We come in peace! This well-known phrase from a movie about
aliens arriving to the Earth is often remembered when we speak about foreign
investors coming to Ukraine. Such associations
are caused by the cultural gap and misunderstanding of “Ukrainian business environment”,
or even broader, the social environment, by foreigners. The gap may be so essential that it is impossible for
the foreign investor to bridge it. Sometimes it would require a total change of
approaches to the corporate culture developed in the foreign company for
decades. The hardships of the famous Swedish group IKEA while attempting to
enter the Ukrainian market is a strong example of such complications in
overcoming “cultural” barriers.
It is not a secret that the foreign investors are
reluctant to consider Ukraine as a potential location for investing. Only the
unusually excessive profits may seduce the foreigners into investing in
Ukraine.But in this case the
investment risks are equally significant. A good example to show this is a
great inflow of foreign capital to the Ukrainian banking sector in the 2000s:
and still the deposit rates in Ukraine are among the highest in the world, as
well as the loan interest rates. However, it would be too optimistic to hope
that this situation will remain untouched on the long-term basis (or at least on
the mid-term basis). And the recent reverse trend in the Ukrainian banking
sector when the foreign investors are leaving it en masse is quite indicative. In an attempt to find out the main, fundamental
cause of the investors’ concerns about Ukrainian assets as the investment targets
we would like to offer our hypothesis. Of course, our explanation is based on
what we see through a prism of the Ukrainian legal system, legal nature of our
work or our special knowledge, and probably it does not entirely consider other
important social aspects: political, economical or other.
Today, an uncertainty and unpredictable “rules of the
game” seriously affect the investment climate in our country. There are many facts
proving that. Contradictory and sometimes tendentious court practice.
Widespread practice of loose interpretation of the law by the tax and customs
authorities… Partly that distortions are a result of mistakes and incompetency;
but also it is a result of the corruption practices. The worst of it is that
both the mechanism for mistakes correction and the procedure for punishment of
guilty persons prove ineffective.
High-risk investments are possible, if the risks can
be properly identified, but the investments with unidentifiable risks look like
a stake in a casino game.
By the way, the lawmakers are evidently aware of the
problem related to the unpredictability of law enforcement practice. At least,
such conclusion can be drawn from the tendencies in legislative process. It is
known, the practice of courts and government agencies of the developed European
and North American countries is an integral and essential element providing a
link between rather general legal rules to the specific situation when they
have to be applied. Moreover, this link is strong enough in both continental
and Anglo-Saxon legal systems. The administrative and court practices in
Ukraine are not able to meet that challenge creating necessity in a certain
compensatory mechanism. Burdening the legal regulations with excessive details
is that mechanism. Due to this, the level of uncertainty of law enforcement
practice slightly reduces, but is not fully taken away because the adding
details also has its limits. And when the limits are exceeded, the law will no longer be a law in
the sense of general and generic rules. This approach has one essential
disadvantage: a large number of nonstandard (even in some minor aspects)
situations may get into the “blind zones” of legal regulation. Nevertheless,
now there is no practical alternative to that approach which in fact offers
only a palliative treatment. Now we would like to advance from the general to
the special.
Not so long ago, a law modifying the foreign
investments registration procedure in Ukraine was passed. This law does not
provide for any fundamental changes of the procedure; instead it is rather
intended to specify and improve the current legal regulation. Among the most
significant novelties introduced by the law we may outline the possibility to
re-register the foreign investments in case of its alienation to other foreign
investor and cancellation of the foreign investment’s state registration in
case of return (repatriation) of the foreign investments. In addition, the authorities have to register or refuse to
register within seven business days.
It is interesting to trace down the changes made in the
respective draft law during the lawmaking procedure. Initially it envisaged that
the period for applying for the foreign investment registration is to be increased
from three business days to thirty calendar days from the date when the
respective investments are made. Thus, the relevant deadline provisions of the Economic
Code of Ukraine (the first paragraph of article 395) should have been amended
accordingly. But at the last moment, before the second reading (which became
final) of the draft law, the new amendment was proposed. This amendment fully removes
the deadline for applying for the foreign investment registration. And in the
final version of the law, there is not any period during which a foreign
investor has to apply for the registration.
Earlier, the foreign investors had to comply with the
requirement to register a foreign investment within a specified period. This
limitation seemed unjustified and artificial considering the voluntary nature
of the registration procedure. Now the registration is possible at any time if
there is a due confirmation that the foreign investments are made. The foreign investors may apply for the
registration to take the benefits and privileges the Ukrainian law offers them.
Foreign investments regulation: way to perfection
We come in peace! This well-known phrase from a movie about aliens arriving to the Earth is often remembered when we speak about foreign investors coming to Ukraine. Such associations are caused by the cultural gap and misunderstanding of “Ukrainian business environment”, or even broader, the social environment, by foreigners. The gap may be so essential that it is impossible for the foreign investor to bridge it. Sometimes it would require a total change of approaches to the corporate culture developed in the foreign company for decades. The hardships of the famous Swedish group IKEA while attempting to enter the Ukrainian market is a strong example of such complications in overcoming “cultural” barriers.
It is not a secret that the foreign investors are reluctant to consider Ukraine as a potential location for investing. Only the unusually excessive profits may seduce the foreigners into investing in Ukraine. But in this case the investment risks are equally significant. A good example to show this is a great inflow of foreign capital to the Ukrainian banking sector in the 2000s: and still the deposit rates in Ukraine are among the highest in the world, as well as the loan interest rates. However, it would be too optimistic to hope that this situation will remain untouched on the long-term basis (or at least on the mid-term basis). And the recent reverse trend in the Ukrainian banking sector when the foreign investors are leaving it en masse is quite indicative. In an attempt to find out the main, fundamental cause of the investors’ concerns about Ukrainian assets as the investment targets we would like to offer our hypothesis. Of course, our explanation is based on what we see through a prism of the Ukrainian legal system, legal nature of our work or our special knowledge, and probably it does not entirely consider other important social aspects: political, economical or other.
Today, an uncertainty and unpredictable “rules of the game” seriously affect the investment climate in our country. There are many facts proving that. Contradictory and sometimes tendentious court practice. Widespread practice of loose interpretation of the law by the tax and customs authorities… Partly that distortions are a result of mistakes and incompetency; but also it is a result of the corruption practices. The worst of it is that both the mechanism for mistakes correction and the procedure for punishment of guilty persons prove ineffective.
High-risk investments are possible, if the risks can be properly identified, but the investments with unidentifiable risks look like a stake in a casino game.
By the way, the lawmakers are evidently aware of the problem related to the unpredictability of law enforcement practice. At least, such conclusion can be drawn from the tendencies in legislative process. It is known, the practice of courts and government agencies of the developed European and North American countries is an integral and essential element providing a link between rather general legal rules to the specific situation when they have to be applied. Moreover, this link is strong enough in both continental and Anglo-Saxon legal systems. The administrative and court practices in Ukraine are not able to meet that challenge creating necessity in a certain compensatory mechanism. Burdening the legal regulations with excessive details is that mechanism. Due to this, the level of uncertainty of law enforcement practice slightly reduces, but is not fully taken away because the adding details also has its limits. And when the limits are exceeded, the law will no longer be a law in the sense of general and generic rules. This approach has one essential disadvantage: a large number of nonstandard (even in some minor aspects) situations may get into the “blind zones” of legal regulation. Nevertheless, now there is no practical alternative to that approach which in fact offers only a palliative treatment. Now we would like to advance from the general to the special.
Not so long ago, a law modifying the foreign investments registration procedure in Ukraine was passed. This law does not provide for any fundamental changes of the procedure; instead it is rather intended to specify and improve the current legal regulation. Among the most significant novelties introduced by the law we may outline the possibility to re-register the foreign investments in case of its alienation to other foreign investor and cancellation of the foreign investment’s state registration in case of return (repatriation) of the foreign investments. In addition, the authorities have to register or refuse to register within seven business days.
It is interesting to trace down the changes made in the respective draft law during the lawmaking procedure. Initially it envisaged that the period for applying for the foreign investment registration is to be increased from three business days to thirty calendar days from the date when the respective investments are made. Thus, the relevant deadline provisions of the Economic Code of Ukraine (the first paragraph of article 395) should have been amended accordingly. But at the last moment, before the second reading (which became final) of the draft law, the new amendment was proposed. This amendment fully removes the deadline for applying for the foreign investment registration. And in the final version of the law, there is not any period during which a foreign investor has to apply for the registration.
Earlier, the foreign investors had to comply with the requirement to register a foreign investment within a specified period. This limitation seemed unjustified and artificial considering the voluntary nature of the registration procedure. Now the registration is possible at any time if there is a due confirmation that the foreign investments are made. The foreign investors may apply for the registration to take the benefits and privileges the Ukrainian law offers them.
Practices: