Ukraine: Huge Reforms That Do Work Out

Last Updated: 9 August 2017
Article by Shanda Consult Ltd
Most Popular Article in Ukraine, August 2017

Ukraine has been struggling tremendously for two decades with corruption, outlaws, raiders, unjustified enrichment, and political instability. However, effective reforms of the current government are resulting in obvious improvements in many sectors. Foreign direct investment increases for two years.

Struggling with typical symptoms of the post-soviet era, corruption was almost everywhere, outlaws and raiders had no reason to fear any legal sanctions, judges were paid for their judgements, political positions were mainly used for unjustified enrichment, all leading to political instability with frequent changes of governments, prime ministers, ministers and other politically influential posts.

At the same time, Ukraine had and still has to resist and to overcome the war in its Eastern parts against Russian separatists, and it lost Crimea, which has been annexed by Russia.

During the last 20 years, reforms, if any at all, were not able to achieve any real improvements, and often failed even to stabilise the situation. The transition of a post-soviet country and society is indeed not an easy process, and certainly not a task that can be achieved within a couple of years only.

It needs decisive and fearless politicians to implement reforms in an environment of all-present corruption, lawlessness and ruthless oligarchs. On the other hand, reforms need to be actively supported by society and by those who are concerned, to become effective.

This continued struggle did indeed damage the economy of Ukraine dramatically.

Foreign investors were leaving the country, foreign direct investment (FDI) dropped, and domestic businesses had to close. The social consequences for the general population were and are tough.

But the situation started to change, and a lot of effective improvements have been achieved already!

Ukraine: Reforms that do work out!

The current government under President Petro Poroshenko finally has been shaped in a way where younger, modern professionals are on the rise and placed as ministers and in key positions of the administration. These personalities represent the "new" young generation of well-educated people, often in Westerns countries, who do not have any sentimental ties with the soviet era, and who are true Ukrainians in their hearts. Many of them returned from their careers in western countries to serve their own country.

Courageous reforms have been decided and implemented during the last 1,5 to 2 years. It is encouraging to see how these reforms already resulted in serious achievements, including a substantial increase of FDI, securing investments that are desperately needed.

Ukraine: Fighting Corruption

The current government of Ukraine formed the National Anti-Corruption Bureau of Ukraine (NABU) in October 2014, which started to work effectively in April 2015. NABU cooperates closely with related authorities and services in other countries and with Interpol. There are currently (July 2017) 333 proceedings under investigation, 207 notices of suspicion launched, 108 indictments filed and 68 cases currently seen at courts, representing a total loss of state funds of UAH 85 billion (EUR 2,83 billion). Many people have been detained with the suspicion of corruption, among them judges and even the Head of State Fiscal Services.

Closely cooperating with NABU is the Anti-Corruption Action Centre (AntAC), a Ukrainian civil society organization, which unites experts from legal, media and civic-political sectors fighting corruption as a root cause of the key state-building problems in Ukraine.

AntAC's strategic goal for 2015-2017 is to create conditions, under which it would be too risky and unprofitable for the authorities to engage in corruption.

Procurement of the state and its administration units has been re-organised, resulting in the transparent public electronic procurement system PROZORRO, which has been established across the country in 2016. The new procurement system ensures transparency of public procurement and tenders, effectively minimising ground for corruption.

Ukraine: Reform of VAT System

The VAT administration was one of the classical sources for corruption throughout the country. Addressing this problem, the Ministry of Finance under Minister Oleksandr Danylyuk re-organised the VAT system by transferring it into a fully electronical system, thus reducing the possibility of human interference and misuse. The management of the entire VAT system has been transferred from the tax authorities to the Ministry of Finance, putting it under the direct control of the Ministry.

The owner and manager of a 22-years-old private Ukrainian company that exports technical devices to more than 70 countries confirmed to us that a few months ago, the company did receive VAT refunds related to exports, for the first time in the history of the company.

Ukraine: Deregulation for Corporates

One of the never-ending problems especially small and medium enterprises were facing was the unbelievable number of regulations, decrees, directives and laws regulating every little aspect of business, subjecting almost everything to licencing and permitting procedures, without any practical justification. These licencing and permitting procedures were a huge source for corruption throughout all levels of the entire public administration.

The Ministry of Economy (fully: Ministry of Economic Development and Trade of Ukraine) cancelled, without replacement, more than 400 regulations, decrees, directives and laws that had no practical substance or justification, searing the possibility of corruption tremendously.

Ukraine: Business Ombudsman Council

In December 2014, the government of Ukraine established a specialised Business Ombudsman Council as an advisory body of the Cabinet of Ministers. The Council investigates complaints concerning alleged acts of corruption and other violations of legitimate interests of businesses by actions or omissions on the part of the state or municipal authorities, businesses within the scope of their administration and their officials.

Ombudsman is Mr Algirdas `emeta, a Lithuanian economist, who previously served as Minister of Finance in the Government of Lithuania and as European Commissioner.

Ukraine: Decentralisation of Administration

Starting in April 2014, the government of Ukraine undertakes important steps to decentralise public administration and thus to strengthen local administrations, in its efforts to overcome the heritage of Tsarist and soviet excessive concentration of power in the centre. Centralisation of power was one of the reasons for slow economic development during the last two decades, and one of the reasons for easy unlawful influence of certain individual economic powers on the decision-making processes, in their own favour.

As one of the results of the Decentralisation of Power in Ukraine, local authorities are now receiving far larger revenues through redistribution of tax income from the central state budget to municipal and communal accounts. Central tax revenues redistributed to local administrations increased by 42% in 2015, compared with 2014, and by 49% in 2016, compared with 2015.

Ukraine: Other Reforms

Listing and explaining all reforms that are leading Ukraine towards a modern, transparent country, effectively fighting corruption, increasing administrative efficiency and paving the way for a democratic society would by far exceed the intended scope of this article as a news article on our website. We encourage the reader to do their own researched to learn more about the modern Ukraine.

Ukraine: Increased Foreign Direct Investment

The effective reforms in Ukraine put the country back in the focus of foreign investors. While European industrial investors are traditionally more on the hesitating and thus slower side, we see a remarkable increase of FDI particularly from Canada and the USA, but also from Switzerland, France, Poland and the Netherlands.

Foreign Direct Investment increased by 17,1% in 2016, compared with 2015, reaching USD 4,4 billion within 2016.

The war in the East of Ukraine is still a reason for hesitation of foreign companies' investment plans in Ukraine to become realised. However, without down-playing the tragedy of the war in the East of Ukraine for the people of the country, we would like to remind that the territories affected are "only" 3% of the entire territory of Ukraine, and 700 km away from the capital Kyiv.

Services of Shanda Consult related to Ukraine

Shanda Consult advises and assists especially German investors with their industrial investments in Ukraine, often in cooperation with EUMECON EEIG, of which Shanda Consult is a 50%-partner. Our services are particularly sought after during the pre-decision phase of industrial investments, but also accompany our clients during the phase of implementation.

Our services also include the search for suitable local Joint-Venture partners for foreign investors in Ukraine, as well as the search for suitable local Joint-Venture partners from Germany, Switzerland and Austria for industrial investment project owners in Ukraine.

Please view our scope of cross-border investment-related services in our special brochure.

Please keep in mind that you are always welcome to contact us!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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