investment Institutions" (2001),and the
"Law on Financial Services" (2001).

A 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.
Ukrainian Law provides a framework for the circulation of
promissory notes in accordance with the Geneva Convention
of 1930. The absence of a consolidated national
depository complicates transparent and efficient transfer
of ownership of securities. Although a 1997 law created
a national depository, its function was taken over by
other entities, and the Ukrainian government is currently
considering reform options.

The law "On Economic Entities" allows for a "stable
shareholder arrangement" by permitting operation of
close-ended Joint-Stock Companies, which give existing
shareholders priority rights to buy out any, new or
existing, shares in any company being sold. The
provision is used to protect against hostile takeovers,
but its use is not seen as biased against foreign
takeovers. The draft law on the Joint-Stock Companies,
currently pending before the Rada, would cancel the
provision.

A.10. Political Violence
A fraudulent presidential runoff election in November
2004 brought about the "Orange Revolution" in November
and December 2004. The country saw massive nonviolent
street demonstrations in Kiev and other major cities.
Protesters blocked government offices and buildings.
Some companies went on strike in support of the then
opposition candidate, Viktor Yushchenko, but the strikes
lasted just a few days. Disruptions in normal business
activities were minimal. The demonstrations were
peaceful. The likelihood of future widespread
politically inspired violence that would affect foreign
property interests remains relatively low.

A.11.a Corruption

Corruption pervades all levels of society and government
and all spheres of economic activity in Ukraine and is a
major obstacle to foreign direct investment. Ukraine's
new government made fighting corruption and smuggling top
priorities, although much remains to be accomplished.
However, corruption allegations at the highest levels led
to a change in the Prime Minister and Cabinet of
Ministers in September 2005. Ukraine did improve on
Transparency International's Year 2005 Corruption
Perception Index, which was published in March 2005. The
country moved up to 107th place in 2005 on the list of
the 158 countries from 122nd place out of 145 countries
in 2004.

Corruption stems from a number of factors: a lack of
institutional traditions of transparent decision-making
and 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 and tax administration as well as in
the education system. Miniscule salaries in the medical
system mean that the state guarantee of "free medical
care" has been largely supplanted by a system of informal
payments where patients are expected to make a
"charitable donation" to receive treatment. In 2005, the
GOU introduced legislation to increase local court
judges' salaries significantly. High-level corruption
ranges from misuse of government resources and money
laundering to non-transparent privatization and
procurement procedures. In short, corruption impacts the
daily lives of Ukraine's citizens and important decisions
taken at the state level.

Ukraine's prosecution of corruption is based on the law
"On Combating Corruption," which was passed in October

1995. The law is rarely enforced, and on the rare
occasions it is enforced, it is normally aimed at lower-
or mid-level state employees.

Although government action is still limited, fundamental
changes have taken place in the GOU's attitude towards
corruption. Gone are the days when GOU officials refused
to admit that corruption existed in Ukraine. Government
and Rada officials now openly discuss the problem of
corruption with USG contacts and with the press and
public at large. Ukraine signed the UN Anticorruption
Convention in December 2003 but has not yet ratified it.
Ukraine is not party to the OECD Convention on Combating
Bribery of Foreign Public Officials in International
Business Transactions.

RULE OF LAW

As discussed above, improvement of the ability of
investors to protect their property and contractual
rights is crucial to the investment climate. The
judicial system needs to be reformed and its independence
strengthened. Enforcement of court decisions is also
lacking.

A.11.b. 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: Austria (1996),Argentina
(1995),Armenia (1994),Azerbaijan (1997),Belarus
(1995),Bulgaria (1994),Canada (1994),Chile (1995),
China (1992),Cuba (1995),Croatia (1997),the Czech
Republic (1994),Denmark (1992),Egypt (1992),Estonia
(1995),Finland (1992),France (1994),Georgia (1995),
Germany (1993),Greece (1994),Indonesia (1996),Iran
(1996),Israel (1995),Italy (1993),Hungary (1995),
Kazakhstan (1994),Kyrgyzstan (1993),Latvia (1997),
Lebanon (1996),Lithuania (1994),Macedonia (1998),
Moldova (1995),Mongolia (1992),the Netherlands (1994),
Poland (1993),Russia (1998),Slovakia (1994),Slovenia
(1999),South Korea (1996),Spain (1998),Sweden (1995),
Switzerland (1995),Turkmenistan (1998),Turkey (1996),
UK (1993),Uzbekistan (1993),Vietnam (1994),Yugoslavia
(2001),Yemen (2002),Saudi Arabia (2003),Albania
(2004),Finland (2005),Panama (2005).

A.11.c. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) in
2004 resumed financing and insurance for projects in
Ukraine. The U.S.-Ukraine OPIC Agreement was signed in
Washington on May 6, 1992. OPIC is currently in
negotiation with the GOU to recover monies paid out to a
U.S. claimant whose investment was expropriated. OPIC
will review its activity in Ukraine in the near future if
progress toward resolution of this dispute is not made.

On July 20, 2002 the Board of the U.S. Export-Import bank
opened up their 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 2005 MIGA issued
an $18.1 million guarantee to Raiffeisen Bank of Austria
to provide coverage against the risks of transfer
restriction and expropriation its subordinated
shareholder loan to Joint Stock Commercial Bank
Raiffeisenbank Ukraine.

A.11.d. Labor

LABOR AVAILABILITY

Ukraine has a well-educated and skilled labor force with
nearly a 100% literacy rate. The official (registered)
unemployment level is low, 2.9 percent as of November
2005, but these figures are misleading. Most experts
agree that reported unemployment is understated: the
real unemployment rate is closer to 8 percent.

WAGES

Wages in Ukraine are very low by Western standards but
increased significantly over the past year. In November
2005, the nominal average monthly wage in Ukraine was UAH
896.58 (USD 178),up 39% from 644.27 (USD 128) in
November 2004. The highest wages are in the financial
and credit sectors while the lowest wages were paid to
agricultural and public health workers.

MINIMUM WAGE

The minimum monthly wage was increased in 2005 to UAH 332
(up from UAH 237 in 2004). According to Ukrainian
legislation, the minimum wage is adjusted whenever
consumer price increases reach 5%. The 2006 state budget
stipulated further gradual increases of the minimum wage
to UAH 350 as of January 1, to UAH 375 on July 1, 2005
and to UAH 400 on December 1 2006. The GOU announced
that by 2007 the minimum wage in the country would reach
the subsistence level.

LABOR/MANAGEMENT RELATIONS

Ukrainian workers are generally accustomed to "top-down"
management practices and therefore usually do not
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.

A.11.e. Foreign Trade Zones/ Free Ports

As of September 2005, there were 11 Free Economic Zones
(FEZs) and 9 priority development territories (PDT). A
law "On the Amendments to 2005 Budget of Ukraine" dated
March 23, 2005, cancelled import duty exemptions and
other benefits to FEZs that had been meant to encourage
investment and production of goods for export. The IMF
and the World Bank had repeatedly expressed concern about
the zones, strongly supported the elimination of tax
exemptions, and urged the GOU to resist pressures to
reopen the tax loopholes closed in the 2005 budget
amendments. In cases of foreign direct investment, where
the conditions for the privileges had been met by the
investing firms, the IMF and the World Bank suggested
that the GOU determine whether compensation may be due to
some investors. President Yushchenko reported the GOU
was working on the development of such compensation
mechanisms, but none had been put in place by the end of

2005.

FREE PORTS

Porto-Franco FEZ in Odessa Port was a free port until all
FEZs' privileges were cancelled by the 2005 budget. In
total, Ukraine has 20 seaports and 10 river ports located
on the Black Sea, the Sea of Azov, and the Danube,
Yuzhniy Bug and the Dnipro rivers. They are currently
under the authority of the Ministry of Transportation's
Department of Sea and River Transport. All seaports are
state-owned with the exception of a small port that
belongs to the Mykolayiv Alumina Plant. All river ports
are open or closed joint-stock companies.

A.11.f. Foreign Direct Investment Statistics

FOREIGN DIRECT INVESTMENT

According to Ukraine's State Statistics Committee,
foreign investment in Ukraine grew by 10.8% from January
through September 2005. As of January 1, 2005, the stock
of FDI in Ukraine was USD 8.35 billion, which is USD 177
per capita, one of the lowest levels of FDI in the states
of the former Soviet Union. Annual FDI in Ukraine's
neighbor, Poland, was nearly 5 times as high. Over nine
months of 2005, foreign direct investment grew by over
USD 932.2 million to USD 9.53 billion as of October 1,
2005, which is USD 202 per capita. During this period USD
1.32 billion in foreign investment entered Ukraine while
USD 250 million were withdrawn. Mittal Steel's October
2005 purchase of the Kryvorizhstal Steel Mill represented
USD 4.8 billion in FDI in Ukraine.

FDI BY COUNTRY

In all, 117 countries invested in Ukraine. As of October
1, 2005 Ukraine's major investors included: Cyprus
(15.3%),the United States (12.8%),the United Kingdom
(11.0%),Germany (6.6%),the Netherlands (6.2%),Virgin
Islands (7.4%),Russia (5.8%).

FDI BY INDUSTRY SECTOR DESTINATION

Over the first 9 months of 2005, 17.4% of FDI went to
domestic trade: 12.2% -- to food processing, 8.8% -- to
real estate, 7.6% -- to the financial industry, 7.2% --
to machine-building, 5.3% to the chemical industry.
End Text.
HERBST