Adam Mycyk and Anna Ryzhova of CMS Cameron McKenna -

Ukraine's historical ability to adapt and survive in the face of adversity is not necessarily enough to win in the competition among CIS countries for foreign capital. Ukraine needs substantial legal reform to simplify investment.

Surprisingly, the country's economy remains relatively unimpaired by its political instability and the obvious frustration of foreign governments and the private sector with President Viktor Yushchenko's government and lawmakers of all stripes. Further, there are no obvious signs of serious damage caused to the country's economy by the international credit market crisis. Inflation, however, has been on the rise recently.

Since independence in 1990, Ukraine has introduced a number of new laws and regulations: a new constitution, new civil and land codes, and new legislation on mortgages, securities, banking, oil and gas, concessions, registration of ownership rights to immovable property. However, despite all this new legislation and the overall attractiveness of Ukraine as a market, foreign capital remains concerned with the (a) unpredictability and instability of Ukraine's system of laws, particularly at the judicial level, (b) undeveloped corporate governance and protection of shareholders' rights, (c) burdensome foreign currency policy, and (d) number of permits required for doing business in Ukraine, construction in particular, among other things. We highlight a few of these issues below.

System of Laws

The Ukrainian legal framework suffers from ambiguities, inconsistencies and explicit contradictions, and it seems that with every new law, the situation is aggravated. For example, there are a number of inconsistencies between provisions of the civil and commercial Codes, the two principal laws for the entire legal system that were passed a few years ago. With the adoption of a new securities law, capital market players, not having the benefit of proper guidance on the part of the authorities, had to guess which of the then current laws were still effective and which abolished by the new law. Improvement of individual laws may not resolve investors' greater concerns that Ukraine needs reform and improvements in the manner in which it drafts and interprets laws - specifically by the courts. The unpredictability of the judiciary certainly impedes investment, particularly in cases when decisions are blatantly one-sided and not justified by the laws as written, which only serves to further blemish the investment climate in Ukraine.

Corporate governance and shareholder rights

This area is governed by the repeatedly amended 1991 law on companies and the various new codes. The draft of a "Joint Stock Company" law has been discussed and revised at different levels for years now. There is hope that once the current political battles are finished, parliament will finally adopt the law.

Inflexible rules of corporate governance and the absence of protections for minorities, as well as the absence of the concept of shareholder agreements by Ukrainian law, forces investors to invest in Ukraine via holding companies (SPVs) that are established in jurisdictions with more stable and predictable corporate legislation. As an illustration, at the end of 2007 the Presidium of the High Commercial Court of Ukraine adopted controversial recommendations that all shareholder agreements governed by foreign law should be null and void on public-policy grounds. These recommendations also state that agreements to use international arbitration to resolve shareholder disputes, particularly regarding corporate governance issues, are prohibited. This recent pronouncement certainly impedes the development of Ukrainian corporate law and practice, and encourages investors to continue to use jurisdictions outside of Ukraine to structure their investments. This, of course, adds additional cost and time to transactions.

Foreign currency policy

The National Bank of Ukraine's (NBU) regulations aimed at limiting the flight of foreign currency from Ukraine complicates the procedures for making and returning investments, paying dividends, etc. Notably, in April 2005 the NBU took a big step in favour of investors by repealing its Resolution 482 on the, "Procedure for Making Foreign Investments in Ukraine in a Monetary Form, and the Return of Investment to a Foreign Investor, as well as Repatriation of Profits, Incomes and Other Funds Obtained from Investment Activity in Ukraine."

It is undeniable that currency regulations are liberalising, which helps to simplify the movement of foreign capital and goods, and this is one area in which there has been significant improvement in the last decade. Nonetheless, investors still face such issues as the need to channel settlements through Ukraine even though the settlements are between foreign counterparties for a Ukrainian investment, or obtain a fair price assessment with respect to payments abroad for imported services or royalty payments. Further liberalisation of NBU's foreign currency policy is needed.

Permits

The "Law of Ukraine on Permits System in Economic Activity" was passed in 2005 to introduce a "single window" issuing permits for doing business in Ukraine. This law is unfortunately dormant, and a number of permits and approvals to be obtained, for example, for construction of buildings exceed 300. Considering the active preparation of Ukraine to the looming Euro 2012 football championships, resolution of this investment hurdle seems to be imminent.

Thus, as a general matter, the Ukrainian legal system provides a firm basis for doing business in Ukraine. However, the Ukrainian government must commit to further reforming legislation to remove various inconsistencies and ambiguities to make it more transparent, rational and predictable and less burdensome to business. For every success story in Ukraine of a company that has achieved fantastic results despite the various vagaries inherent in the system, there are certainly many more cases of potential projects that were unable to get off the ground, whether because of defects in legislation, lack of political support, corruption or other systemic defects. With Ukraine now firmly on the investment map, now is the chance for Ukraine's government to step up and not only proclaim that Ukraine is indeed open for business, but more importantly to demonstrate that it's committed to reforming the business climate for the benefit of all investors, both domestic and foreign.

Adam Mycyk, Managing Partner, CMS Cameron McKenna LLC, Kyiv, Ukraine

Anna Ryzhova, Associate, CMS Cameron McKenna LLC, Kyiv, Ukraine

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