Obstacles for Doing Business in Ukraine
In general, economists tend to agree that Ukraine has structurally good prospects to attract foreign capital to its market. It has a significant economic potential as a result of its geographic location between Europe and Asia, a large domestic market, a well-educated labour force and access to a variety of natural resources such as coal, iron ore, manganese, nickel, and uranium as well as the very fertile black “chernozem” soil. Currently, however, the country is entangled in a civil war with separatist forces in the East. But is it only the war which deters potential investors or are there other reasons?
by Ewa Martyna-David
Ukraine attempts to attract investment
In late August this year, President Poroshenko announced the creation of the National Investment Council (NIC), which is aimed at attracting more domestic and foreign investments. The former head of the Presidential Administration Boris Lozhkin has been nominated chair of this new institution. On his facebook-site he posted a statement that NIC will be able to attract 3-5 billion USD in investment in 2017 provided that it demonstrates headway in reforms.
Ukraine is making progress in its reform process at a very slow pace, especially in crucial areas such as anticorruption or deregulation. The present developments at the local market do not encourage new investments. In the last two years, there has been no entry of new Austrian companies to the market, as Rainer Staltner from the Ukrainian Chamber of Trade and Industry in Vienna has observed. Some years ago, Austria was among the biggest investors in Ukraine.
International rankings show the problems
Ukraine has taken some steps forward in order to provide a welcoming environment for private business growth and investment, but much remains to be done.
According to the World Bank´s Doing Business 2016, the Global Competitiveness of World Economic Forum 2016 and the Overseas Business Risk – Ukraine Feedback 2016 prepared by the British Foreign and Commonwealth Office, substantial barriers for domestic and foreign business are corruption, access to finances, macroeconomic instability, inefficient bureaucratic processes, tax rates and lack of transparency in tax administration as well as weak rule of law.
Local rankings show a similar picture
The Investment Climate Survey 2016 published by Bleyzer Foundation in Kiev shows that the enterprises operating in Ukraine see the major deficiencies in the legal and judiciary environment, corruption and financial sector. These three drivers are considered to be severe/moderate obstacles by 93% to 96% of the respondents.
According to the survey on the investment climate conducted by the American Chamber of Commerce in 2016, 75% of businessmen in Ukraine consider corruption the key problem for business. Ukrainian legal system (16%) and significant bureaucratization (9%) are also seen as problems by business community.
There are also positive trends
The Business Ombudsman Council in Kiev noticed the decline in complaints concerning registration of business and property rights in its last report. Furthermore, the reduction of complaints related to permits and licenses has been also observed. This fact could be explained as the first results of a successful implementation of deregulation reform. The sectoral reforms in the judiciary, in public administration and anti-corruption have already started but are complex and will take more time.
Additionally, the Deep and Comprehensive Free Trade Agreement EU-Ukraine (DCFTA) has provisionally been applied since January 2016. It opens both markets through the progressive removal of customs tariffs and quotas, and by an extensive adjustment of laws, norms and regulations in various trade-related sectors of Ukraine to EU standards. The DCFTA will not bring instant investment; first tangible results will be visible no earlier than in two years.
The resolution of the conflict in the eastern Ukraine, a successful and sustainable implementation of reforms in the areas mentioned above combined with a more open market and better standards may attract new European investors.