RESTRICTEDWORLD TRADE
ORGANIZATIONWT/ACC/UKR/69/Add.1
17 August 1999
(99-3460)
Working Party on the
Accession of UkraineOriginal:  English
ACCESSION OF UKRAINE
Memorandum on Investment Regime
Addendum
The following information on the investment regime in the Ukraine has been received from
the Governmental Commission on Ukraine's Accession to WTO.
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1. Rights of Foreign Investors .
Current conditions of economic development require an active investment policy.  In Ukraine,
the legislative base established in the sphere of regulating investment activity is continuously being
improved with the aim of achieving an increased inflow of foreign investment and increasing the
effectiveness of this investment.
With the Law of Ukraine “On the Foreign Investment Regime,” No.93/96-VR, of
19 March 1996, foreign investors in Ukraine receive equal conditions with domestic investors.  This
law provides foreign investors with state guarantees for protecting their investments.
In particular, foreign investment is not subject to nationalization.  State bodies do not have the
right to requisition foreign investments, except when taking emergency rescue measures in the case of
disasters, accidents, epidemics, and epizootic events.  If such an unexpected event takes place, foreigninvestors are guaranteed sufficient and effective compensation.
Foreign investors have the right to indemnification for losses, including reduced profit and
moral damage sustained as a result of action, inaction, or unsatisfactory fulfilment of lawful
obligations towards foreign investors on the part of state bodies of Ukraine or its officials.
In case of the termination of investment activity, foreign investors are guaranteed the return of
their investment in kind or in the currency invest ed without paying duty, and also income from said
investments in cash or goods.  The state also guarantees unfettered and immediate transfer abroad of
profits and other foreign currency received by lawful means from foreign investment.
If special legislation on foreign investment that guarantees the protection of foreign
investments stipulated by the above-mentioned law is repealed, upon the demand of foreign investors,
the protection guarantees of foreign investments given in the Law of Ukraine “On the Foreign
Investment Regime” will apply for a period of ten years from the day such legislation is promulgated.
2. Other Applicable Laws
A peculiarity of the legal regulation of foreign investment activity on Ukrainian territory is
that, along with the above-mentioned law, foreign investors should also take into account theWT/ACC/UKR/69/Add.1
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requirements of a whole series of other laws and normative acts.  These include the following Laws of
Ukraine: “On Investment Activity,” No.1560-XII,  of 18 September 1991; “On Protecting Foreign
Investment in Ukraine,” No.1540a-XII, of 10 September 1991; “On Foreign Economic Activity,”
No.959-XII, of 16 April 1991; and “On the General Principles for the Establishment and Functioning
of Special (Free) Economic Zones,” No.2673-XII, of 13 October 1992.
The norms applied through Ukraine's laws addressing foreign investment processes, are
norms derived from various branches of law: constitutional, administrative, civil, financial, land,
labour, criminal, and other areas, which reflect both the legal and social natures of the process.
3. International Agreements
Among the important legal documents regulating relations between investment entities are
bilateral international agreements “On the Promotion and Mutual Protection of Investments.”  Such
agreements are guarantors of providing fair conditions for investments and their protection in other
states.  These agreements have already been signed with 48 other countries.
Another entire series of draft agreements are currently being reviewed.
The Law of Ukraine “On the Action of International Agreements on the Territory of
Ukraine,” No.1953-XII, of 10 December 1991, provides that set and properly ratified international
agreements by Ukraine are an inseparable part of Ukraine's national legislation and are appliedaccording to the procedures established for the norms of national legislation.  This provision is fixed
in Article 9 of the Constitution of Ukraine.
The Law of Ukraine “On Ukraine’s International Agreements,” No.3767-XII, of
22 December 1993, provides for the ratification of international agreements by adopting a special lawon ratification.  Further, the draft Law of Ukraine “On Agreements as to the Distribution of
Production,” should facilitate attracting foreign capital for acquiring petroleum and gas stockpiles in
Ukraine once it is accepted.
It is important to note that Ukraine's legislation on foreign investment and international laws
on foreign investment regimes require unity, which is particularly important at the current stage of
Ukraine's integration into the world economy.
4. Current State of Foreign Investment
The legal regime for investment activity in Ukraine by both Ukrainian and foreign business
entities is complicated.  Ukraine has become, along with other countries, one of the participants of acompetitive battle for attracting foreign investment.  Having significant potential in this respect,
Ukraine should effectively use all existing methods to attract such investment.
The second half of 1998 commenced with a series of macroeconomic events in Ukraine that
could significantly influence investment activities, but require detailed analysis of investment policy,its sufficiency, and an overview of the current situation.
The results of the first half of the year testify that the first steps towards stabilizing production
have been taken.  There is a continuing tendency  towards the stabilization of GDP, industrial and
agricultural output.  Monthly volumes of real GDP increased starting in March 1998 and cumulatively– since May 1998 (compared to the corresponding period in the previous year).WT/ACC/UKR/69/Add.1
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5. Volume and Distribution of Investment
In the first two quarters of 1998 foreign investors placed US$ 517.7 million in Ukraine, which
is 54.3% more than during the same period in 1997; this sum includes US$ 18 million from the CISand the Baltic States (3.5% of the total) and US$ 499.7 million (96.5%) from other countries.
The total volume of direct foreign investment in Ukraine as of July 1,1998 was US$ 2,467
million.  The greatest investment activity was by us citizens not residing in Ukraine (US$ 428.9
million, or 17.4% of the total), followed by the Netherlands (234.7m USD, or 9.5%), Germany (US$
196 million, or 7.9%), Korea (US$ 182.5 million, or 7.4%), Great Britain (US$ 168.3 million, or
6.8%), Cyprus (US$ 163.4 million, or 6.6%), the Russian Federation (US$ 160.3 million, or 6.5%),and Liechtenstein (US$ 100.5 million, or 4.1%).  The greatest interest on the part of investors as to
capital input was in the following branches of the Ukrainian economy:
- food industry (US$ 503.1 million, or 20.4% of the total);
- domestic trade (US$ 389.1 million, or 15.8%);- machine-building and metal-processing (US$ 336 million, or 13.6%);
- finance, lending, insurance, pensions (US$ 197.7 million, or 8.0%);
- chemical industry (US$ 131.5 million, or 5.3%).
In the first two quarters of 1998 Ukraine invested US$ 3.4 million in other countries,
including US$ 1.8 million (51.9%) in the CIS and the Baltic States and US$ 1.6 million (48.1%) in
other countries.  The volume of investment fr om Ukraine was US$ 120 million as of 1 July 1998,
including US$ 42.1 million (35.1%) in the CIS and the Baltic States and US$ 77.9 million (64.9%)
into other countries.
The fist half of 1998 exhibited a trend in active investment and capital development.  The
volume of capital investment was 4.8% in the first quarter and 8.5% in the first two quarters
combined.  The proportion of capital investment into production is increasing and technology is
improving as a result.
6. Privatization
Since independence, 59,000 enterprises have been denationalized, including nearly 9,000 with
sales reaching at least 70%.  Over 10,000 joint-stock companies have been created.  As a result, 66%
of industrial products, 63% of agricultural products, and 50% of construction work is accomplished in
the non-state sector.
The state reduced its influence on price-setting, division of resources, and structural reforms
in industry.  These functions continue to be handed over to market institutions, such as, commercial
banks, investment and pension funds, and stock market and commodities exchanges, which are
developing, albeit slowly.
In order to facilitate structural changes in the economy and create a framework for the
development of entrepreneurial activity, President Kuchma has issued a number of decrees which set
out concrete measures in the following areas:
- deregulation of business activity;
- improvement of the management of state-owned entities;
- reduction of taxes and review of specific taxes;
- adjustment of stock market activity, protection of investor rights;
- stimulation of investment activity.WT/ACC/UKR/69/Add.1
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One of the most important factors in improving the investment climate is reducing the
expansion capacity of the shadow economy; this is  being promoted through the adoption of various
decrees..
Pursuant to relevant presidential decrees, the stimulation of investment in Ukraine will be
facilitated by the introduction of a special investment regime and special economic zones in such
regions as Donetsk and Slavutych.  Further, the tasks outlined by President Kuchma at a meeting of
the Cabinet of Ministers in the first half of 1998, include the development of legislative and other
normative acts addressing the adjustment of the budget process, the reduction of excessive state
expenditures, the increase of effective sectoral management and control over the use of state property,
implementation of a competition policy, issuance of state bonds for investment projects, and attracting
foreign investment into the privatization process.
7. Further Developments
Investment activity typically decreases during periods of economic instability.  Thus, the
development of macroeconomic stabilisation measures include measures to support the domesticinvestment climate, and clarification of the instruments of investment policy.
Increasing the effectiveness of investment policy requires the application of methods, which
are appropriate to the conditions of market transformation, in order to balance the supply and demand
of investment resources and widen the spectrum for investment, taking into account priority goals andspecifics of the current situation.  Above all, this  involves, first, the development of the investment
market, since without such a market even the insign ificant amount of investment resources that are in
the country are not utilized to their fullest potential.  Second, the demand for investment must
correspond to the desired structure of the production sector. Third, the highest levels of capital return
and profitability are formed only in a competitive en vironment, where prices play the critical role of
regulating supply and demand.  Overall. these investment strategies are linked primarily to the
structural rebuilding of the economy; and are aimed at stimulating and developing the internal
consumer market.
During economic crises and situations involving large commercial and investment risks,
tactical aims are important.  The main strategy in activating investment in the short term is to
development the infrastructure of food and non-food markets through networks of small processingand preparation enterprises that channel agricultural goods to the cities and through networks of food
markets in rural areas.  This involves deregulating business activity.
However, the main hindrance to increasing investment markets is the insufficient purchasing
power of the population, especially in non-industrial regions.  Increasing this purchasing powerdepends on paying and increasing minimum wages and pensions.  Another requirement for the
effectiveness of a long-term investment policy is that it should be aimed at forming a rational
economic structure through significant investment in  long-term reconstruction projects in the high-
technology branches of industry.  Ukraine’s goal of developing into a high-technology state demands
the input of long-term investment into this sector.
Today, while sharp reductions in capital investment and reduction of the role of state
regulation take place, the task is to find more effective models of financing and implementing long-
term projects.  International experience shows that such models involve varied financing with both
state and private capital.  Such a model provides for a coordinating and regulating role for the state,while increasing private capital expenditures.  Depending on the degree of the investment crisis, the
relative involvement of the state would be greater or less; responsibility to private investors regarding
their capital would remain paramount.WT/ACC/UKR/69/Add.1
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Countries with limited budget potential concer ning investment in the economy must tackle
the task of optimal allocation of resources to investment programs.  This means, first, developing a
structural reform program with clearly delineated  priorities and, second, preparing an assessment of
financing sources, as well as limited amounts of guarantees given by the state , e.g. regarding the
payment of loans and insuring non-commercial risks..
The structural reform program for Ukraine's economy, which was developed in 1995, was not fully
implemented due to incomplete denationalization and lack of clarity regarding the transfer of
ownership rights to incorporated and privatized ente rprises.  Today, the tasks of increasing investment
and its effectiveness, preventing the downfall of the production sector and falling behind developed
countrie, demand a review of this reform program and redefining priorities and financing sources.
An important issue is the development of an in frastructure to implement investment projects,
including specialized investment banks involving state participation, private investment institutions
(e.g. investment funds, investment companies, non-state pension funds, commercial banks), state
investment loans, and municipal loans.  Their activity depends on a firm legal foundation, which
forms the framework for stable and effective work.  Most of these questions will be addressed in thenear future.
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