Difficulties awaiting attraction of foreign investors in Ukraine

Ukraine is an attractive destination for both foreign and domestic investment. This country has high potential due to its favorable geographical location, extensive logistics network and developed infrastructure. In addition, Ukraine is actively developing the digital economy, providing favorable conditions for investment. High investment returns and the availability of a skilled and affordable workforce are also advantages that help attract investment into the country.

However, there are significant disadvantages and obstacles that make foreign investors think twice before investing in Ukraine . Only a comprehensive and comprehensive solution to complex issues in problem areas can increase the investment attractiveness of Ukraine.

Over-regulation of business

According to the pre-war survey “Business Expectations 2021” conducted by the Ukrainian Chamber of Commerce and Industry, 77.8% of respondents - representatives of national business - drew attention to the problem of excessive government intervention in regulating economic relations in the field of small and medium-sized businesses. Possible areas for improving the business climate in Ukraine, among other things, respondents named the deregulation of business activities in the direction of reducing the cost of doing business (91.7%) and a significant reduction in the number of government regulations  and  limiting state intervention in the regulation of business activities (90.3%).

While in no way objecting to the licensing of certain types of economic activity, we agree with the general problem of over-regulation of this activity. This is especially noticeable in the field of tax administration and business audits. Also, the process of obtaining licenses and certificates is often associated with significant bureaucracy and lengthy procedures, which in turn gives rise to corrupt practices. Additionally, ambiguous or opaque licensing and certification requirements can create uncertainty for businesses. This can lead to unpredictability in business planning and risk for investors.

In other words, a foreign investor can now register his company in Ukraine in the form of a limited liability company as the most common way to do business in one day. But obtaining licenses or other regulatory approvals can take months or even years.

Without delving into a discussion about the level of government participation in the formation of the economic market, I believe that simplification and rationalization of licensing and certification processes and a sound approach to business inspections will definitely help improve the business climate and attract investment . Thus, part of the powers to issue permits and exercise other powers on behalf of the state can be transferred to private structures. In particular, if, for example, we provide the opportunity (as an alternative) to the relevant government agencies for the construction and commissioning of real estate objects to insure the corresponding risks in top insurance companies, the level of control over the quality of construction is unlikely to deteriorate.

Moreover, the procedures for obtaining permits, in particular the deadlines for consideration and the grounds for refusal, should be spelled out as clearly as possible. Of course, some of the powers of state bodies will still be discretionary, but in the conditions of Ukrainian realities, discretion must be significantly limited.

Ideally, the issue of simplifying the regulation of relevant relations to attract investors, especially strategic ones, deserves special attention. For example, there is an investor who plans to build a plant from scratch in Ukraine , which is especially important in light of both the cessation of production activities of many international companies located in the Russian Federation, and the creation of joint production of defense goods with foreign partners . To do this, the investor needs :

• purchase or lease a plot of land, most likely from the relevant territorial communities, with the potential need to change its intended purpose;
• obtain technical conditions for connecting to communications;
• obtain the necessary permits and approvals for the construction and commissioning of production facilities;
• obtain licenses and quite a few operating permits.
• On practice there have been cases when these processes (not including direct construction) even for small projects took two years or more. Whether Ukraine has this time when attracting strategic investments is very important for the survival of the economy and the country as a whole is a rhetorical question.

  You also need to understand that obtaining permission from an official does not always amount to corruption. But the legislation may be written in such a way that the official simply does not want to take the risk and issue the appropriate permit. Despite the fact that the country and society will benefit from this, law enforcement agencies come with questions about abuse of power to a specific official. Therefore, the issue of simplifying/increasing the efficiency of legislative regulation of relevant processes is extremely important .

  Corruption

  The high level of corruption in Ukraine is always one of the most serious reasons for investor concern when deciding to invest in our country. Despite the martial law, law enforcement agencies carried out many high-profile anti-corruption revelations. And although this is a positive phenomenon, statistics show that on average only 25–35% of registered criminal proceedings that can be associated with corruption reach the court. Moreover, less than half of such cases result in a conviction . It is also necessary to take into account that most of these sentences concern minor officials or attempts by drivers to bribe police officers. According to the results of the Anti-Corruption Barometer project, only 15–20 sentences involve high- and mid-level officials and involve actual imprisonment.

  Thus, the fight against corruption in Ukraine leaves much to be desired. We hope that in the future, effective investigation of corruption crimes will increase, as well as bringing the perpetrators to justice.

  In any case, without completing the reform of the judicial and law enforcement systems, which are the basis of the rule of law in any state, it is possible to talk about the investment attractiveness of Ukraine only with some reservations.

• Currency restrictions

  From the very first day of the full-scale invasion, the National Bank of Ukraine took urgent measures to ensure the reliability and stability of the functioning of the Ukrainian banking system. Thus, among other things, the NBU Board of Directors adopted a resolution “On the operation of the banking system during the introduction of martial law” No. 8 dated February 24, 2022.

  Of course, such a step was and remains completely justified under martial law. But a number of financial restrictions and prohibitions have inevitably complicated both doing business and investing in Ukraine. In particular, authorized institutions are prohibited from carrying out most types of trade in currency values, cross-border transfers of currency values ​​from Ukraine, transfer of funds to correspondent accounts of non-resident banks in hryvnia and foreign currency opened in resident banks (with exceptions). As for settlements for export-import transactions, a deadline of 180 calendar days applies for transactions carried out from April 5, 2022.

• However, despite the ongoing martial law, The NBU is gradually reducing the number of restrictions and prohibitions for the gradual restoration of the foreign exchange market. In particular, the latest relaxations occurred on December 1, 2023, according to which the restriction for banks and financial companies on the volume of sales of foreign currency to individuals in cash was lifted. Among the changes there is also permission for the Export Credit Agency to cross-border transfers of funds for reimbursement/compensation to insurance (reinsurance) companies and reinsurance companies for the costs incurred in connection with the implementation of insurance contracts and reinsurance contracts, as well as for payment of costs (payment for bank services , legal advisers, etc.) related to such operations. The NBU is committed to easing currency restrictions, while maintaining the balance necessary for a martial law economy.

  But in practice, there may be cases when banks refuse to buy currency and transfer it abroad even for absolutely transparent trade transactions , unofficially citing some informal requirements. This practice, of course, is unacceptable from the point of view of the investment attractiveness of Ukraine.

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  So there are a number of important challenges that have a negative impact on the attractiveness of the investment environment in Ukraine. Among them are bureaucratic obstacles, excessive business regulation, a corruption component, instability in legal regulation, and currency restrictions. With the beginning of the war, these problems did not disappear, but were supplemented by risks derived from the state of war in the country.

  Despite this, in the political and economic environment there is a certain consensus, at least at the declarative level, on the need to improve the investment climate, post-war reconstruction of Ukraine and attract foreign resources. We hope that through the joint efforts of the authorities, the business community and civil society, it will be possible to overcome obstacles and create a favorable environment for investment, continuous economic development and increasing the competitiveness of Ukraine in the world market.