Okno: Policy Developments in Ukraine

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Ukraine: Recent Policy and Business Developments

Sampling of briefs from the East/West Letter

Central & Eastern Europe Policy Developments

Russian Policy Developments

Policy Developments in other FSU countries

[back to Ukraine’s facts & figures page]

Ukraine announces sell-offs, but obstacles persist The Ukrainian State Property Fund announced a number of sell-offs in early 1998 in an effort to achieve revenues of over $1 billion in 1998. Some key firms to be privatized include the Zaporizhstal steel mill, a 24% stake in Tsentrenergo (a power generator), a stake in Ukraine International Airlines (already part owned by Austria Airlines and Swissair), and shares in the Kherson Naftopererobka oil refinery and the LINOS oil refinery. However, the track record for Ukrainian privatizations has not been good, particularly because of disagreements between the government and parliament over the pace and direction of sales. The Ukrainian government also frequently cannot decide on the exact details of specific sales, especially when it comes to valuations. The government also prefers to retain controlling stakes in privatized enterprises. These factors contribute to foreign investors' reluctance to participate in what could someday be a lucrative market.

January 1998

Ukraine import restrictions miff EU In mid-February, Ukraine imposed restrictions on imported used cars at the behest of Daewoo, the South Korean conglomerate which plans to invest $1.3 billion there over the next six years. Beginning 1 April, Ukraine is banning imports of used cars more than five years old and establishing a minimum customs value of $5,000 on cars under five years. The restrictions were imposed to help conclude negotiations with Daewoo, which was holding off on its joint venture agreement created last September with AvtoZAZ. Daewoo has already received many tax breaks, including tax exemptions until 2008, and debt write-offs-spurring complaints from western companies and the European Union. The import restrictions appear to be the last straw as the European Commission, the EU executive, has started formal consultations with Ukraine. The Commission has warned that if these consultations do not solve the problem, the matter would turn to the dispute settlement procedure under the EU's 1995 interim trade agreement with Ukraine. The fact that Ukraine went ahead with the restrictions-despite violating its agreement with the EU and jeopardizing its chances with the World Trade Organization-points to the country's eagerness to lock in an investment equivalent to more than half of the $2 billion total investment that Ukraine has attracted in the past six years.

February 1998

Ukraine is finally issuing its new national currency, the hryvna. The hryvna, was introduced on 2 September with an exchange rate set at 1.76 hryvna to the dollar, 1.2 hryvna to the Deutschemark, and 3,000 Russian rubles to one hryvna. The rate is based on the stabilized rate of the karbovanets, the temporary "coupon" currency in use since 1991. With the hryvna’s introduction, all wages, pensions, and exchanges for foreign currency will be made in the new currency. Citizens could exchange an unlimited amount of karbovantsi at a rate of 100,000 to one hryvna until 16 September. The equivalent of 100 million karbovantsi is being paid out in hryvna in cash; sums above that amount are being credited to citizens’ bank accounts. The government should receive a hryvna stabilization loan of $1.5 billion from the IMF in October. The National Bank of Ukraine also plans to take steps to make its new currency fully convertible. Initially, the government may peg the hryvna to a convertible currency or introduce a narrow currency exchange band similar to Russia’s.

In a move aimed at supporting the new national currency, the hryvna, the Ukrainian government ordered a price freeze on goods and services for one month beginning on 2 September. The decision was in response to the dramatic decline in the street value of the karbovanets which fell to 200,000 to the dollar (compared to 176,000 on the Interbank Currency Exchange) since the announcement of the introduction of the hryvna. The governor of the Ukrainian National Bank, Viktor Yushchenko, feared currency "speculation" and that the $2.1 billion worth of karbovantsi circulating outside the Ukrainian banking system could lead to a doubling of prices. He does anticipate prices increasing by 8-10% once the price freeze is lifted. Exchange points which sell dollars at a rate higher than 193,600 karbovantsi to the dollar or who decline to accept karbovantsi up to the last day of the exchange period will have their licenses revoked.

September 1996

The Ukrainian Supreme Council approved a new law foreign investment on 19 March which was signed by the president in mid-April. According to the law, contributions made by a foreign investor to capital assets of a joint venture is exempt from export tax. In addition, companies with foreign investment will receive privileged tax status for three years. Any tax privileges granted prior to adoption of the law will remain in effect. There is no minimum foreign capitalization and the foreign ownership threshold is lowered from 20% to 10%. The law also includes a ten year grandfather clause against any future changes in legislation. (from East/West Letter, March/April 1996)

The Ukrainian government plans to bring the system of Ukrainian customs tariffs in line with the system used by the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) by 2005. The transformation of the customs tariffs will be carried out through gradual changes to current customs duty rates. The government hopes to avoid any drastic changes that will result in importing goods which could "seriously harm national production." Low customs duty rates will be established for raw materials, medium rates for semi-finished products, and high rates for finished products. High rates will also apply to certain other goods when these goods can be manufactured in Ukraine, such as goods manufactured from ferrous metals and agricultural products, machinery and equipment. (from East/West letter, March/April 1996)

March 1996

In a highly unusual move, President Leonid Kuchma issued a decree in early January suspending collections of value-added and excise taxes from enterprises which are wholly or partially foreign-owned. He did so citing confusion in the tax regulations. The decree also suspended late-payment penalties for foreign enterprises. The move creates a temporary boon for importers, but will likely play havoc with the government budget, which assumes revenues from a 20% VAT on imports (20% of the budget as it currently stands is to be derived from VAT). The issue was forced by a series of unfavorable rulings in Ukrainian arbitration courts against government attempts to collect the taxes from foreign-owned enterprises. The disputes arose from confusion over government proposals to raise revenue by eliminating certain tax exemptions. The Cabinet of Ministers must complete revisions of the tax regulations by mid-February. (from East/West Letter, December 1995/January 1996)

January 1996

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