investors may seek damages (lost profit and moral damages) resulting from negligent acts by, or fail- ure to perform on the part of, state bodies of Ukraine or their officials; a guarantee in the event of termination of investment activity (the right of foreign investors to remit their revenues and to withdraw their investments from Ukraine free from export duties within six months from termi- nation of their investment activity); and a guaran- tee of repatriation of profits (after payment of taxes, duties, and other mandatory payments, for- eign investors are guaranteed the right to unim- peded and immediate transfer abroad of all prof- its and other proceeds in foreign currency legally earned as a result of their investment activity). In addition to these guarantees, the govern-
ment offers incentives to promote the general investment image of Ukraine outside of the coun- try. The success of such incentives is rather dubi- ous, however.
Ups and downs There are, of course, risks for investors too. Ukraine still remains extremely vulnerable to external economic fluctuations; this has been the case since the onset of the financial crisis. Cooperation with the IMF has been on hold over the past year. Ukraine has received no further tranches under the stand-by programme and was forced to borrow money on the international mar- kets and from the Russian banks. In addition, the reserves of the National Bank of Ukraine (NBU) have decreased significantly. On top of that, the parliamentary elections triggered fears of a possi- ble devaluation of the Ukrainian currency (the hryvna). Altogether this has made foreign and local investors rather reluctant to invest actively. Investors should be aware that the Ukrainian
currency is artificially pegged to the US dollar. During politically unstable times in particular, this does not add attractiveness to the investment image of the country and keeps certain investors on hold. Currency risk is quite significant today. Ukraine has plans both to join the EU and to
seek closer cooperation with Russia and the CIS countries. This has led, and most likely will con- tinue to lead, to certain political ambiguity. Certain steps need to be taken to stabilise the
country’s economic situation and to ensure con- stant growth. This will take several more years. International investors doing business in
“
Corruption has
been a problem for many years and is something that the government is trying to counteract more actively
”
Ukraine should also be conscious of the existing high level of corruption in the country. This has been a problem for many years and is something that the government has been trying lately to counteract more actively. It not only concerns the various state bodies, but also the court system. There is also a certain risk of raiders’ attacks:
attacks on businesses aimed at forced change of control. This, as well as the constantly changing legal environment, requires secure protection of assets at all stages of business activity in the coun- try. In addition, there are many formalistic requirements, such as the requirement to seal all official documents, or sometimes to bind official documents together. These may appear rather archaic to a foreign investor, but failure to comply with them implies a certain risk. In addition, when acquiring assets in Ukraine,
a foreign investor should structure the transaction in compliance with Ukrainian legislation. The investor may otherwise experience significant problems at the stage of transfer of the profit from Ukraine abroad. For example, if a non-resident of Ukraine acquires shares in a Ukrainian company from another non-resident of Ukraine, it is high- ly advisable to make payment through investment accounts of both parties opened with Ukrainian banks, as is prescribed by the effective legislation of Ukraine. If the settlements are performed abroad, which is not prohibited, the purchaser, in order to transfer abroad his profit generated by such assets in Ukraine, will have to provide a Ukrainian bank with documents confirming that a foreign investment in relation to these assets was previously made (in other words, that the previ- ous owner has transferred funds in Ukraine in payment for these assets). Sometimes, it can appear impossible to provide sufficient proof and the only legitimate way remaining is to obtain an individual licence from the NBU. It should also be noted that Ukraine has one of
the strictest currency control regimes in Europe. Under the effective currency control rules (NBU Regulation on Procedure of Foreign Investing in Ukraine), foreign direct investments in cash can be made only in hryvna and a certain number of other currencies (most freely-convertible curren- cies). But the main barriers are aimed at preven- tion of the outflow of foreign currency outside the country. The NBU, as the main body for exchange control, has established a precise list of
About the author Oleksander Plotnikov joined Arzinger in 2010. He focuses his practice on the areas of general banking and finance, bank and corporate lending, debt restructuring, capital markets and foreign investments, structured and project finance. Plotnikov has substantial experience on various types of loan facilities (bilateral and syndicated) and regularly acts for lenders and borrowers on a wide range of local and cross-border transactions, including the complex syndicated lending transactions and debt restructurings involving several jurisdictions. With five years experience at UkrSibbank (BNP Paribas Group) and CIB
Credit Agricole, Plotnikov is highly valued by clients as an expert in banking regulatory matters, currency control and foreign investments. His expertise covers a broad range of industries, including banking,
agriculture, real estate, energy and retail. He has been practicing law since 2001. Contact information
Oleksander Plotnikov Arzinger
Eurasia Business Centre, 75 Zhylyanska St., 5th Floor, 01032 Kyiv, Ukraine T: +38 (044) 390 55 33 F: +38 (044) 390 55 40 E:
oleksander.plotnikov@
arzinger.ua W:
www.arzinger.ua
042
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