Remarks by the Minister of Economy of Ukraine

Ukraine Business Forum

Volodymyr Makukha

Remarks by Volodymyr O. Makukha, the Minister of Economy of Ukraine, delivered during the Ukraine Business Forum (December 6, 2006, New York City, NY, Waldorf Astoria” Hotel).

Dear Ladies and Gentlemen,

On behalf of the Government of Ukraine let me present my complements to all of you and express my sincere gratitude to the organizers of this Ukraine Business Forum – the Business Council for International Understanding, the Center for US-Ukrainian Relations, and the Ukraine-US Business Council.

The level of participation and the importance of issues scheduled for discussion allow me to notice without exaggeration that this event could be considered as an outstanding element of the US-Ukraine investment cooperation, the positive dynamics of which we are contemplating these days.

The cooperation between Ukrainian and American financial and business communities will promote strategic partnership between our countries, further developing mutually beneficial investment cooperation both through the wider presence of the US businesses on the Ukrainian market and the Ukrainian businesses in the USA.

Positive trends in the development of the bilateral economic relations between Ukraine and the USA will constitute the basis for fostering the process of integration of Ukraine into the global economic system.

In my remarks I would like to outline the plans of the Government to transform Ukraine into the country with a competitive economy and new opportunities created for business activities and the attraction of investments into its industries.

First of all let me outline the major macroeconomic indicators of Ukraine.

During the year of 2006 Ukrainian economy demonstrated positive development dynamics, overcoming negative impacts of a significant rise in prices for energy resources at the beginning of the year. We are contemplating a certain adaptation of our industries to the new business environment.

The results of the first 10 months of 2006 reflect the existence of real positive trends in our economy. During January-October real growth of GDP amounted to 6.5%; the industrial production increased by 5.3%. Growth of the foreign investment for 9 months of 2006 constituted 3.3 billion dollars, which is 3.3 times higher then for the same period of the previous year. The overall amount of foreign direct investments today makes up a amount equaling 19.9 billion US dollars, which is twice the amount for the same date of the previous year.

At the same time, despite all positive trends that our economy has demonstrated this year, the resources for extensive development have been exhausted. The industrial structure of the Ukrainian economy resembles that one of developed countries in the fifties-sixties of the last century – with high level of energy consumption and low added value, namely – metallurgy, chemicals, energy production. Such a structure of our economy also has a negative impact on the environmental situation in our country.

Hence, the Government of Ukraine is facing challenges both in conducting already initiated economic reforms and development of the brand new ones. The main objective of these reforms will be the facilitation of economic development of Ukraine and wellbeing of its people.

I realize the importance of businesses having a real vision of the Government”s intention in order to be able to plan their activities and do not feel threats from the State.

As all of you are aware, Prime-Minister of Ukraine Viktor Yanukovych is considered to be a pragmatic person. In the same way, our economic policy and the Action Program of the Cabinet of Ministers of Ukraine will be pragmatic. The Government will become more predictable and transparent.

At this very moment, the Government is finalizing the development of a strategic document entitled Competitive Ukraine”. The draft of this Program provides for two stages: the objective of the first one – for up to 2008 – is to ensure sustainable economic growth, while the second one – during 2008-2011 – would aim at creating the necessary conditions for transformation of Ukraine into the postindustrial economy.

Now, what are the major steps to be taken by the Government of Ukraine in order to transform Ukraine into an investment attractive” country with a competitive economy?

First – we are planning to go ahead with the reform of the Public Administration system in order to stimulate other transformations, to make public sector less inclined to corruption and bureaucracy, to improve the image of our country. As a result, Ukraine will be in a position to take the fast-track pace in attracting the investments, facilitate the growth and development. The State must stimulate economic development rather than create barriers for other economic reforms. The role of the State is not to compete with the private sector but assist it by creating the attractive environment for business activities. One of the major elements of this reform is going to be transformation of the taxation system in order to reduce tax burden and simplify the administering of taxes.

Bearing in mind the amendments to the Constitution of Ukraine that ensure efficient cooperation between the Parliament and the Cabinet of Ministers and in longer term allow for the Government to be in power on a firmer basis, today we have a unique opportunity to successfully implement the Public Administration Reform.

Second – we are committed to ensure a predictable and stable legislative process. Last year the investors have experienced the highly negative impact of unpredictable legislation, when changes to the Law on the Budget resulted in multiple amendments to many other laws and regulations—sometimes post factum.

It is obvious that judicial system is a key element that ensures justice in the State, including the protection of investors” rights which are guaranteed by a number of laws. Despite the adoption of the Law on Judiciary System, this branch of power remains weak and experiences lack of independence which constitutes the major barrier for development of efficient legal environment. The low level of law enforcement is another major problem.

It is worth mentioning that by the end of 2006 our Government is planning to renew the activities of the Commission on Prejudicial Dispute Settlement between the foreign investors and executive bodies.

Third – the development of regulatory reform and liberalization of business activities. Our Government is committed to further enhance the successful transformation of the regulatory environment for business activities achieved in 2005-2006. On the other hand, we now are experiencing a low level of law enforcement and reluctance of regional authorities to change the existing system of regulation. That leads us to reconsidering the existing system of remuneration for the civil servants, who at the moment are more inclined to preserve rather then to reduce the requirements for obtaining numerous permits.

The Government of Ukraine will continue to take efforts aiming at further liberalization of business activities through the regulatory reform. We are confident that the improvement of procedures of organization and voluntary dissolution of a business, reduction in a number of licenses and permits, the establishment of a simple and a comprehensible system of inspections are among the key conditions for the attraction of investors.

Fourth – improvement of corporate governance and protection of shareholders rights. Direct and efficient solution of many problems connected with corporate governance could be established by adoption of the Law On Corporations” that meets international standards. This legislation, in particular, has 1) to make a clear distinction between public and joint-stock companies; 2) to determine functions and authority of the board of the company; 3) to simplify dispute settlement procedures amo
ng shareholders; 4) to improve the protection of minority shareholders; 5) to set clear requirements concerning divulging of information. A draft bill that contains considerable part of these principles was approved by the Cabinet of Ministers of Ukraine in the end of 2005. So, the important task of the new Parliament and the Government is to expedite the adoption of the Law On Corporations” in a wording that meets international standards.

Fifth – continuation of liberalization of movement of goods and capitals through the borders. Comparatively low wages (in comparison with the EU standards) and highly qualified labor force make Ukraine very attractive for businesses who look for opportunities to effectively invest their funds and who are ready to organize the facilities in Ukraine for manufacturing and exporting their products all over the world. But those investors are restrained by non-transparent custom procedures and strict controls over capital movement that are often corruption-related and seriously undermine all the attractiveness of the low primary cost.

The main direction in solving these problems is Ukraine”s accession to the WTO (we are almost already there) and the creation of free trade zone with the European Union. The removal of trade restrictions with Ukraine”s largest trade partner will promote the attraction of investors from European countries and expansion of Ukrainian exports.

I would like to emphasize that Ukraine”s WTO accession will open new prospects for creation of predictable and transparent environment for the influx of foreign investments.

Sixth – strengthening of the financial sector. Easy access to credits is one of the most important matters impacting the creation and development of small and medium investors. Today the banking credit system is the most common source of financing of the business activities in Ukraine. However it cannot satisfy existing credit funds demand because of the high level of interest rates and short terms of repayment. Other alternatives of getting funds such as, for instance, emission of the corporate bonds for public sale are used seldom due to the underdevelopment of financial markets.

The main actions for the improvement of companies” access to the financing sources provide for: 1) the strengthening of the banking sector and 2) facilitation of the development of non-banking finance institutions.

Needless to say, there are representatives of Ukrainian businesses now participating in our forum; they are exploring the possibilities of entering the world capital market by taking an example from the best practices of the American companies.

As for talking about the attraction of foreign investments into Ukraine”s economy, I would like to indicate the following:

The legislation of Ukraine provides for concrete guarantees of foreign investors” rights protection. Foreign investors enjoy treatment that provides them with equal conditions of operation with domestic investors and prohibits the nationalization of foreign investments. Besides, Ukrainian Parliament has ratified the Washington Convention of 1965 on the Settlement of Investment Disputes between States and Nationals of Other States.

Today the Government of Ukraine is working on the improvement of enforcement of the Laws: On Product Sharing Agreements”, On Concessions”, On Concessions for the Construction and Operation of Highways”, that will further facilitate the influx of investments into the economy of Ukraine.

The opportunities of investment cooperation with international financial institutions are most promising in the implementation of major infrastructure projects –i.e.- construction and modernization of highways, bridges and the airports, production, transportation and distribution of energy as well as telecommunications projects.

The concept of the establishment of the industrial parks in Ukraine” has been developed. It provides for the mechanism and sequence of actions to implement the government policy in creation and development of industrial parks in order to facilitate the investment and innovation activities. Today the regional authorities together with the potential investors are already drafting first pilot projects.

In 2007, the Government of Ukraine anticipates that it will provide, on the firm legal basis, a number of incentives for investors who will operate on the special territories, in particular:

  • granting the investment tax credit for profit tax;
  • exemption from payment of import duties for equipment and its parts that are imported within the framework of investment projects;
  • providing the companies that implement investment processing projects in free economic zones with the right to place the promissory notes with the customs authorities for the amount of import duties and VAT. This provision, however, would not include importing of excisable goods.

In 2005, in order to create favorable conditions for foreign investors, the Government of Ukraine has established the Ukrainian Center for Facilitation of Foreign Investments and has approved its supervisory board. The supervisory board includes the representatives of the Government, international financial institutions and the business community.

In conclusion I would like to mention the following:

Ukraine is among the few countries of the world that possess space technology, aircraft construction facilities, and scientific inventions in such leading branches of the modern science like virology and biotechnologies.

Such indicators as a high average level of education of the population of Ukraine, availability of highly skilled experts and a powerful scientific potential allow us to compete with the leading countries that ensure global progress.

The favorable location of Ukraine on the borders of two integration zones (the European and the Eurasian) will allow Ukraine to benefit from the effects of interaction of large-scale and deep integration processes by fostering cooperation in both directions.

The competitive advantages of the Ukrainian economy mentioned above have been recognized by such transnational corporations as Microsoft, Deutsche Telecom, Sony, Mittal Steel, Philip Morris, Lukoil, Coca-Cola and others that are already in the field.

Dear Colleagues,

I want to assure you that Ukraine is and will remain a European country with a predictable domestic and foreign policy. The Ukrainian State will continue to protect the interests of private sector which represents the foundation stone of the successful development of the country and which will play the key role in all further development of Ukrainian economy.

Now, I invite you, the representatives of Ukrainian businesses, to turn and answer the questions that are of the interest for American side.

Thank you for attention.