Ukraine business environment - Energy related business in transformation

Ukraine business environment with focus on Oil and Gas Industry

Ukraine business environment has transformed since Ukraine independence in 1991. Remnants of the old rent seeking economy can still be seen in certain areas of Ukraine business and law making. However, the latter years have introduced several changes into law and reforms within the authorities. However, its too early to state that Ukraine has arrived at the finish line for its business environment policy making.

I have written several books and articles about Ukraine business opportunities within Ukraine. I have focused my attention towards the oil and gas industry in general and made another focus towards the commercial regime governed by laws in the country. The commercial regime in Ukraine is also controlled by how the laws and regulations are implemented in the country as well as how sanctions are performed by violations of these. The judicial system in Ukraine is decentralized through the various oblasts within Ukraine, and there is therefore likely to find variations of how the laws are implemented there. The central court in Kiev makes ruling in most cases of national interest and several cases have been brought into justice here for decision. Laws regulating business activities have also been changed regularly and have therefore been in some degree not predictable to businesses in Ukraine.

As Ukraine developed into a market economy and gradually try to find its way out of rent economy regime, it has met obstacles on its way. Certain public offices have not yet found its place into the new market regime, and still work on old premises. However, Ukraine has transformed remarkable during the years since 1991 and its independence from Soviet Union.

The business environment in Ukraine is still regarded as high risk, but the risks vary a lot depending upon which segment of business you are involved into. Traditionally oil and gas together with steel industry has been the major profit seeking segments of Ukrainians in the hunt for wealth and business opportunities. It is also in these segments we will find remnants of the old rent economy still strong, as players within these segments are also politically involved at various degrees. This allows for the continuation of rent economy aspects to develop and sustain it, even if Ukraine becomes more market oriented. There are signals of changes within these sectors as well; however it will take time and efforts to pass the hurdles in the way in these sectors.

Let’s look at some aspects of business environment that affects at least the SME’s in Ukraine.

Permits and inspections continue to be identified as the most serious regulatory barriers to private sector development. IFC experts to conclude that permits and inspections remain one of the top-rated administrative problems impeding business activity, along with taxation procedures, government regulation of export activities, and mandatory certification and licensing of products and services. Taxation issues for SMEs are different from all other elements of fiscal policy in both the manner in which they define the tax basis and tax rates and in the fashion of their administration. They need a comprehensive assessment.

A pervasive problem undermining business development in Ukraine is the high number of businesses operating unofficially, without registration (at least 500,000, or 25% of the total number of active businesses). This suggests that (1) government regulation of business activity remains very rigorous, making compliance burdensome for businesses, and (2) the potential for the development of private entrepreneurship in Ukraine, nevertheless, remains high.

What needs to be done is; Amend the Law “On the System of Permits for Business Activity” by setting out a standard procedure for issuing permits and adopting the “single window” and “silence-is-consent” principles.

There is also a need to amend the Law “On the System of Permits for Business Activity” to clarify the definition of a permit and thus distinguish it from other types of documentation.

There is also a need to reform the system as it is today, and one of the main activities to reform is to establish a maximum frequency of inspections for all risk categories of businesses needed to classify in Ukraine. There needs to be established a maximum duration for inspections.

To ensure proper control and unified control of businesses there is a need to introduce uniform inspection routines by developing and approve standard procedures for conducting inspections and presenting inspection findings.

At the same time, experts are stating that they don’t expect the government to find the courage to institute those transformations that could significantly improve the business environment, especially through the times of recession.

We have pointed at some few elements to improve business environment and which could strengthen international investment into Ukraine businesses. However, there a numbers of factors that needs to be looked into as well.

With this said, it is important that domestic investor’s finds time to invest into Ukraine business and to positively participate in transforming Ukraine into a more robust market oriented economy supportive of business activities. The wait is over to just look and hope that traditionally centralized rent economy will save the future of Ukraine. It is time to act upon more market oriented mechanisms that will be robust enough to provide business opportunities that is sustainable for Ukraine, both on the domestic market, but as well in the international arena.

Ukraine relies too much on steel export, which also is using the majority of gas import costs of the country to produce its products. Therefore there is a need for a energy reform that translates into how the energy needing sector of Ukraine business will contribute more to energy reforms in the country.

There will also be a need in the short to medium term to substitute some of the gas import with domestic gas production, that will be more cost efficient for the country and will enable a energy reform which gradually will have residents and business pay more for the energy they use. The cost increase will not be as big as only relying on imported costly gas.

Another aspect is modernization and effectiveness of agribusiness sector in Ukraine. This sector is in high need of modernization in order to deliver higher quantities of products for both domestic as well as international needs. It is also needed in order to enhance the product quality within their produce. This has lately been seen as export to Egypt of wheat as prompted questions about the wheat quality compared to US products.

Oil and Gas related books;

http://www.lulu.com/content/paperback-book/geological-and-geophysical-studies-hydrocarbon-potential-in-ukraine/307459

http://www.lulu.com/content/paperback-book/geological-and-geophysical-studies-hydrocarbon-potential-in-ukraine/307459 

Law- Finance books;

http://www.lulu.com/content/paperback-book/legal-framework-affecting-foreign-investment-in-ukraine/2631725

http://www.lulu.com/content/paperback-book/basic-law-of-ukraine/2505873

http://www.lulu.com/content/paperback-book/ukraine-financial-law/2506917

http://www.lulu.com/content/paperback-book/ukrainian-civil-law/2506879

http://www.lulu.com/content/paperback-book/ukrainian-labour-law/2506674

http://www.lulu.com/content/paperback-book/ukrainian-trade-law/2506459 

http://www.lulu.com/content/paperback-book/the-theory-of-the-state-and-law/2506420

http://www.lulu.com/content/paperback-book/law-on-social-protection-in-ukraine/2506400

http://www.lulu.com/content/paperback-book/legislative-basic-law---in-ukrainian/2506350

http://www.lulu.com/content/paperback-book/international-public-law-in-ukrainian/2506329

http://www.lulu.com/content/paperback-book/international-law---part-2/2506079

http://www.lulu.com/content/paperback-book/international-law---part-2/2506079

http://www.lulu.com/content/paperback-book/law-on-intellectual-property-in-ukraine/2506035

http://www.lulu.com/content/paperback-book/law-on-intellectual-property-in-ukraine/2506035

http://www.lulu.com/content/paperback-book/economic-law-of-ukraine---part-1/2505981

http://www.lulu.com/content/paperback-book/criminal-law-of-ukraine---part-2/2505961

http://www.lulu.com/content/paperback-book/criminal-law-of-ukraine---part-1/2505940

http://www.lulu.com/content/paperback-book/criminal-law-of-ukraine---part-1/2505940

http://www.lulu.com/content/paperback-book/basic-law-of-ukraine/2505873

Outlook for business environment in Ukraine

I highlight a relatively dire outlook for Ukraine’s growth prospects in 2009. Although we prognoses’ a contraction in real GDP growth of in excess of 10%, i caution that risks remain weighted heavily to the downside. I think there are five scenarios which pose the biggest risk to stability in 2009, and caution that the emergence of one will have a significant knock-on effect throughout the wider economy, potentially dragging growth below -15%. Although we expect Ukraine's economy to recover in 2010, with growth of 2 % currently projected, we caution that previous rates of robust economic expansion are not likely to be repeated in the foreseeable future. Indeed, the days of cheap, readily available credit, which helped fuel an average rate of real GDP growth of 7.4% between 2000 and 2007, are now likely to have passed. As such, i forecast real GDP to expand by an average of 4% between 2011 and 2013.

I believe 2009 will test the limits of Ukrainian governmental stability. Although i generally hold a relatively pessimistic outlook on policy formation in Ukraine, the combination of a severe economic downturn and upcoming presidential elections are set to exacerbate pre-existing tensions in parliament. As leading politicians begin campaigning for the January 2010 vote, i caution that the government's ability to effectively tackle the effects of the ongoing economic crisis will remain impaired through the medium term, which will increase the risks of the impending recession being more severe than currently expected. Moreover, as public discontent increasingly turns against the government, we also expect to see further ruptures within the recently restored 'Orange' alliance, thereby elevating the risks to the ruling coalition's medium-term stability.

Although the hryvnia stabilized in January, i maintain a core view that fundamental pressures on the currency will remain firmly to the downside. Given the combination of an expected slowdown in capital inflows, a bleak macroeconomic outlook, and ongoing political instability, i see little reason to like the currency through the medium term, and project further depreciation towards UAH 11/USD by end-2009. While this would typically benefit current account dynamics by increasing the price competitiveness of Ukrainian exports, i caution that the ongoing demand destruction taking place throughout emerging Europe will likely mitigate the immediate impact of a weaker currency.

An agreement reached on January 18 between Ukrainian Prime Minister Yulia Tymoshenko and her Russian counterpart Vladimir Putin brought the latest Russia-Ukraine gas crisis to a conclusion. According to the terms of the deal, Ukraine will pay European gas prices, less 20%, in 2009, with a full transition to European market prices in 2010, while Russia will pay the same transit fee for shipping gas to European markets in 2009, with a transition to full market prices the year after. In addition, it was agreed that intermediary gas trader RosUkrEnergo (RUE) is to be phased out of the Russian-Ukrainian gas trade. Although I do not believe the temporary disruption in gas supplies in January will have a pronounced impact on full-year real GDP growth, i nevertheless caution that industrial production figures for January when many firms were forced to suspend or cutback production, will likely be subdued. Lately there have been put question marks to how robust this deal is for stabilization of gas transport through Ukraine, and how it will affect the Ukrainian economy. It remains to be seen how well the Russians and Ukrainians will collaborate on this issue.

Please feel free to contact me on: sak@ec-ba.com if you want more details or want to discuss issues around doing business in Ukraine.