Table of contents for Encouraging trade and foreign direct investment in Ukraine / Keith Crane, F. Stephen Larrabee.

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Preface	iii
Figures	vii
Summary	ix
Barriers to Trade and Foreign Direct Investment in Ukraine	ix
Recommendations for Improving the Climate for Trade and FDI in Ukraine	xi
Acknowledgments	xv
1. Introduction	1
Missed Opportunities	2
Organization of the Report	5
Research Approach	5
2. Foreign Trade, FDI, and the Ukrainian Economy	6
Ukrainian Economic Growth: The Record	6
Ukraine's Foreign Trade	9
Foreign Direct Investment in Ukraine	13
3. Barriers to Trade and Foreign Direct Investment in Ukraine	16
Corruption	16
Barriers to Trade	18
Barriers to Foreign Direct Investment	22
4. Recommendations for Improving the Climate for Trade and FDI in Ukraine	28
Reducing Corruption	28
Fostering Trade	29
Attracting Foreign Direct Investment	32
Setting Priorities and Sequencing	35
Figure 1 -- Ukraine's GDP 1989-2007	6
Figure 2 -- Per Capita GDP in 2006 for Selected Former Soviet Republics at Market and 
Purchasing Power Parity Exchange Rates	8
Figure 3 -- Ukrainian Exports: 1994-2006	10
Figure 4 -- Ukrainian Exports by Region or Country in 2006	11
Figure 5 -- Ukraine's Imports by Region and Country in 2006	11
Figure 6 -- Ukraine's Trade with the United States: 1996-2006	12
Figure 7 -- Cumulative FDI in Ukraine and Hungary	13
Figure 8 - Cumulative Foreign Direct Investment in Ukraine by Country of Origin in 
2006	14
Figure 9 -- Foreign Direct Investment in Ukraine from 2001 to 2006 by Country of 
Origin	15
Ukrainian governments have found it singularly difficult to implement policies to 
liberalize trade and improve the climate for foreign direct investment (FDI), ostensibly 
economic policy priorities. Trade and FDI have contributed heavily to economic growth 
and increases in standards of living throughout the world, especially in Central Europe. 
In contrast to Central Europe, Ukrainian governments have been slow to open Ukraine's 
borders to trade and have had difficulty in attracting sizeable inflows of FDI. Ukraine 
has suffered economically for this failure: Ukrainian standards of living are currently far 
below those in Central Europe, Russia, and Kazakhstan.
Barriers to Trade and Foreign Direct Investment in Ukraine
Corruption, petty and grand, constitutes the single greatest barrier to expanding trade and 
investment in Ukraine. Grand corruption involves high-level officials with discretionary 
authority over government policy, the sale of government assets, or large government 
contracts. Petty corruption involves lower-level officials who make decisions about 
enforcing regulations (or not).
Foreign businesses complain most vociferously about Ukrainian regulatory and legal 
hurdles designed to elicit bribes. As in most countries afflicted by corruption, Ukrainian 
government employees deliberately design licensing and registration procedures to be so 
complex that they may credibly threaten to halt or slow trade or a foreign investment in 
hopes of eliciting a bribe. As a consequence, the time and expense of obtaining the 
requisite permits and licenses to trade or set up and open a business add substantially to 
costs, reducing both trade and investment. Rigged privatizations also impede foreign 
investment. Ukraine's contradictory laws and corrupt judges discourage investment as 
businesses find it hard to enforce contracts. 
Barriers to Trade
The most immediate problem facing Ukraine is that it is not yet a member of the World 
Trade Organization (WTO) despite support from all major political parties for this step. 
Because it is not yet a member, Ukrainian firms face discriminatory treatment in most of 
their export markets. Exporters and importers in Ukraine confront arbitrary changes in 
domestic policies, as the Ukrainian government is unconstrained by treaty obligations.
The most severe impediment to exports in Ukraine is the corruption embedded in the 
system for providing rebates to exporters for value-added tax (VAT). Government 
employees encourage companies seeking VAT refunds to hire local law firms or 
consulting companies that charge a "fee" of 25 to 30 percent of the refund to expedite 
reimbursements. If the designated firms are hired and paid, VAT is reimbursed promptly. 
Companies that do not make these payments wait 3 to 18 months; smaller companies 
sometimes receive no refunds at all.
Ukraine's complex, corrupt system of certifying imports imposes the greatest barrier to 
importers. Accepted international practice recognizes products that have been certified 
by accredited bodies in partner states as acceptable in the importing country. In Ukraine, 
products that are subject to mandatory certification--a very long list--have to be 
recertified, substantially increasing costs to importers.
Nothing has served to undermine Ukraine's reputation as a responsible trading partner 
more than the embargoes imposed on grain exports in 2006 and 2007. The embargoes 
were instigated by Ukrainian commercial interests tied to the government. They hoped to 
benefit from obtaining and reselling export quotas to legitimate grain exporters, 
pocketing substantial sums. This policy resulted in the loss of upwards of $200 million 
by the larger grain exporters. It will have a lasting, depressing effect on the incomes of 
Ukrainian farmers, as international grain trading companies now shun the Ukrainian 
market because of the risks of export embargoes and quotas.
Barriers to Foreign Direct Investment
Potential investors in Ukraine find it very difficult to obtain satisfactory sites. Potential 
investors are unable to build distribution centers and factories because they cannot obtain 
land. Retailers and restaurateurs complain that municipal governments sell or lease all 
the best commercial sites to favored individuals. Problems in obtaining titles, 
construction permits, and operating permits add to costs and complexity.
A number of provisions in the 2004 Commercial (or Economic) Code contradict existing 
provisions in the more market-oriented Civil Code. Businesses find that some activities 
are mandated by one code, while violating provisions of the other. Some Ukrainian 
businesses exploit these legal discrepancies to select those laws they find preferable for 
their current operations. If disputes arise, they choose courts that favor their choice of 
applicable law or judges who are willing to be bribed to do so.
Because of deficiencies in the laws pertaining to joint stock companies, shareholders lack 
key rights of ownership. Majority shareholders can use the legal system and a friendly 
court to issue new shares and steal assets. Minority shareholders ("raiders") have used 
current laws to deprive majority shareholders of their rights and in a few instances of 
control of their company.
 In contrast to Central Europe, Ukrainian governments have not extensively used 
privatization to attract foreign capital and business expertise to Ukraine. With the 
exception of a very few transparent sales of major assets, privatization has usually 
resulted in the acquisition of formerly state-owned enterprises by Ukrainian businessmen 
or foreign companies controlled by Ukrainians. In most instances, Ukrainian 
businessmen have effectively excluded foreign investors by usurping the privatization 
Current laws and policies, although ostensibly designed to make it possible for foreigners 
to invest in Ukraine's energy sector, effectively discourage most potential investors. 
Those companies that have invested in Ukraine's energy sector have had difficulties with 
Ukrainian regulators. Some decisions have been in violation of the law or based on 
extraordinarily narrow interpretations of regulations. 
Recommendations for Improving the Climate for Trade and FDI in Ukraine
The Ukrainian government should adopt a two-pronged strategy to remove the worst of 
these impediments to trade and investment. The first prong should focus on making a 
few, highly visible policy changes that promise results within one hundred days. The 
second prong should set in motion changes in Ukraine's institutions necessary to reduce 
corruption and other impediments to trade and investment, which would take longer to 
bear fruit. Below, we provide several recommendations that if adopted would reduce the 
most egregious barriers. We have classified them according to whether they would bring 
results within 100 days or longer.
Within the next 100 days, the Ukrainian government should reduce opportunities for 
government employees to manipulate the regulatory system to solicit bribes in the 
following ways:
-	Set up a network of regional boards to which businesses and citizens can appeal 
administrative decisions. The boards should be composed of civil servants, businessmen, 
and citizens. They should have the authority to stay decisions taken by lower level civil 
servants until reviewed by higher level administrators or administrative courts. All 
meetings should be open to the public.
-	Give Inspector Generals the authority to immediately put government employees 
facing credible accusations of soliciting bribes on administrative leave and then quickly 
bring cases to court for resolution.
-	Reprimand or dismiss supervisors whose employees have been convicted of 
Fostering Trade
Joining the WTO is the most important near-term step that the Ukrainian government can 
take to spur trade. If bilateral negotiations fail to resolve issues with current WTO 
members that threaten to block entry, the Ukrainian government should turn to the 
secretariat of the WTO, the United States government, or the European Commission to 
assist in resolving these issues.
The Ukrainian government will need to maintain an inter-ministerial working group with 
the clout to prevent the issuance of laws or regulations that violate Ukraine's agreements 
with the WTO. The Ukrainian government should give the Department on Cooperation 
with the WTO full authority to ensure that Ukrainian legislation and regulations remain 
in compliance with the WTO.
The Ukrainian government should promptly reimburse exporters for VAT payments. 
Regulations should be issued stipulating that VAT reimbursement requests be processed 
in accordance with the law (60 days). Supervisors should be penalized if these time 
periods fail to be observed.
Ukraine should immediately accept all products that conform to EU standards. Once a 
product is certified by the EU, no further certification should be necessary in Ukraine.
The Ukrainian government should immediately eliminate all remaining embargoes on 
grains. It should pass legislation conforming to WTO practices that strictly defines when 
export quotas on agricultural products may be imposed and how they will be allocated.
Attracting Foreign Direct Investment
The Ukrainian government should set legal limits on the ability of government employees 
to impede the establishment of businesses in Ukraine. It should:
-	Set fixed deadlines for action on permits. 
-	Set a yearly limit on the total number of inspections to which a business is 
-	Ensure that initiatives for one-stop registrations and permits be operating by 
January 1, 2008.
The Ukrainian government should also ensure that its decision to repeal the ban on 
agricultural land sales goes into effect on January 1, 2008.
The Ukrainian government should immediately abolish the Commercial Code and 
appoint a task force to revise the Civil Code. The task force should be composed of 
representatives from the judiciary, government agencies, the legal profession, businesses, 
and consumer groups. It should provide draft legislation or regulations to fix problems in 
laws affecting Ukrainian businesses that are contradictory, poorly written, or lacking. It 
should also appoint a small team of senior government officials to spearhead efforts to 
make the necessary legislative changes.
The Ukrainian government should replace its current privatization strategy with a new 
one geared towards the rapid, transparent privatization of almost all of the remaining 
commercial assets owned by the government. The government should draw up a revised 
list of companies to be privatized, including an accelerated time schedule for 
privatization. The government should establish clear procedures for issuing tenders for 
trade sales, permit all interested parties to bid, and publish the terms of all bids and the 
winning bid. The highest bid should win.
To ensure adequate, competitive supplies of energy, the Ukrainian government should 
actively seek FDI in the energy sector. It should lengthen production-sharing agreements 
from the current 5 years to international standards of 10 to 20 years to encourage foreign 
investment in domestic production of oil and gas. The government should increase 
wholesale prices of Ukrainian natural gas to those of imported gas. It should also 
encourage foreign investors to participate in the construction and ownership of new gas 
or oil transit pipelines. 
This report benefited greatly from the insights and suggestions of a large number of 
investors, managers, government officials, and analysts both in Ukraine and outside the 
country. We would likely to express our deep appreciation for the assistance of the 
following individuals: Dr. Irina Akimova, Bureau of Economic and Social Technologies; 
Dr. Anders Aslund, Peterson Institute of International Economics; Edward Chow, Center 
for Strategic and International Studies (CSIS); Dr. Elisabetta Falcetti, European Bank for 
Reconstruction and Development; Alexander Gorodetsky, Interpipe Corporation; Mark 
Iwashko, Western NIS Enterprise Fund; Gary Litman, Vice President, Europe and 
Eurasia, U.S. Chamber of Commerce; Douglas Kramer, Economic Counselor, U.S. 
Embassy in Ukraine; Jock Mendoza-Wilson, System Capital Management; Lidiya 
Melnyk, Deputy Director, Ministry of Economy of Ukraine; former U.S. Ambassador to 
Ukraine William Miller; Lauri Molnar, Office of the United States Trade Representative; 
Pavel Moyseychenko, Ministry of Economy of Ukraine; Olga Oliker, RAND 
Corporation; Ambassador Steven Pifer, Center for Strategic and International Studies; 
Andrea Raffaseder, Siemens Ukraine; Andreas Rickmers, Cargill; Dr. Farooq Siddiqui, 
International Steel and Tube Industries; Ihor Shevliakov, International Centre for Policy 
Studies; Ambassador William Taylor, U.S. Embassy in Ukraine; Serheii Teriokhin; 
Member of the Verkovna Rada; Morgan Williams, Sigma-Bleyzer; Ihor Petrovich 
Zahlada, Director, Ukrainian Center for Promotion of Foreign Investment; Svetlana 
Petrivna Zaitseva, Ministry of Economy of Ukraine; and Jorge Zukoski, American 
Chamber of Commerce in Ukraine. 

Library of Congress Subject Headings for this publication:

Ukraine -- Commerce.
Investments, Foreign -- Ukraine.
Ukraine -- Commerce -- United States.
United States -- Commerce -- Ukraine.
Investments, American -- Ukraine.