RESTRICTEDWORLD TRADE
ORGANIZATIONWT/ACC/UKR/70
23 July 1999
(99-3109)
Working Party on the
Accession of UkraineOriginal:  English
ACCESSION OF UKRAINE
An Overview of State Support for Ukranian Entities Engaged in Foreign Economic Activity
The following information concerning state support for Ukranian entities engaged in foreign
economic activity in Ukraine has been received from the Governmental Commission on Ukraine'sAccession to WTO.
_______________
TABLE OF CONTENTS
Subject: Page
1. Support for Entities engaged in foreign trade in the industrial sector 2
(a) Brief description and evolution of legislative acts regulating foreign trade in the
industrial sector 2
(b) Description of current legislative acts
(i) Law of Ukraine “On Stimulating Production of Automobiles in Ukraine”
No.535/97, of 19 September 1997 2
(ii) Resolution of the Supreme Rada “On Anti-Crisis Measures in the Metal
Mining Complex of Ukraine” No.166-XIV, of 6 October 1998
(iii) Resolution of the Supreme Rada “On Crisis Prevention Measures in the
State Communications Sector in Ukra ine” No.462-XIV, of 2 March 1999 3
(iv) Resolution of the Cabinet of Ministers “On Confirming the Schedule of
Exemption From Levying of Fees on Turnover Resulting From the Sale
of Passenger and Freight-Passenger Automobiles, Motorcycles and
Pneumatic Rubber Tires for Passenger Automobiles, Manufactured byUkrainian Enterprises of All Forms of Ownership” No.155, of
16 February 1998 4
(v) Law of Ukraine “On Certain Amendments to the Law of Ukraine “On
Levying of Fees and Import Duty for Certain Kinds of Goods
(Production)” No.276-XIV, of 20 November 1998 4
(vi) Agreement Between the Governments of Ukraine and the Russian
Federation on Cooperation in Manufacturing, of 24 April 1998 4
(vii) Application of the above acts and consequences of their implementation
in the context of international organizations 5
2. Support for entities engaged in foreign trade in the agroindustrial sector 5(a) Agricultural privileges and subsidies - a history 5
(b) The grain market today 6
(c) “Bread of Ukraine” (“Khlib Ukrainy”) - an appraisal 6
(d) Privatization of grain collection, bread baking and distribution enterprises 6
(e) Changes in the status of “Bread of Ukraine” 6(f) Limits on grain traffic      7WT/ACC/UKR/70
Page 2
(g) The pesticide and herbicide market today 7
(h) The fertilizer market today 7
(i) The grain spirits, alcoholic beverage and tobacco products market today 8
3. Conclusion 8
1.   Support for entities engaged in foreign trade in the industrial sector
(a) Brief description and evolution of legislative acts regulating foreign trade in the
industrial sector
It was common practice in the past to adopt numerous normative acts providing for various
types of privileges and subsidies to specific firms and enterprises, as well as entire branches of
industry.  The greatest number of such acts, 31 Cabinet of Ministers (CMU) resolutions, were adopted
in 1993. In 1992 and 1994-1996 a total of ten such acts were adopted.
Most of these normative acts provided for ex emption from tax or duty payments for certain
agreements or contracts entered into by Ukrainian enterprises, often with scant or no reason.
Sometimes privileges were provided for an entire year.  For example, the Resolution of the Cabinet of
Ministers “On Granting Tax Privileges to th e Joint Stock Company  (JSC) “Nord”, No.613, of
10 August 1993, provided JSC “Nord” (not a state enterprise) with exemption from value-added taxon barter operations conducted on the basis of ten different contracts.  In that same year the
Makiyivka Metal Mining Plant was exempted from paying profit tax on metal production exports.  All
of the above acts were limited in duration (generally they expired after one year) or have been
revoked by subsequent decisions of the Rada or the CMU. None are in force today.
(b) Description of current legislative acts
Nonetheless, a number of legislative acts, providing privileges in foreign trade are in effect at
this time.  These privileges touch and concern both concrete companies and enterprises, as well as
entire branches of industry.  They are listed below.
(i) Law of Ukraine “On Stimulating Production of Automobiles in Ukraine”
No.535/97, of 19 September 1997
Despite the obvious fact that this law was prepared for the “AvtoZAZ-Daewoo” joint venture
(JV), no mention is made of this company in the te xt of the law.  Formally it applies to all joint
ventures with foreign capital.  However, at closer inspection it becomes obvious that only onecompany enjoys the full spectrum of privileges contained in this legislation.  The list of privileges
includes:
- Exemption from payment of import tariffs on goods utilized in the production of
automobiles and spare parts, as well as the manufacturing needs of enterprises thatmanufacture such goods.
- Exemption from VAT payment of the above goods upon their entry onto the customs
territory of Ukraine.
- Exemption from VAT for sales of automobiles produced by companies residing in
Ukraine.WT/ACC/UKR/70
Page 3
- Exemption from the payment of land (real estate) tax for the land upon which the
above-named enterprises are situated; however, this applies only to that part of the
site, in which the amount of foreign investment into the statutory capital of the
enterprise equals $400,000 per hectare of land.  For example, if a JV occupies a 10
hectare site, and the amount of foreign investment equals $1,000,000, then 2.5hectares ($1,000,000/$400,000) will be exempted from land tax, while the remaining
7.5 hectares will be subject to land tax.
- Exemption from payment of contributions into the State Innovation fund.The above privileges are granted on the condition that the foreign capital paid into the
statutory fund of a domestic automobile producer constitute no less than $150,000,000, and that locallabor utilization be less than 90 percent; that is, at least 90 percent of the labor input into automobile
and spare parts production of the local enterprise must be of local origin.
The above privileges, taken together with the ban on the import of automobiles older than five
years and the introduction of minimum (indica tive) prices (CMU Resolution No.146, dated
16 February 1998) have created highly favorable conditions for the “AvtoZAZ-Daewoo” JV.
Taken together these factors have caused a number of general complications.  The heart of the
problem lies in the fact that the above normative acts violate provisions of the Agreement on
Partnership and Cooperation between Ukraine and the European Union, of 16 June 1994, and
GATT/WTO norms.
In particular, Sections 10,14,15,16 and 49 of th e EU Agreement and Sections III.2, V, VII.2,
XI of GATT. The European Commission, acting  within the framework of the Ukraine-EU
Cooperation Committee, has already made its concerns known and has indicated that such violationsmay complicate the process of rapprochement.
Even so, it is too early to talk of any market breakthroughs by the “privileged” JV in question.
According to experts, the entire  automobile market in Ukraine for 1998 approached 200,000 units.
By the end of September, 1998, “AvtoZAZ-Daewoo” JV had produced 20,000 automobiles, of which
2,000 had been sold.  The JV's future development is  not clear, insofar as Daewoo recently questioned
the practicality of increased production, as had been planned earlier, and thus has cast a cloud onscheduled investment.
(ii) Resolution of the Supreme Rada “On Anti-Crisis Measures in the Metal Mining
Complex of Ukraine”, No.166-XIV, of 6 October 1998
In Paragraph 5 of the Resolution of the Supreme Rada “On Anti-Crisis Measures in the Metal
Mining Complex of Ukraine”, No.166-XIV, of  6 October 1998, the Cabinet of Ministers is
encouraged to exempt from import duties “goods of a manufacturing and technical character for the
metal mining industry.”  Paragraph 6 recommends that the National Bank of Ukraine (NBU) permit
producers in the metal mining complex to conduct advance and progress payments on importcontracts, as well as other privileges that give these enterprises a leg up in comparison with other
entities engaging in foreign trade.  However, so far neither the Cabinet of Ministers nor the NBU have
taken any measures to enact these recommendations, and thus the resolution in question has not
affected the market or its participants.WT/ACC/UKR/70
Page 4
(iii) Resolution of the Supreme Rada of Ukraine “On Crisis Prevention Measures in
the State Communications Sector in Ukraine”, No.462-XIV, of 2 March  1999
As in paragraph 1 of the Resolution of the Supreme Rada of Ukraine “On Crisis Prevention
Measures in the State Communications Sector in Ukraine”, No.462-XIV, of 2 March 1999, the
Parliament recommends that the Cabinet of Ministers implement normative acts exempting state-
owned communications providers from payment of import duties on manufacturing and technical
equipment in accordance with a list prepared by the State Committee on Communications. Paragraph
4 recommends that the NBU amend its normative acts to permit advance and progress payments on
import contracts guaranteed by financial lending institutions servicing these enterprises.  This
paragraph also recommends that the NBU permit the use of credit resources, obtained from foreign
entities, on advance payments for import; clearance of payments on foreign economic contracts
without obtaining a “no tax debt” certificate from the State Tax Administration; and preferential
currency conversion on payments for goods. Paragraph 5 states that managers of state
communications enterprises may set the order of payments in the course of business and clearance of
obligations before the state budget, the State Pension Fund and other mandatory payments.  However,as with the previous example, neither the Cabine t of Ministers nor the NBU have taken any measures
to implement these recommendations, and their net effect on the market and market actors amounts to
nil.
(iv) Resolution of the Cabinet of Ministers of Ukraine “On Confirming the Schedule
of Exemption From Levying of Fees on Turnover Resulting From the Sale of
Passenger and Freight-Passenger Automobiles, Motorcycles and Pneumatic
Rubber Tires for Passenger Automobiles, Manufactured by Ukrainian
Enterprises of All Forms of Ownership”, No.155, of 16 February 1998
The aforesaid resolution sets out the schedule of exemptions from payment of fees on
producers of automobiles and automobile tires.  The basic criterion for obtaining this privilege is the
production of no fewer than 1,000 automobiles or 100,000 tires annually. Market activity is described
above. As far as tire producers are concerned, two producers are beneficiaries (“Dniproshyna” and
“Rosava”); together they produce more than 95 percent of all Ukrainian tires. Some 70 percent of
their production is exported.  The above privileges are one of the chief factors in the low cost of
domestically manufactured tires and their relative advantage to imported tires.  Needless to say,imported tires are disadvantaged in this respect.
(v) Law of Ukraine “On Certain Amendments to the Law of Ukraine “On Levying
of Fees and Import Duty for Certain Kinds of Goods (Production)”, No.276-
XIV, of 20 November 1998
In accordance with Law of Ukraine “On Certain Amendments to the Law of Ukraine “On
Levying of Fees and Import Duty for Certain Kinds of Goods (Production)”, No.276-XIV, of
20 November 1998, Ukrainian producers of color television sets are exempted from payment of
certain fees.
These criteria require a producer to have a minimum annual production potential of 100,000
units, to produce no fewer than 1,000 units monthly, and to include at least 20 percent domestically-
produced components in these units.
However, according to the Ministry of Industrial Policy, owing to the impossibility of
meeting all three criteria, no domestic television producer has been able to benefit from these
privileges since 1 January 1999 (effective date of this legislation). In addition, the Law of Ukraine
“On Certain Amendments to the Law of Ukraine “On Levying of Fees and Import Duty for CertainWT/ACC/UKR/70
Page 5
Kinds of Goods (Production)” No.276-XIV, of 20 November 1998, set specific import duties on
television sets as follows: up to 37 cm - 1 Euro; 37-54 cm - 1.2 Euro; 54 cm and greater - 2.7 Euro per
cm of diagonal screen length.
Unfortunately, it is very difficult to assess the precise effects of this law on the television
market due to the current market downturn, which began in August 1998.  It is certain that this law is
an important factor in the decrease in sales that has occurred.  One should note as well that the law
provides for expiration of the above fee and an import duty schedule at the end of the year 2000.
(vi) Agreement between the Governments of Ukraine and the Russian Federation on
Cooperation in Manufacturing, of 24 April 1998
Another important document that must be take n into consideration is the Agreement between
the Governments of Ukraine and the Russian Federation on cooperation in manufacturing, of
24 April 1998.
A “Protocol between the Cabinet of Ministers of  Ukraine and the Government of the Russian
Federation on Supply of Production Within the Framework of Cooperation on Manufacturing” was
signed in connection with the agreement at issue.  This document provides for exemption from VAT
and fees for specific quantities of goods supplied on an interstate basis by enterprises listed in
Attachments #1 and #2.  The protocol was signed on 23 October 1998, and on 13 January 1999 its
duration was extended through 1999.  Yet one should note that VAT in foreign trade operations withRussia was annulled in February 1998, and that all Ukrainian exporters are exempted from payment
of VAT and fees.  The actual effect of the agreement is merely the exemption of Ukrainian importers
from fees.
Attachment 1 lists Russian suppliers and Ukrainian recipients of goods, as well as the goods
themselves and codes and quantities that enjoy privileges.  The attachment is 42 pages long with 23
Ukrainian enterprises (not counting subsidiaries), each enjoying on average 15 types of imported
goods.  Yet of all the goods on the list, only tires are actually subject to fees. In effect, of all Ukrainian
recipients of goods only buyers of tires, specifically JSC “Atek” (Kyiv --- 54 ,000 units) and “AP
KRAZ” (Kremenchuk --- 36,300 units), benefit from the document in question.  The fee stands at 5
Euros per unit.  One must note as well that Ukraine produced more than 8 million tires in 1998 and
that, as we saw earlier, the greater part of these is exempt from fees as well.  In real terms, privilegedimports (or those on an equal footing with locally produced goods in regards to exemption from fees)
comprise slightly more than 1 percent of all imports.
Clearly, the protocol was less concerned with the provision of privileges, insofar as these had
been proffered earlier.  Its real purpose was to provide additional guarantees for certain enterprises inthe event of legislative changes.
(vii) Application of the above acts and consequences of their implementation in the context of
international organizations
The potential consequences of the above-mentioned laws on Ukraine's international
obligations are difficult to predict.  Most of the named laws and acts have already drawn the ire of the
European Union.  The satisfactory resolution of such conflicts is one of the preconditions for
Ukraine's obtaining EU balance of payments credits,  thus directly affecting foreign borrowing.  The
European Commission has already put forth a demand for urgent consultations on this matter.  If thegovernment does not soon deal with the resulting friction, Ukraine's ability to obtain credit from the
EU and a plethora of other international financial institutions may be threatened, insofar as these
institutions' interests frequently coincide.WT/ACC/UKR/70
Page 6
2. Support for entities engaged in foreign trade in the agroindustrial sector
(a) Agricultural privileges and subsidies - a history
The situation in the agricultural sector is significantly different from other sectors of the
economy.
The high liquidity of agricultural production is the first and chief reason for the state's
heightened interest in this sector.  As with the industrial sector, a number of legislative and normative
acts conferring privileges on the agricultural sector (including export operations) had been adopted.
At this time however, most of these lie dormant. Fo r example, Resolution of the Cabinet of Ministers
“On Declaring Certain Government Decisions on Taxation Invalid” No.957, of 29 November 1995,
annulled 12 previous government decisions conferri ng tax privileges to agroindustrial entities.
In examining those privileges in effect at this time, one must first keep in mind the two-year
moratorium on taxation of agricultural producers, due to expire on 1 January 2000.  It is crucial to
note that this moratorium applies to all agricultural producers without exception.
Now let us take a look at regulatory activities and provision of especially favorable conditions
to certain entities.
(b) The grain market today
(i) “Bread of Ukraine” (“Kh lib Ukrainy”) - an appraisal
Government action is most prevalent on the grain market. The issue at hand is the State Joint-
Stock Company “Bread of Ukraine”, created by Resolution of the  Cabinet of Ministers “On
Establishing the State Joint Stock Company “Khlib Ukrainy, No.1000, of 22 August 1996. This
company arose in response to the liquidation, at the behest of the State Anti-Monopoly Committee of
the Main Bread Products Department and the Main  Feeds Department at the Ministry of the
Agriculture. However, the resolution that created “Bread of Ukraine” gave this company monopolistic
functions, including the right to operate grain and feeds production enterprises, and be the exclusive
state purchaser of grain. The company was also charged with storing grain and seeds purchased for
the state reserve.
International financial institutions have long expressed their disapproval of the present
situation on the Ukrainian grain market. This has caused the World Bank and International Monetary
Fund to make the liberalization of the grain market and the restructurization of “Bread of Ukraine” a
key condition of further financing.
(ii) Privatization of grain collection, bread baking and distribution enterprises
Two years ago privatization of enterprises in the bread production system was banned by law.
Naturally, the resulting artificially high grain elevator costs hit commercial structures very hard. In thesummer of 1998, the basic package of services (collection, drying, cleaning and 1-2 months storage)
accounted for 30 percent of the cost of the grain itself (whereas for corn, this figure reached 75
percent).  Recently, the situation has changed radically. According to the State Property Fund of
Ukraine, as of 28 April 1999, more than 70 percent of 327 grain collection and
breadbaking/distribution enterprises have been privatized.  Effects of privatization will be measurableonly after the coming harvest.
Note: The Memorandum on Economic Policy for 1 July 1999 – 30 June 2001, entered into
with the IMF within the framework of the Extended Fund Facility requires the completion of theWT/ACC/UKR/70
Page 7
privatization of 443 grain collection and breadbaking/distribution enterprises to 70 percent, / i.e. no
less than 70 percent of each enterprise must be privatized/). At this time privatization has begun with
442 such entities. The total number of such enterprises in Ukraine is 543: thus 81.6 percent of
Ukrainian grain collection and breadbaking/distribution enterprises are slated for privatization.
(iii) Changes in the status  of “Bread of Ukraine”
Resolution of the Cabinet of Ministers “On Changes in Certain Decisions of the Cabinet of
Ministers of Ukraine”, No.220, of 16 February 1999, transformed the State JSC “Bread of Ukraine”
into an open joint-stock company. This has brought to an end that company's supervisory authority
over grain and feeds production enterprises as successors to the previous Main Bread Product and
Main Feed Departments. “Bread of Ukraine” also  no longer holds a monopoly over the state grain
order, although it continues to enjoy sole storage rights to the state grain and seed reserve.
The chief drawback of the above-named resolution is the lack of an effective mechanism for
the transformation of “Bread of Ukraine” (be it by pr ivatization or corporatization) into an open JSC.
So far only the name has changed. Even so, attendant monitoring by numerous interested partiesmakes it more than likely that considerable movement in this area will take place sooner rather than
later.
(iv) Limits on grain traffic
In concluding our examination of the grain market , it is worthwhile noting that from year to
year the authorities took measures limiting the free movement of grain. Last year was no exception. In
virtually every major grain producing oblast of Uk raine (such as Chernihiv, Odesa, Kherson and
others), local administrations took measures to ban the sale of grain by commercial entities. This ban
remained in effect until agricultural enterprises fulf illed regional contracts and paid off their debts to
the state reserve, state resources, and other state organizations. Keeping in mind that up to 90 per cent
of agricultural production equipment inputs (fuel, lubricants, seeds, farm equipment and spare parts)
are provided by commercial structures in advance (with the harvest acting as a guarantee of
repayment), the serious consequences of this decision are not difficult to understand. Some experts
have noted that such government action has effectively buried the grain futures contract as an
agricultural financing mechanism.
(c) The pesticide and herbicide market today
Another important part of the agro-industrial complex worthy of our attention is the pesticide
and herbicide market. Although the state has not acted as a direct supplier of such substances for more
than two years, it nonetheless continues to exert significant influence on this market. In 1996,following the split-up of the State Amalgamati on “Ukragrokhim,” the open JSC “Agrokhimtsentr”
was founded.  Despite the fact that this company is not state-owned, its official ties are obvious.  One
can look to, for example, the decision of Parliament (Resolution of the Supreme Rada “On the
Utilization of the Credit of the Japanese Bank”, No.263, of 16 May 1997) directing that a Japanese
Eximbank credit be utilized for the repayment of 85 percent of “Agrokhimtsentr” debt, to the tune of
$9.1 million before the Japanese Sumitomo Corporation for pesticides delivered by that company.  Or,
for example, the decision, confirmed by the Ministry of the Agroindustrial Complex, Ministry of
Finance, and the State JSC “Bread of Ukraine” (Order of the Ministry of the Agroindustrial Complex,
Ministry of Finance, and the State JSC “Bread of Ukraine”, No.65/213/77, of 14 October 1997) to
give monopoly rights for the provision of domestic fertilizer to agricultural producers for the 1998grain-growing season.  “Agrokhimtsentr,” through support at all levels of government, and through its
utilization of the old oblast agrochemical centers, taking in practically the entire territory of Ukraine,
has carved an extremely preferential position for itself on the Ukrainian market, while making market
entry quite difficult for potential competitors.  A lthough it is true that “Agrokhimtsentr” is not aWT/ACC/UKR/70
Page 8
monopolist, it is, in our view, in a greatly superior position to other operators on the pesticide and
herbicide market.
(e) The fertilizer market today
The situation on the fertilizer market is quite different from that on the herbicide and pesticide
market. Fertilizer production capacities far outpace herbicide/pesticide production capacities. There
are more than ten important producers of fertilizers. A properly functioning market is nonetheless
absent. Much of the blame can be assigned to a heightened state interest in the material and technical
outfitting of agricultural enterprises in general, and fertilizer supplies in particular. Last year, the well-
known “Agrokhimtsentr” sold fertilizer at State JSC “Bread of Ukraine's” behest on the basis of
trilateral agreements between agrochemical producers, agricultural producers, and processingenterprises. However, as of 30 June 1998, in spite of the heightened indicative price of grain (US$120
per ton for Grade /Class/ 3 grain) in comparison w ith the market price (US$106 for such grain), grain
producers paid for a mere 15 per cent of the value of fertilizer obtained. In addition to this, in the
absence of a market pricing mechanism, the losses associated with growing winter wheat with the
application of fertilizer approached 20 per cent in excess of expenses.
(e) The grain spirits, alcoholic beverage and tobacco products market today
According to the Law of Ukraine “On State Regulation of Production and Trade in Ethyl
Alcohol, Cognac and Fruit Spirits, Alcoholic Beverages and Tobacco Products”, No.481/95, of19 December 1995, state enterprises, by special permission of the Cabinet of Ministers, retain
exclusive rights to the import and export of ethyl alcohol, cognac and grain spirit, as well their
wholesale supply. Retail trade in such spirits is forbidden.  The Cabinet of Ministers authorizes state
companies to engage in the above trade at the recommendation of the Interministerial Commission
charged with reviewing such requests.  Producers of champagne (sparkling wines) and cognac areexempt from payment for special permission to import wine ingredients (this will expire on January 1,
2000).
The limitations of this law do not apply to the production and distribution (trade) of technical
(industrial) spirits for manufacturing purposes, to the brewing and distribution of beer, as well as the
production of grape and berry wines and home-prepared alcoholic products for personal consumption.
These areas are exempt from the state monopoly.
The import and export of all types of alcoholic beverages and tobacco products is conducted
by all manner of enterprises on the basis of licenses issued by the Ministry of Foreign Economic
Relations and Trade.
3. Conclusion
This work has analyzed the issue of state support and privileges for entities engaged in
foreign economic activities in Ukraine.
The examples mentioned above yet again point to the inability of the state to effectively
regulate allocation of resources and, as a consequence, the undesirability of such regulation, which
shows itself in losses that affect both the stat e budget and enterprises. Following the liquidation of
state regulatory influence, appropriate market mechanisms will go into action and decide what will be
produced, who will produce it, and what resources will be required for such production (thankfully,Ukraine is not short on resources).
As we have seen, the bulk of so-called privileged legislation in the industrial sector, has not
been implemented.  In certain cases, the inability of enterprises to meet all necessary criteriaWT/ACC/UKR/70
Page 9
prevented the enactment of privileges (such as the case of the domestic color television producers).  In
that case the legislative acts in question did not have a practical continuation.  The scale of such
privileges is also relatively small, and most important of all, a broad debate is ongoing concerning
these issues.  The Government is realizing more and more that granting privileges to particular market
players is slowing the development of a competitive market, which in turn is the basis of a normalmarket economy.
The situation in the agroindustrial complex is, in our view, more complex.  In the first place
the agrosector is less transparent and more prone to government intervention.  However certain
serious steps in the direction of market mechanism development have been taken.  This is occurring
not without the active participation of international financial organizations, which are constantly
monitoring this process, and giving recommendations.  There is every reason to believe that, barring asea change in general economic policies, changes recently initiated will soon become apparent and
sustainable.
__________