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Ukraine risk: Legal & regulatory risk(RiskWire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentD62D62Legal & regulatory riskD73D73Note: E=most risky; 100=most risky.SUMMARY The legal process is not independent and the judiciary is easily cowed by vested interests. Contracts are difficult to enforce and regulation is neither impartial nor clear. Although it is possible for foreign firms to win court cases, particularly at the higher levels, the judicial process remains slow and inefficient. Ukraine is dominated by powerful local players who have successfully excluded foreign capital. The risk that foreign investors' assets will be de facto expropriated is low, but recent examples of this exist. The outgoing government's record on promoting competition and restraining unfair competitive practices was poor. Although the new presidential administration is more committed to a level playing field, reforming the old system will take a while. Private property rights are still not well protected. Local accounting standards are well below accepted levels in the EU and the US. SCENARIOS Western firms suffer as a result of biased regulatory practice and legislation (Moderate Risk) The government will push ahead with legislation to liberalise and modernise commercial law, but enforcement is likely to remain a problem. In practice, legislation and regulations are likely to be interpreted in a manner hostile to Western firms because of the power enjoyed by vested interests. Domestic economic interests are well represented in parliament and able to influence the legislative process. Foreign firms should lobby the government themselves and through their embassies to at least attempt to establish a level playing field. They should also inform their embassies of any bias shown by regulatory agencies as this may, in some cases, constitute a violation of Ukrainian trade and investment agreements with foreign countries. Foreigners receive unfair treatment in the local courts (High Risk) Ukrainian courts are not independent, lack judicial experience with commercial law and are frequently open to external influences, such as from politicians and their allies in domestic industries. Some of the basics of commercial law, including a respect for property rights, are frequently absent. The legal framework has proved inadequate for foreign firms seeking to enforce contracts or resolve disputes with Ukrainian partners. Firms should not rely on the letter of the law or formal regulations for protection. Instead, they should ensure that their contracts allow them to take disputes to international arbitration or to legal fora outside Ukraine. BACKGROUND (Background material is updated twice yearly. Last update: March 1st, 2005) Enforceability of Contracts Ukraines legal system is weak. Property rights exist mostly on paper and are poorly protected, while contracts are difficult to enforce. The courts are unreliable and inconsistent. Disputes with foreign investors are a little less frequent than they used to be. The body of commercial law needs considerable reform. The 1996 constitution grants private land ownership rights. This constitutional provision is, however, difficult to make use of as the government and state-owned firms can prevent foreign investors from enjoying their ownership rights. There is also a degree of inconsistency between the 1992 Land Code, which restrains land ownership, and the constitution. The effect on commercial law of the June 2001 Civil Code is, as yet, unclear. Judicial Independence The judiciary is open to meddling from both politicians and large, domestic vested economic interests, many of which are also represented in parliament. Judicial reform has been slow and ineffective. Foreign firms generally avoid Ukrainian courts. Corruption pervades all levels of society and government and all spheres of economic activity in Ukraine. On Transparency International's 2003 Corruption Perception Index, Ukraine ranked 111th on the list of 133 countries, ahead of such typically poor performers as Bangladesh (133), Nigeria (132), Georgia (127) and Azerbaijan (125), but behind Russia (87). Foreign Investment: Discriminatory Practices On paper there is no legal distinction between domestic and foreign capital. In practice, large local firms, mostly state-owned companies in the industrial sector, have considerable political and legal influence. There are sections of the economy which are informally closed to foreign investors and which foreign firms would find it hard to enter. Important enterprises are often indirectly represented in parliament and have connections at all levels of government. Foreign investors have received and have lost various tax privileges over the ten years since independence in 1991. Tax breaks are generally no longer available, but foreign firms do receive official guarantees, such as the right to repatriate profits unhindered and the grandfathering of all regulations in force at the time a deal was signed. Some tax incentives are still available for investors in the financial sector. There are 21 designated areas with three different regimes (special free economic zones, priority development areas and territories of priority development), which offer tax incentives such as corporate tax or import VAT exemptions (among other incentives). These special areas are, however, likely to be scrapped in coming years. There are important restrictions on foreign investment. Foreign firms cannot own more than 49% of the equity of alcohol, armaments, insurance, publishing or telecommunications companies and no more than 30% of a radio or television broadcaster. Additionally, the approval of a land code by parliament in October 2001 prevents foreign ownership of agricultural land for a 20-year period. The government, according to the 1996 foreign investment law, guarantees that there will be no nationalisation, except in the event of a national emergency, an accident or an epidemic. Despite this commitment, there have been cases of foreign investments, in effect, being nationalised. Some foreign firms have reported that their Ukrainian joint venture partners attempt to oust them once the common enterprise starts to make a profit--making it worth stealing. There are no proper dispute resolution mechanisms available in Ukraine. Foreign firms find it difficult to enforce either legal decisions or arbitration decisions. Ukrainian firms sometimes fail to give full disclosure and, on occasion a firms shares can be reallocated, assets sold and phantom shareholders can appear. Ukraine adopted an international arbitration law in 1994 and is a party to the 1958 New York Convention on the recognition and enforcement of foreign arbitration awards. Enforcement of foreign arbitration awards is, however, erratic. Unfair Competitive Practices Ukrainian commercial law is a weak ragbag of outdated legislation and poorly thought out new laws. As a result, there are large loopholes in the law. The government has made little effort to adopt EU style laws regulating business practices. According to World Banks 2002 Survey of Ukrainian Businesses, unfair competitive practices ranked as the fourth most significant barrier to doing business in Ukraine. The barriers are caused by unfair competition from competitors in the shadow economy (who do not pay taxes fully, for example) and privileged permits/permissions given businesses favoured by local authorities. Ukraines Antimonopoly Committee implements anti-monopoly, competition, and consumer protection legislation. New companies and mergers/acquisitions face strict controls by the committee. Most investments, joint ventures with multiple partners, and share acquisitions require the committees approval. It reported over 9,000 violations of anti-monopoly legislation in 2001, including 3,610 cases of monopoly abuse, 224 cases of anti-competitive coordinated actions, 770 cases of unfair competition, and more than 2,000 cases of discriminatory actions by government entities. On March 2nd 2002 the Law On Protection of Economic Competition came into force, giving the antimonopoly committee authority to regulate and/or prohibit co-ordinated anti-competitive activities. The law requires that the Committee obtain a court order before entering residences or other private property. Offenders of fair-competition rules may be fined up to 10% of the prior years turnover. If illegally gained profit exceeds 10% of income, up to three times the normal penalty can be collected. Intellectual Property Rights Copyright and trademark piracy are widespread. Police corruption is so bad that some confiscated pirated goods are actually sold by the authorities. Ukrainian legislation falls well below the standards needed for (TRIPs), a prerequisite for World Trade Organisation (WTO) membership. Organised crime gangs use Ukraine as an important base to manufacture pirated goods. Ukraine produces an estimated 70m CDs per year, of which just 5m are purchased locally. Intellectual property rights are poorly protected, and Ukraines failure to address this has led the US to impose trade sanctions on the country. It withdrew benefits from Ukraine under the Generalised System of Preferences (GSP) in August 2001, and imposed US$75m worth of sanctions on Ukrainian imports on January 23rd 2002, based on the repeated failure of Ukraine to comply with a June 2000 Joint Action Plan. These sanctions are still in effect due to Ukraine's failure to adopt and enforce adequate optical disc (OD) media licensing legislation. There is still substantial traffic in illegal OD media, both in street sales to consumers and in larger distribution to Western Europe, the Baltics, and elsewhere. On May 1st 2003, the US Trade Representative once again named Ukraine a Priority Foreign Country under the Special 301 provisions of the US Trade Act of 1974. On July 4th 2002, the Parliament of Ukraine adopted a law On the Introduction of Amendments of Certain Laws of Ukraine on Intellectual Property Issues. Overall, the Law extends to the Internet some provisions of the countrys intellectual property laws. Most importantly, it amends the law On the Protection of Rights in Trademarks and Service Marks (the Trademark Law) to address the issue of domain names in the Ukrainian legislation. The Trademark Law defines a domain name as the name one that is used for addressing computers and resources on the Internet. Under the amendments, the exclusive rights of a registered trademark owner now include the use of the trademark on the Internet, as well as the use of domain names that are identical or confusingly similar to the trademark. The Trademark Law also grants a higher standard of protection to trademark owners, as reflected in a new policy on the .ua domain, currently used to delegate a top-level Ukrainian site. In order to obtain a second-level domain name (such as www.mycompany.ua), it will be necessary to present a trademark-registration certificate for the identical name. This requirement does not extend to third-level domain names (such www.mycompany.com.ua or www.mycompany.kiev.ua), which remain susceptible to abusive registration. The Internet Association of Ukraine has established a Court of Arbitration for the resolution of various Internet-related disputes, including those related to domain names. The court--which is the only specialised institution in this area in Ukraine--is comprised of lawyers and IT professionals. Domain-name disputes may be referred to the court by mutual consent of the parties. The court aims at helping the parties to reach amicable agreements, and it keeps confidential the subject matter of the dispute and the names of the parties. Meanwhile, the Business Software Alliance--an international private-sector group (including Microsoft and other dominant players) concerned about electronic piracy--reported in June 2003 that an estimated 89% of software in use in the country was unlicensed, or pirated. And going against the international trend, this represented a rise from 2001, when the piracy rate was estimated at 86%. In dollar terms, the situation is even more stark: the BSA estimates that software companies losses to piracy in Ukraine increased from US$28.2m in 2001 to US$78.2m in 2002. Price Controls Although many price controls have been removed, a number of price controls remain in place, particularly for staples. There are no controls on the prices of goods provided by foreign investors. |