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Memoire Viktoriya Dronova MCI-IAI(1)

MBA ESG Viktoriya Dronova
35 Avenue Philippe Auguste MBA MCI/IAI
75011 PARIS School year 2012/2013
Ukraine-Europe: present and future of economic relations
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Memoire Viktoriya Dronova MCI-IAI(1)

  1. 1. MBA ESG Viktoriya Dronova 35 Avenue Philippe Auguste MBA MCI/IAI 75011 PARIS School year 2012/2013 Ukraine-Europe: present and future of economic relations September 2013 Under the supervision of Pierre Deplanche, Stratégie et consulting MBA-ESG director.
  2. 2. Ukraine-Europe: present and future of economic relations
  3. 3. Table of contents INTRODUCTION 5 1. UKRAINIAN BUSINESS CLIMATE AND TRADE RELATIONS WITH THE EU 7 1.1. Major characteristics of the Ukrainian economy and business environment. 7 1.1.1. Ukraine key figures 7 1.1.2. Economic conditions in Ukraine 7 1.1.3. Ukraine’s economy strengths 8 1.1.4. Ukraine’s economy weaknesses 9 1.1.5. Ukraine’s Risk assessment 10 1.1.6. Business Climate 12 1.1.7. Foreign direct investments in Ukraine 13 1.2. The role of Ukrainian government in foreign business activities. 16 1.2.1. Issues affecting the business in Ukraine 16 1.2.2. Starting a Business in Ukraine 16 1.2.3. Custom procedures 17 1.2.4. Corruption 18 1.2.5. Court system 19 1.2.6. Technical barriers to trade 19 1.2.7. Taxes and VAT Refund 20 1.2.8. Land reforms 21 1.2.9. Foreign currency regulations 22 1.3. EU-Ukraine trade relations 24 1.3.1. Trade 24 1.3.2. EU foreign direct investments in Ukraine 25 2. MAIN ATTRACTIVE SECTORS ANALYSIS FOR EUROPEAN INVESTMENTS IN UKRAINE 27 2.1. Agribusiness 27 2.1.1. Ukraine’s agribusiness sector at a glance 27 2.1.2. Competition in the Ukrainian agricultural sector 30 2.1.3. Investments opportunities for EU companies 31 2.2. Biomass-based energy production sector 33 2.2.1. Global trends 33 2.2.2. Ukraine competitiveness in production of biomass-based energy 33 2.2.3. European investments in biomass-based energy sector in Ukraine 34 2.3 The National Projects as practical tools of FDI attraction 35 3. POTENTIAL AND RISK OF THE EUROPEAN –UKRAINIAN COLLABORATION 37 3.1. Possibility and goal of the EU-Ukraine Association Agreement 37 3.1.1. Background of the Association Agreement 37 3.1.2. Ukraine’s interests in the Association Agreement 38 3.1.3. European Union’s interests in the Association Agreement 39
  4. 4. 3.1.4. European Union’s expectations from Ukraine 40 3.2. Political reality in Ukraine: its influence on the relations with the European Union. 42 3.2.1. Ukraine between East and West 42 3.2.2. The risk for Ukraine for signing an Association Agreement with the EU 43 3.2.3. The lack of democratic freedom 44 CONCLUSION 46 BIBLIOGRAPHY 49
  5. 5. 5 Introduction The topic of this thesis is ―Ukraine-Europe: present and future of economic relations‖. The choice of the subject was driven by the actuality of current affairs between Ukraine and the European Union and in particular the preparation for the signing in November 2013 of the EU-Ukraine Association Agreement and its core element, the Deep and Comprehensive Free Trade Agreement. Presently, the question is debated actively in the press of Ukraine and the EU Commission respectively. The possible ratification of these agreements would signify closer economic integration, which would lead to a new historical stage in the development of the EU-Ukraine relations. This study is motivated by main problematic, which comprises the question whether Ukraine and the European Union can be reliable economic and business partners to each other. In the pages that follow, it will be argued that their existing relations may evaluate into a trustworthy alliance. This research may also contribute to the EU companies willing to implement their businesses in Ukraine as conveniences and precautions of doing business in Ukraine are accurately framed in the theoretical part. The solution to the problem is to determinate the credibility of actual economic and business partnerships and investigate future potential of the collaboration between the European Union and Ukraine. This work is focused on three directions:  Ukraine’s competitiveness features  The EU-Ukraine present relations and existing potential  Nearest future prospectivity This research is divided into introduction, three chapters, conclusion and bibliography. Each chapter is split into subchapters related to the section content. To begin with, the first chapter ―Ukrainian business climate and trade relations with the EU‖ is the largest constituent of the thesis. It includes findings of major Ukraine’s economic environment characteristics, internationally evaluated risk assessment and the government’s importance in the business. Besides, the EU-Ukraine trade relations’ status is observed. The second chapter ―Main attractive sectors analysis for European investment in Ukraine‖ begins by laying out the empirical dimensions of the research. On the assumption of deep searching, it is understood that Ukraine is an emerging marketplace of compelling opportunities to European investment. Two promising sectors, where the EU businesses can generate profit, were identified. The third chapter ―Potential and risk of the European-Ukrainian collaboration‖ sets out the arguments in favor of further EU-Ukraine economic integration. Containing pioneering aspects of cooperation, the EU-Ukraine Association Agreement is related to transition to a high level economic partnership. The last chapter assesses the mutual interests of the EU and Ukraine in deep economic cooperation. However, the ambitions of the EU and Ukraine to approach economically and politically can end up due to unfinished democratic and judiciary reforms on the part of the Ukrainian government and due to a strong outside pressure on Ukraine from Russia.
  6. 6. 6 Finally, this work underlines the progress of the EU’s foreign policy towards Ukraine, a country of the Commonwealth Independent States accounting only twenty two years of independence from the Soviet regime. The preference in these relations is given to the priority fields, in particular trade and investment. The EU is interested in improving the cooperation in Ukraine in the areas of justice, security and home-affairs. Indeed, a country like Ukraine which has common borders with the European Union represents a strong economical and security interest for the EU. On the other hand, Ukraine has its own ambitious strategy of integration into the European economical, legal and political spaces. Nevertheless, many domestic reforms remain necessary to improve the business environment and develop strong economic ties with the European Union.
  7. 7. 7 1. Ukrainian business climate and trade relations with the EU 1.1. Major characteristics of the Ukrainian economy and business environment. 1.1.1. Ukraine key figures  Population: 47 732 079 (25th in the world, population density – 80 p/km2)  Capital: Kiev  Major languages: Ukrainian (official), Russian  Major religion: Christianity  Life expectancy: 64 years (men), 75 years (women) (UN)  Monetary unit: 1 Hryvnya  Main exports: Military equipment, metals, pipes, machinery, petroleum products, textiles, agricultural products.  Central Bank : National Bank of Ukraine (NBU)  President: Viktor Yanukovitch  Prime-minister: Mykola Azarov  Major cities: Kharkiv, Lviv, Dnepropetrovsk and Odessa.  Parliament: Verkhovna Rada.  Human Development Index (Rank): 78/187  GDP (current US$): 176.3 billion in 20121 1.1.2. Economic conditions in Ukraine After years of important growth, Ukraine experienced in 2009 one of the worst recession in Europe. The growth shrunked by 15% under the combined effects of the slowdown in the economic activity, the diminution of the foreign funding and the drop in the world steel demand. The country coped with a collapse of its industrial activity, a currency crisis, a rise in inflation and a weakening of its banking sector leading Ukraine to call on the International Monetary Fund (IMF). The country returned to a fragile growth in 2010 (3.7%) and in 2011 (+4.7%) due to a recovery of the foreign trade, the political stabilization of the country and good harvests. Due to the recession in the euro zone that severely eroded its exportations, Ukraine growth slowed in 2012 (2%). The government expects for 2013 a minimum growth of 2.5% but the World Bank forecasts are much more modest (1%). The Ukrainian economy is in a difficult period. In 2012, the external deficit widened, the currency reserves are at their lowest level since 2010, the country access to credit is limited whereas a 3.3 billion EUR debt expires in the end of 2013. The government priority is to increase the social expenses to rise up the living standard of the population. The government also continues the reforms necessary for an EU-Ukraine association agreement. Negotiations are underway with IMF and they could lead to a new loan agreement of 15 billion USD, after the suspension of the last agreement due the absence of significant progresses on the reforms programme. 1 World Bank data
  8. 8. 8 The economic crisis had important social consequences in Ukraine. The level of real wages fell and the unemployment rate strongly increased, although it went down to 7.4% in 2012. Table 1: Main Ukraine macroeconomic indicators Economy Indicators 2009 2010 2011 2012 2013 (e) GDP, current prices (billions USD) 117.23 136.42 163.42 176.24 181.6 GDP, constant prices (% change) -14.8 4.1 5.2 0.15 3.5 GDP per capita, current prices (USD) 2550 2980 3584 3877 (e) 4015 General government structural balance (% GDP) -2.1 -3.7 -2.8 -4.3 -4.4 General government gross debt (% GDP) 35.4 40.5 36.8 37.4 42.2 Inflation rate (%) 15.9 9.4 8.0 0.6 0.5 Unemployment rate (% total labor force) 8.8 8.1 7.9 8.0 8.2 Source: IMF - World Economic Outlook Database- http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weoselser.aspx?c=926&t=1, [consulted the 7th of august 2013] Note: (e) Estimated data 1.1.3. Ukraine’s economy strengths Ukraine is the second largest country in Europe, strategically located at the crossroads between Europe, Russia and Central Asia. The country has access to the Black Sea through the ports of Odessa and Sebastopol and it is a key energy transit country for Russian oil and gas exports to Western Europe (see Figure 1). Figure 1: EU countries and Ukraine geography
  9. 9. 9 Once called the ―breadbasket of Europe‖, Ukraine has traditionally specialized in agriculture. It has 324 784 square kilometers of arable land, the largest such area in Europe. In the 1990s, agriculture accounted for around 20% of GDP but its share gradually declined to 9% of GDP in 2012 following a reallocation of labor from agriculture into the industry and services sectors. Agriculture still accounted for 25% of total exports in 2009 (WTO, 2010), and the country is the world’s largest exporter of barley and the seventh largest exporter of wheat. However, agriculture exports consist mainly of goods with a low degree of processing. Ukraine is the world’s eighth-largest producer and fourth-largest exporter of steel, and the fifth-largest exporter of nitrogen-based fertilizers. Industry valued added accounted for 30% of GDP in 2010 (World Bank, 2011), while the share of total exports represented by fuels and mining products was 12.3% and that accounted for by manufactured products was 62% according to the WTO. The labor force is highly skilled, thanks to the legacy of the rigorous and scientifically oriented education system of the Soviet Union, and relatively inexpensive. For instance, Ukraine as universal literacy and high general school enrolment: the combined gross of enrolment ratio in education of both sexes was 90% in 2009, higher than those of Czech Republic (83.4%) and Poland (87.7%). According to the World Bank (2011), female labor participation is also higher than the average for Europe and Central Asia (see Figure 2). Figure 2: Ukraine’s labor force has a high level of tertiary education Source: World Bank (2011), World Bank Development Indicators, http://data.worldbank.org 1.1.4. Ukraine’s economy weaknesses Ukraine economy is poorly diversified and highly depends on steel and imported gas prices. Indeed, steel accounts for more than one third of total good exports. In July 2008, the IMF estimated that a 10% decline in steel prices would slow Ukraine’s annualized GDP growth by between ½ and ¾ of a percentage point over a full year (IMF, 2008). 0 10 20 30 40 50 Ukraine Europe and Central Asia (all income levels) Europe and Central Asia (developing only) Labour force with tertiary education (% total) 2005
  10. 10. 10 Ukraine is also vulnerable to gas price increases from its main supplier which is Russia. For example in 2006, Ukraine had to pay almost twice the old price for Russian gas after Russia stopped the gas supplies. However, Ukraine is trying to rectify this situation by switching towards greater use of local coal. Besides, the political insecurity makes it difficult to apply a consistent economic policy, macroeconomic stability being a prerequisite to attracting foreign investment and switching to a long term sustainable growth path. Another main weakness of Ukraine is its banking system. Deposits from firms and households as well as lending to the private sector are very tiny even when compared to very poor countries. Empirical analyses demonstrate a strong positive link between the functioning of the financial system and long-run growth (Ross Levine, 1997). In fact, empirical evidence shows that the development of the financial system is a precursor and a necessary condition for sustained growth and economic transformation, especially in transition economies like Ukraine. 1.1.5. Ukraine’s Risk assessment In a competitive commercial environment, payment facilities are a decisive factor in carrying off a contract. It’s therefore essential for exporters to evaluate the Ukraine political and commercial risks. Political risks include wars, riots, foreign currency shortages or arbitrary government decisions. The commercial risk can be a non-payment after a buyer's arbitrary decisions or bankruptcy. Ukrainian economy is evaluated by several international rating agencies, well-known credit insurers and foreign financial institutions in order to estimate of the average credit risk on Ukraine’s businesses. Among them, we will consider two European credit insurers: the Office national du ducroire (ONDD), the Belgian public credit insurer and Coface, a French company specializing in export credit insurance. According to the point of view of ONDD: ―The Ukrainian economy overheated and the credit boom at home was becoming ever more financed by means of foreign debt. High external financing needs pushed the country towards the extreme need of international help, which was the only one option left.‖2 ONDD - Country risks synthesizing chart was made of risk assessment for Ukraine. The relevant mark is given to two directions: export transactions and direct investments (see Figure 3 below). 2 Stricter cover terms for medium and long term transactions on the Ukraine. ONDD. Retrieved from: http://www.ondd.be
  11. 11. 11 Figure 3: Ukraine’s risk assessment Source: ONDD (July 2013), http://www.ondd.be As far as Coface is concerned, they have a ranking system which is made up from seven- levels. In ascending order of risk, these are: A1, A2, A3, A4, B, C and D. The rank attributed to Ukraine in 2013 was: ―D‖ for the Country Risk Assessment, ―D‖ standing for high risk profile of the economic and political environment, very bad payment record.3 Several factors explain these bad evaluations from ONDD, Coface and others. First of all, there is a degradation of the economical situation that should result in a drop in economic growth in 2013. In Q1 2013, the GDP decreased (-1.3% vs. Q1 2012), confirming the recession observed since mid 2012. The Ukrainian economy suffers from a weak external demand taking into account the bad economical performances of its partners (Euro zone, Russia and other CEI countries) that should perpetuate a great part of the year 2013. The private consumption is likely to be penalized by the rise in inflation expected in 2013 (notably the food price increase). This inflation should be increased by gas tariff increases demanded by the IMF as a counter part of a new loan. Another reason is the fragility of the public finances and the balance of payments. The public expenses slightly increase, reaching 52% of the GDP in the Q1 2013 (46% in 2012). The slowdown of the exportations and the surge in the imported gas prices largely contributed to the rise in the deficit in 2012 and this deterioration should continue in 2013. There is a high risk of devaluation in 2013 that would a negative impact on the household consumption but also huge repercussions on the sovereign default and the risk of bank default. Whatever the strategy chosen by the government in 2013 (rise in gas prices and/or devaluation), the risk of social dissatisfaction is high. 3 Risk countries. Economic studies. Ukraine. Coface 2012. Retrieved from : http://www.coface.fr
  12. 12. 12 On the political aspect, the Party of Regions from the president Viktor Yanoukovitch won the legislative elections of October 2012. However, the main opposition parties didn’t recognize this victory, accusing the Party of Regions of fraud. The continuing detention of Julia Timoshenko and the president’s will to reinforce the links with Russia participate in the rising dissatisfaction of the western part of the country, which is largely in favor of a rapprochement with the European Union. 1.1.6. Business Climate Ukraine’s business climate has always been very difficult, but the instability and uncertainty triggered by the financial crisis have contributed to a further deterioration. The World Bank’s ―Doing Business‖ project ranked Ukraine 137th out of 185 economies in 2013 (first place was given to Singapore).4 This index is the averages of the country's rankings on 10 subjects with an equal weight to each subject. A high ranking means the laws and regulations are more contributive to the creation and operation of local companies. In 2012, Ukraine was ranked 152th. According to the World Bank’s assessment, Ukraine has improved the ease of doing business across several areas of regulation: ―starting a business‖, ―getting electricity‖, ―registering property‖, ―paying taxes‖, ―enforcing contracts‖ and ―resolving insolvency‖ (see Table 2). Table 2: Ukraine’s business climate Source: Doing Business in Ukraine (World Bank Group), http://www.doingbusiness.org/data/exploreeconomies/ukraine/ However, there is still a lot to do to be at least at the level of its regional peers (see Figure 4 below). 4 Doing business 2013. Smarter regulations for small and medium-size enterprises. A co publication of the World Bank and the International Finance Corporation. ISBN: 978-0-8213-9624- 7. Retrieved from : http://www.doingbusiness.org
  13. 13. 13 Figure 4: How Ukraine and comparative economies rank on ease of doing business Source: Doing Business (World Bank Group), Economy Rankings, http://www.doingbusiness.org/rankings Ukraine trade policy doesn’t always remain within the limitation set by the international trade rules. For example, in March 2013, the Ukrainian government unilaterally introduced additional taxes on imported cars from the EU. Moreover, officials plan to give financial compensations to consumers that would buy domestically-made vehicles only. If this measure were adopted, it would be another step against the international trade rules. Besides, the legal system is globally instable and remains inefficient. The judicial power may indeed be pressured by the executive power or by some criminal organizations. It also suffers from corruption. This one is almost everywhere in the economic system and it is one of the main barriers to foreign investments (see sub-chapter 1.2.4). Last but not least, the companies in Ukraine are not very transparent on their accounts. They are also very vulnerable to external shocks, therefore maintaining a high risk on credit. 1.1.7. Foreign direct investments in Ukraine In 2005, the United Nations Conference on Trade and Development (UNCTAD) categorized Ukraine as a ―front-runner‖ country meaning it has high foreign direct investments (FDI) potential and performance.5 This inward FDI performance index ranks countries by the FDI they receive relative to their economic size. The FDI potential index evaluates the host country ability to attract FDI flows comparing to other countries. The FDI potential index is based on twelve economic indexes like the GDP per capita, the country risk, the infrastructures, etc. During the three last years, Ukraine did not attract a large amount of FDI in spite of its large market. In 2010, its inward FDI stock was 58 billion USD (see Table 3). It represents 42% of 5 Investment country profiles 2012. Ukraine. UNCTAD. Retrieved from : http://unctad.org
  14. 14. 14 the GDP which is lower than its neighbour countries. Ukraine suffered a lot from the crisis of 2009 but in 2010 the FDI inflows reached 6.5 billion USD.6 The failure in bringing Ukraine closer to the EU and the loss of the IMF support are certainly two factors impacting negatively the investors’ confidence. Besides, a corrupted and inefficient judicial system, the complexity of laws and rules, poor contract enforcement and bad governance act as a disincentive to investment. Table 3: Foreign Direct Investments (FDI) in Ukraine, 2010-2012 Source: United Nations Conference on Trade and Development (UNCTAD) – http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx - [consulted the 7th of august 2013] Note: * Greenfield investments are a form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. Countries in the EU account for the majority of the inward FDI stock of the country (79% in 2010). Cyprus was the largest investor in 2010 (22%), followed by Germany (16%) and the Netherlands (11%). Concerning the outward FDI stock, the EU is also the main destination with 95% of FDI stock in 2010, Cyprus being the main destination. In 2012 the situation has not changed. According to the State Statistics Committee of Ukraine still the European Union was the biggest source for FDI into Ukraine (see Figure 5). Figure 5: Foreign direct investment into Ukraine (by countries of origin) Source: State Statistics Committee of Ukraine as for 2012. http://www.ukrstat.gov.ua/ 6 Investment country profiles 2012. Ukraine. UNCTAD. Retrieved from : http://unctad.org
  15. 15. 15 As for the structure of FDI in 2012, the financial activity sector represented the biggest part of inward FDI in Ukraine. The second largest sector for FDI in 2012 was the Processing Industry (manufacturing sector), which accounts for 12488, 1 USD million (see Figure 6). Figure 6: Structure of foreign direct investments into Ukraine (by branches in USD million) Source: State Statistics Committee of Ukraine as for 2012. http://www.ukrstat.gov.ua/
  16. 16. 16 1.2. The role of Ukrainian government in foreign business activities. 1.2.1. Issues affecting the business in Ukraine According to the survey of 144 European companies CEO’s , members of EBA in Ukraine, the year 2013 saw a slight worsening of the situation with solving 7 strategic issues. Nothing has changed for better if compared to Q4 2012 (see Figure 7 below). Figure 7: Estimation of the situation of the solving issues Source: EBA Investment Attractiveness Index 2013 1.2.2. Starting a Business in Ukraine The legislation of Ukraine provides a wide variety of possible investments and business conducting in Ukraine. There are two basic Codes in Ukraine allowing creation, maintenance and liquidation of business legal entities, these are: The Civil Code of Ukraine and The Commercial Code of Ukraine both dated January 2003. Moreover, the Law of Ukraine on Companies adopted in 1991, the lately adapted law on Joint Stock companies Law from 2008 and the Ukrainian Law on State Registration of Legal Entities and Individual Entrepreneurs effective from 2004. As for the business registration, Ukraine has simplified rules for business registration starting from July 1, 2013. That means that the functions of registration of legal persons and natural persons-entrepreneurs will be delegated to the State Registration Service. Unified standards of business registration will be in Ukraine with relevant control of the quality of state registration terms. The majority of state registrars will be located in the same premises, where
  17. 17. 17 people got accustomed to see them. Ukrainian government has a strong influence on the foreign business activities, at the point of conducting business in Ukraine; foreign companies have to face a number of obstacles such as:  custom procedures  corruption  court system  technical barriers  taxes/VAT refund  land reforms  currency regulation 1.2.3. Custom procedures The quality of customs operations and simple customs clearance of goods are an inevitable part of a country's trade potential. Adapting Ukraine’s customs laws is a main goal for the Ukrainian state so that its legislation is aligned with the EU’s. Therefore, in March 2012, the Ukrainian parliament (Verkhovna Rada) adopted the new Customs code of Ukraine. The main improvements in the custom procedures compared to the previous legislation are detailed below:  the customs clearance becomes possible at any customs office, regardless of the importer's place of registration (before, entities had to ask for permission for customs clearance in a customs office different from the one they used to register);  there is now the possibility to amend customs declarations within three years after customs clearance without penalties;  goods can be re-exported by non-residents if there is a failure to fulfill contractual commitment and customs duty will be reimbursed;  there is an imposed four hours time limit for customs clearance procedures (previously customs clearance had to be finished within a day, but in reality it took more time);  the possibility of relevant experts and professionals to participate in the procedure of customs is provided for;  a list of documents to be submitted for customs clearance is established (at the level of the Code);  Full introduction of e-declarations by the end of 2013;  In case there are different interpretations of laws, a decision will be taken in favor of the importer. The new Customs code has brought some improvements but customs treatment of royalties remains unclear and international investor’s community underlines that the Customs Code is
  18. 18. 18 still far from the standards of WTO7 . Notwithstanding the improvements, further positive changes could be made in the following areas:  implementation of the WTO’s Customs Valuation Decisions;  responsibility for customs offences (the current fines are very high);  introduction of centralized customs clearance;  bringing foreign exchange control in line with new customs regulations. 1.2.4. Corruption One of the biggest threats to the foreign business activities in Ukraine is the systemic corruption. In May 2011 TORO, the Transparency International national contact group in Ukraine, published an assessment of the institutions in the country, which concluded: Corruption in Ukraine is a systemic problem existing across the board and at all levels of public administration. Both petty and grand scale corruption are flourishing. Among the institutions which are perceived by the public to be highly corrupt are political parties, legislature, police, public officials and the judiciary. Ukrainian society can be characterized as a society with a high tolerance for corrupt practices. 8 In particular, the corruption at the customs service is a major problem for the development of foreign business activities. The custom authorities have been enjoying the right to independently execute court rulings at the borders. In most of the cases, the EU companies have to struggle against the unauthorized confiscation of some part of the goods upon the arrival to the Ukrainian borders. The local official customs officers then demand a bribe to allow the further circulation of the goods on the Ukrainian territory. Other possible corruptions are linked with the every-day activities like the simple registration-licensing to establish a plant or the opening of a restaurant or a shop. This may include acquiring the permit and getting an approval from the sanitizing commission. For example, the foreign companies are obliged to pass the administration bureaucratic offices, most of them would propose an extra fee for their services to facilitate their life and save time. Ukraine presidents, the former one Viktor Yuschenko in 2005 and the current one Viktor Yanuckovich in 2010 and 2012 made fighting corruption the top priority of their administration. Under the pressure of the EU authorities and the IMF, the government made steps forward to simplify the rules of conducting business in Ukraine for European companies and not only European ones. Anti-corruption efforts were notably held in 2010, when the public organization Anti- Corruption Council of Ukraine (ACCU) was established. The purpose of the ACCU is to 7 Interfax-Ukraine (24 May, 2012). American Chamber of Commerce: New Customs Code promotes relaxation of custom procedures. The Kyiv post. Retrieved from: http://www.kyivpost.com/content/politics/american- chamber-of-commerce-new-customs-code-to-p-1-128160.html 8 Transparency International. Ukraine 2011. Retrieved from: http://www.transparency.org/whatwedo/nisarticle/ukraine_2011
  19. 19. 19 ensure transparency among Ukraine’s public central and local authorities.9 It has been followed by the new Customs Code of Ukraine in April 2012 (see chapter above) with also the purpose of reducing the level of corruption. Despite of these governmental efforts, there is still a lot of area for improvements. Indeed, Transparency International organization gave in 2012 a Corruption Perceptions Index rank of 144/175 and a score of 26/100. The Corruption Perceptions Index ranks countries based on how corrupt a country’s public sector is perceived to be. Scores range from 0 (highly corrupt) to 100 (very clean). 10 1.2.5. Court system It has been only recently that court system has begun the transformation reforms. The Law of Ukraine No. 2453-VI ―On the Court System and the Status of Judges‖ provided a new judicial system of Ukraine. In Ukraine, the constitutional court and the system of general jurisdiction courts are based on the principles of territoriality. Generally speaking, the judicial system comprises four levels of courts as follows:  Local courts of general jurisdiction (combining criminal and civil jurisdiction);  Appeal courts  High courts with specialized jurisdiction  The Supreme Court covering all cases11 . The Highest Commercial Court of Ukraine is the supreme body for resolving economic disputes but for the foreign entities it also advised to apply for the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry. It can be very efficient to settle commercial disputes. However, the judicial system of Ukraine is not very predictable for the businesses and system of commercial courts is not always fair. It is also very well-known for being corrupted12 . Therefore, both foreign and local firms don’t trust the judicial system in business matters as it was underlined by the US Department of State in 201213 . 1.2.6. Technical barriers to trade Technical Barriers to Trade (TBT) between the EU and Ukraine are technical regulations referred usually to safety issues and national standards of Ukraine applied by the government and its officials to ban the import of goods coming from the EU member states. In many cases, the government is using the technical barriers to protect the local manufactures and judge the foreign goods as unsuitable for the Ukrainian market. Until a new national 9 United Nations Office on Drugs and Crime. Anti-Corruption Council of Ukraine. Retrieved from : http://www.unodc.org/ngo/showSingleDetailed.do?req_org_uid=21953 10 Transparency International: Corruption by country. Retrieved from: http://www.transparency.org/country#UKR_DataResearch 11 Government portal of Ukraine : Judicial power. Retrieved from : http://www.kmu.gov.ua/control/en/publish/article?art_id=246406533&cat_id=246405235 12 Klaus Schwab. World Economic Forum. Global Competitiveness report 2012-2013. Retrieved from : http://www.weforum.org/issues/global-competitiveness 13 US Department of State. 2012 Investment Climate Statement – Ukraine. Retrieved from : http://www.state.gov/e/eb/rls/othr/ics/2012/191257.htm
  20. 20. 20 standards body is created, the standards adoption is under the responsibility of the Ministry for Economic Development and Trade. Unfortunately, regardless the standardization, Ukraine still remains in its transition state from a soviet standardization model to an EU standardization model. In the soviet one, standards are obligatory imposing a bureaucratic burden on the manufacturers. In the EU, standards are voluntary. In 2009, the EU launched a Sector Policy Support Program worth of 39 million Euros with an end date in December 2013 in order to facilitate trade between EU member states and Ukraine. The goal is also to eliminate trade barriers including the modernization of the institutional framework for quality assurance. 14 This way, Ukraine will progressively adapt its technical regulations and standards to those of the EU. Due to its obligations as a member of the WTO and its responsibilities indicated on the WTO Agreement on Technical Barriers to Trade, the Ukrainian Government adopted in 2012 the Amendments which simplified the procedures for introduction of the products into Ukrainian market by removing the obligation to register the declaration of conformity for the producers. 1.2.7. Taxes and VAT Refund The hostile corporation tax legislation used to be the main cause explaining why international companies refused to go to the Ukrainian market. The vote of the first Tax Code of Ukraine in December 2010 was therefore a major event. It brought together Ukrainian tax legislation in its entirety. The Code adjusted rates and benefits, and also the process of tax imposition. The Prime-Minister of Ukraine, Mykola Azarov, while introducing the draft version of the Code said: ―A new Tax Code in Ukraine will create one of the most attractive investment regimes in Europe. We will set low taxes, probably the lowest taxes in Europe.”15 Among the reforms, one concerned the corporate income tax (CIT) rate that has been gradually reduced from 25% in 2011 to 19% in 2013. A last rate decrease is planned for 2014 (16%). The Tax Code also introduced favorable regulations for a number of industries. For example, until 1 January 2021, hotels as well as electricity and light industry companies, shipbuilding and aircraft companies are simply exempted from CIT. Besides, until 1 January 2016, companies with an income not exceeding UAH 3 million per year, and whose staff numbers not more than 25 employees, are not subject to CIT at all. There are a number of other benefits and privileges, which are given to companies, which provide services in the area of information technology. The timely value-added tax (VAT) recovery is also a major issue. It’s one of the reasons that discourage foreign companies from conducting business in Ukraine. In reality, with the current procedure, it is almost impossible to get a VAT refund in Ukraine. In order to better regulate the issue of VAT refunds, the Tax Code obliges the Ukrainian state to pay interest 14 EU Cooperation News. (2 April 2013) . Interview on legal and product safety with Stefanos Ioakeimidis, Team Leader of an EU-funded project and with Dmytro Lutsenko, Legal Expert, Opening doors of EU-Ukraine Trade. Newsletter of the delegation of the European Union to Ukraine. Retrieved from: http://euukrainecoop.com/2013/02/04/eu-ukraine-trade/ 15 Interfax-Ukraine (3 September, 2010). Azarov: Ukraine to have lowest taxes in Europe. The Kyiv post . Retrieved from: http://www.kyivpost.com/content/business/azarov-ukraine-to-have-lowest-taxes-in-europe- 80962.html
  21. 21. 21 for the late payment of refunds. In Ukraine the VAT rate is 20% and it is planned to decrease it to 17% by 2014.16 Nevertheless, it is not enough to have a good legislation. Powerful institutions are also necessary for the laws to work properly. In fact, Ukraine still copes with strong difficulties for VAT collection and refund. A survey done by the American Chamber of Commerce in Ukraine revealed that among its 26 member companies, the cumulative VAT arrears reached almost UAH 3.4 billion in February 2012. More than half of this total was composed of overdue VAT. 17 The European Union is aware of what the European companies have to tackle with in Ukraine and some failed commitments of the Ukrainian government. José Manuel Pinto Teixeira, Ambassador, Head of Delegation of the European Union to Ukraine on conducting business in Ukraine said in July 2012: Taxation difficulties, problematic VAT refund and tax losses carry forward as well as pressure from state authorities (17%) still have the lead. Coming up next are complaints over unstable political course and court system in Ukraine, hot-off-the- press Law on Personal Data Protection, and destructive corruption (14%). European businesses and members of EBA have not perceived any real improvements in the business and investment climate in Ukraine in recent months. I am not surprised but I find it disappointing that so many issues still remain unresolved, despite frequent calls for action from the EU and the EBA, and commitments made by the Ukrainian government to improve the business climate. 18 The government should tackle with the tax reforms, as they are part of challenge that serves to create a business friendly environment both for Ukrainian entrepreneurs and for foreign investors. A key undertaking is the effort to weed out regulations while encouraging growth and discouraging corruption. 1.2.8. Land reforms Since many years the land reform is a subject of discussion in Ukraine. After the independence the first round of farm reforms initiated privatization of land. In 1992, all land were owned by the state whereas in 2013, the state owned only 48.9% of land and 51% of land were owned by private entities19 . In the end of 2011, the primary draft bill on land market was voted. It precised the market organization and its way of operating. The very important issue in the land reform principle is avoiding the monopolization on the market by imposing the limitation of land ownership at 100 hectares regardless of location. The development of new land reforms is still an in-work- 16 Jaroslawa Z. Johnson and Anna Iakubenko. (06.11.2011) Ukraine adopts first Tax Code. Lexology. Retrieved from: http://www.lexology.com/library/detail.aspx?g=41644abe-f8fb-42a6-8063-3d572535b8dc 17 The American Chamber of Commerce in Ukraine. Reforming the Ukrainian Tax System – Important for the Country’s Future Prosperity. Retrieved from: http://blog.chamber.ua/2012/02/reforming-the-ukrainian-tax- system-important-for-the-countrys-future-prosperity/ 18 European Business Association Press-release (10.07.2012). Ukraine’s Attractiveness: Fair to Middling. Retrieved from: http://www.eba.com.ua/en/press-room 19 ForUm. Land reform: to be or not to be? (11.06.2013). Retrieved from: http://en.for-ua.com/analytics/2013/06/11/134501.html
  22. 22. 22 process nowadays. For example, in 2012, the parliament voted some changes to the Land Code and foreign companies were allowed to buy Ukrainian lands. However, even if the government recognizes the necessity of land reforms, unfortunately for the business entities, the second reading of this document is still frozen due to various political forces. The President Viktor Yuschenko declared in April 2013: « We want to carry out the reform without infringing the interests of land plot owners. This is the main issue ».20 If the Ukrainian government finally passes the reform, in some years, Ukraine may have a real competitive land market. Then, it will maybe attract foreign investments into the agribusiness industry. 1.2.9. Foreign currency regulations There are numerous currency control difficulties faced by foreign investors in Ukraine. Foreign currency operations are ruled by the 1993 Cabinet of Ministers decree, On the System of Currency Regulation and Currency Control. They also follow numerous implementation rules created by the National Bank of Ukraine (NBU). The key issues regarding Ukraine’s current exchange control regulation are that:  Payments under foreign trade contracts between resident and a non-resident should be in foreign currency only;  Payments in foreign currency between residents of Ukraine are forbidden (a specific license is required);  Salaries to Ukrainian staff must be paid un UAH currency (but expatriate employees can be paid in hard currency);  Foreign loans must be registered with the National Bank of Ukraine before funds are transferred to Ukraine. A maximum interest rate may be applied to foreign currency loans obtained from non residents;  If a Ukrainian company makes an advance payment to a foreign company, this company must realize the actual importation of the goods or services concerned within 180 days following the date of the advance payment. This 180-day period may be extended only based on an individual permission granted by the Ministry of Economic Development and Trade. The non respect of this 180-day period may lead to important fines for the Ukrainian company;  Payments by Ukrainian companies for services given by nonresident for amounts exceeding EUR 100,000 (annually) require confirmation from the Foreign Markets Monitoring Center that the fee for the services doesn’t not exceed market prices. Otherwise, the bank will disallow the transfer. On November 2012, the Parliament of Ukraine has increased control over foreign currency circulation in Ukraine. The National Bank of Ukraine introduced a temporary requirement on mandatory conversion of a foreign currency transferred to Ukraine from abroad. The Resolutions # 475 and # 479 were adopted that modify the settlement periods under export and/or import agreements and put on a obligatory necessity for the foreign businesses to 20 Interfax-Ukraine (3 September, 2010). Viktor Yanukovich: Interests of land plot owners should be considered in land reform, Yanuckovich says. Kyiv Post. Retrieved from:
  23. 23. 23 convert the foreign currency revenues into national currency Hryvnia.21 These regulations impact eventually all international businesses as well as individuals that receive foreign currency from abroad. 21 Adam Mycyk, Inna Antipova (28 November 2012). Ukraine changes to foreign currency control regulation. Lexology. Retrieved from : http://www.lexology.com/library/detail.aspx?g=4361bf46-4849-456b-8de0- 1019b5506d71
  24. 24. 24 1.3. EU-Ukraine trade relations 1.3.1. Trade The trade relations between EU and Ukraine really started in 1998 when a Partnership and Cooperation Agreement entered in the force. It provides a comprehensive and ambitious framework for cooperation between the EU and Ukraine, in all key areas of reform. Ukraine is a priority partner country within the European Neighborhood Policy and the Eastern Partnership.22 In 2012 Ukraine was the EU’s 22nd largest trading partner and the 19th largest export market in value (23.79 million Euros). In 2012, the EU was Ukraine’s first largest trade partner with 31% of the total trade with the world. 21.8% of Ukrainian exports of goods went to the EU and 39.9% of import of goods came from the EU. Ukraine mainly exports iron, steel, mining products, cereals, and electric machinery. The main goods the EU exports to Ukraine are machinery and transport equipment, chemicals, textile and clothing and agricultural products (see Figure 8). Figure 8: EU27 Merchandise Trade with Ukraine by product (2012) Source: Eurostat (Comext; Statistical Regime 4) Ukrainian exports to the EU are to a large extent already liberalised thanks to the Generalised System of Preferences (GSP), granted by the EU to Ukraine since 1993. In 2011, total preferential exports to the EU under GSP reached a level of 72.2% of the eligible product. Preferential imports to the EU from Ukraine include machinery and mechanical appliances, plants, oils, base metals, chemicals and textiles. 22 EU around the Globe. Countries. Ukraine. European Union External Action. Retrieved from: http://www.eeas.europa.eu/ukraine/
  25. 25. 25 Figure 9: EU trade in goods balance with Ukraine 2010-2012 Source: Eurostat (Comext; Statistical Regime 4) 1.3.2. EU foreign direct investments in Ukraine In 2010, Europe’s share of actual FDI inflows was 26% (first place), which is equal to its share of world GDP23 . The second place was occupied by Russia. Figure 10: EU27 FDI with Ukraine Source: Eurostat (Comext; Statistical Regime 4) In 2010 Ukraine experienced a revival of inward foreign direct investment (IFDI) flows from EU compared to 2009. At 8.3 billion Euros IFDI flows from EU to Ukraine in 2011 were well above their level of 1 billion Euros in 2009 (see Figure 10). The increase in 2010 was partly due to the difficult economic situation, which pushed many investors to sell their businesses to willing buyers. The improved performances of the Ukrainian economy in 2010, as well as the legislation changes in the financial industry also explain this increase. The fall of IFDI in 2011 can be explained by the delay in concluding an association agreement with the European Union (EU). The EU countries that invest the most are Germany, Austria, the Netherlands, France and Cyprus. The industrial companies are the one that catch the biggest mount of EU’s 23 "Global and Regional FDI Trends in 2010‖, Global Investment Trends Monitor, UNCTAD, 17 January 2011.
  26. 26. 26 investments (34%). Financial institutions receive 32.4% of FDI. Then we can find the companies engaged in real estate transactions, engineering, trade, vehicle repair, production of household gods and personal goods.24 24 Worldwide News Ukraine: EU’s Direct Investments to Ukraine Grow 19.3 Percent Retrieved from: http://wnu-ukraine.com/news/economy-business/?id=707
  27. 27. 27 2. Main attractive sectors analysis for European investments in Ukraine 2.1. Agribusiness Agribusiness represents a comprehensive value chain that covers all aspects of agricultural production (farming, seed, crop production, post-harvest handling and other agricultural inputs), processing and distribution. World production, consumption and trade of agricultural products are expected to increase sharply over the coming decade. Foreign agro-food companies investing in emerging economies could play a significant role by improving productivity while implementing the highest food safety and regulatory standards, allowing access to developed markets such as the European Union. Some emerging economies, such as Ukraine has a significant opportunity to strengthen its important role in agribusiness thanks to global demand for food that is accelerating with the worldwide population growth.“Today Ukraine is fully engaged in ensuring global food security and meets the growing needs of humanity in food. Ukraine is ready to take an active, enhanced and mutually beneficial cooperation”25 , said Mykola Prysyazhniyuk, Minister of Agrarian Policy and Food of Ukraine in June 2013. 2.1.1. Ukraine’s agribusiness sector at a glance Fertile land Ukraine has over 40 million hectares of agricultural land; of which about 80 % (around 32 million hectares) is arable more than any other European country (see Figure 11 and Table 4). The country is rich for black soil, which is one of the country's greatest resources. The country is home to over 16 million hectares of ―chernozem‖ (black soil), a very fertile black- colored soil with high content of humus and minerals that offers a high potential for agricultural yields.26 25 Mykola Prysyazhniyuk, Minister of Agrarian Policy and Food of Ukraine. (13 June 2013) Panel discussion: ―Investment in the agricultural sector of Ukraine. Let’s feed the world together!‖ First Annual Business conference ABC: Ukraine and partners. Retrieved from : http://www.ukraine-partners.org 26 OECD (2012), Competitiveness and Private Sector Development: Ukraine 2011: Sector Competitiveness Strategy, OECD Publishing. ISBN 978-92-64-12878-1
  28. 28. 28 Figure 11: Ukraine’s agriculture land structure Source: The Ministry of Agrarian Policy and Food of Ukraine 2011 The table below demonstrates the comparison of the Ukrainian land to other countries on total agricultural area with arable territories. According to the Food and Agriculture Organization data, Ukraine has more arable land than some EU countries like France, Germany, the United Kingdom or Poland. Table 4: Agricultural land (millions ha) Source: Food and Agriculture Organization (2011)
  29. 29. 29 Climate Climatic conditions are very favorable to the production of most agricultural products in different areas of the country. The moderate climate gives agri producers strong competitive advantages. Ukraine comprises three distinct climatic zones, which allows producers to vary crop growth. The western regions are suited to crops that demand high humidity, specifically vegetables and spring grains. The conditions in the central and north –eastern regions are favorable for all kinds of grains. The southern regions are best-suited to winter crops as the area is Ukraine’s warmest overall. Cost-competitiveness Ukraine’s average cost of production per ton of grain is lower than its competitors. Low production costs, estimated 50% lower than of European producers like Germany, result from low usage of input, low labor costs and a lack of proper equipment. Ukraine’s production commodities As it was mentioned before, excellent climate is very suitable for growing large-scale production. Among production products there are: potatoes, cow and whole milk, sugar beet, different grains, sunflower seeds, tomatoes, cabbages, soybeans. Figure 12: Top ten commodities - Production quantity 2011 Source: FAOSTAT (2011), FAO Statistical database Ukraine is already among the top five exporters of grain. In 2011 Maize was the most cultivated grain, about 22,8 million tones harvested in 2011 (see Figure 12 above). Wheat is the second largest grain produced with more than 22, 3 million tons harvested. Barley is the third most important grain. In 2011 Ukraine became the world’s largest producer and exporter of sunflower, globally ahead of Argentina and Russia. In value terms, cow milk and sunflower seed are Ukraine’s two most significant agricultural products (see Figure 13 below). 0 5000000 10000000 15000000 20000000 25000000 30000000 Quantity (t)
  30. 30. 30 Figure 13: Top ten commodities - Production value 2011 Source: FAOSTAT (2011), FAO Statistical database The red meat and dairy sectors are also an important part of agribusiness in Ukraine. Both sectors suffered severe declines during the transition period from the planned economy. Even though, the dairy sector is a major part of the global food chain, covering operations from raw milk production to processing into a wide variety of products (milk, yogurt, cheese, butter etc.) However, the quality standards of Ukrainian milk for food production do not match those of the EU. Even the highest quality Ukrainian milk is not exportable to the Western Europe. 2.1.2. Competition in the Ukrainian agricultural sector Main players Urkaine market is still dominated by small companies that have less than 1000 hectares with poor equipment and run by farmers. Aggressive market leaders emerged during the last years with land banks from 30 to 250 m ha. Some of them are vertically integrated in processing and many of them are export oriented. Several of these companies attracted direct foreign investments. The major agricultural companies in Ukraine are: Astarta, ED&F Man, Agrotrade Group, UAC, Nibulon, Mriya Agroholding and Myronivsky Khliboprodukt. Major constraints Grain storage is one of the major constraints in the agro industry. Currently capacity deficit exceeds 10 million tons. Besides, success of any agricultural enterprise is fully dependent on relationships with local authorities and good contacts with villages. Moreover, local players 0 500000 1000000 1500000 2000000 2500000 3000000 3500000 Value (1000 USD)
  31. 31. 31 are traditionally short of development capital and the local firms are poorly equipped. At least, westernized management and quality control are only implemented by few companies. 2.1.3. Investments opportunities for EU companies European companies should first invest in the grain sub-sector. It includes wheat, rice, maize, barley, oats, millet and other grains. Indeed, market trends for the grain sub-sector are driven by an expected increase in global consumption. World wheat consumption is projected to rise by around 1.1 % annually during the next decade to reach 746 million tons in 2020 (OECD/FAO, 2011).27 The growth of grain demand will come mainly from middle-eastern, African and South-Asian countries due to increasing GDP per capita, rising feed requirements for fast-growing livestock sectors and dynamic population growth. As consequence, prices are expected to increase, making the grain sector potentially more attractive for investment. By 2020, nominal wheat prices are expected to approach USD 240 per ton. Corn prices might reach USD 203/t in 2020. Ukraine already accounts for about 10 % of global grain exports. It supplies grain to Asia, North Africa, and the Middle East. In 2012, Ukraine ranked seventh in the world, exporting almost 23 million tons of grain. According to 2012 state statistics, revenue from agricultural exports reached an amount of $18 billion (25 percent of total export revenue). In the same time the sector attracted $800 million of foreign direct investment. At the end of 2013 the amount of FDI is even expected to reach $3 billion28 (see Table 5). The growth has been reinforced by continuous financial support on behalf of international financial organizations, including the European Bank for Reconstruction and Development, Ukraine's largest investor, and the International Finance Corporation. The EBRD provided nearly $180 million to Ukraine's agribusiness sector as of April 2013.29 27 OECD (2012), Competitiveness and Private Sector Development: Ukraine 2011: Sector Competitiveness Strategy, OECD Publishing. ISBN 978-92-64-12878-1 28 SSCU (2012), State Statistics Service of Ukraine. Retrieved from : http:// www.ukrstat.gov.ua 29 Economic News and Events. (13 May 2013) European Bank for Reconstruction and Development. Retrieved from: http://www.ebrd.com
  32. 32. 32 Table 5: Ukrainian agricultural sectors in numbers 2011 - 2013 Source: State statistics, Agriculture ministry of Ukraine The port capacities of Ukraine are the key links in the logistic chain of export grain supplies to the countries of the Middle East and North Africa. The owners of agribusiness in Ukraine are foreseeing a strong growth of profitability in future years. For example, Charles Beigbeder, the previous owner of the agricultural company AgroGeneration that was created in 2007 and that now exploits 120 000 hectares of farming land in Ukraine says that Ukraine has the largest potential in Europe.30 Investing in Ukraine farmland over the long-term could be profitable as land prices are still low and the profile of investment return is stable. There are many niches and opportunities for introducing new players and strengthening the positions of existing ones. Ukraine's agribusiness sector has a great potential to grow and contribute to global food security. To attract foreign investments in deep processing of grain, Ukraine has an access to low-cost grain suppliers, in addition ice-free seaports (Odessa, Ilyichevsk and Nikolayev). However, the quality remains an issue. The lack of equipment combined with limited use of fertilizers make the seeds more sensitive to weather conditions and parasitic diseases. There is a need to increase the number of combines and other harvesters, for example agricultural machines. European countries such as the Netherlands and the United Kingdom are already among the principal foreign investors in Ukraine. 30 Ivan Ryabchiy. (August 30 2012). Interview with Charles Beigbeder. Ukrainian Week. Retrieved from: http://www. ukrainianweek.com
  33. 33. 33 2.2.Biomass-based energy production sector 2.2.1. Global trends Renewable energy sources are playing an increasingly important role in meeting energy needs across the world. They reduce dependence on fossil fuels and also help to protect the environment by reducing greenhouse gas emissions, create new jobs and contribute to economic development. In particular, heat and power production based on biomass was identified as a pilot sub-sector. The OECD (2010) defines biomass as ―any organic material of plant and animal origin, derived from agricultural and forestry production and resulting by- products, and from industrial and urban wastes, used as feedstock for producing bio-energy and other non-food applications‖. It is estimated that the world demand for energy resources will more than triple before 2035 and China, India and the Middle East will count for 60% of this development.31 According to the experts of International Energy Agency, the electricity and the biofuel based on biomass will quadruple by 2035. Global bioenergy resources are more than enough to meet in the same time the future demand for biofuel and for food. 2.2.2. Ukraine competitiveness in production of biomass-based energy Ukraine’s abundant agricultural products and the rise in fossil energy prices are the two elements that are likely to drive the future development of energy production based on biomass. Biomass resources are widely available in Ukraine. Biomass waste and residues are indeed widely and conveniently available from the agriculture and forestry sectors. Straw, manure and wood are especially promising as sources of heating. The economic potential of crop wastes has been estimated by the National Academic of Sciences of Ukraine at 14 million tonnes of coal equivalent per year. Therefore, the use of primary agricultural residue could partly satisfy increasing heat consumption needs and replace traditional heat production systems. In terms of regional distribution, all regions except the western part of the country and the Crimean peninsula have high economic potential for development of energy generation based on agricultural residues. This primarily correlates with production of wheat and sunflowers, which are the primary sources of agricultural residues, however it is also influenced by other factors, such as the quality of the soil and the region’s climate. With natural gas prices expected to increase further as a result of the price reform in the internal market, the use of natural gas for production of heat and power will become very expensive. According to World Bank estimates, prices of natural gas might increase by more than 400% from 2009 until 2017 in Ukraine.32 Global prices for other fossils fuels, such as oil 31 World Energy Outlook 2012. International Energy Agency (IEA). Retrieved from: http://www.iea.org/aboutus/ 32 World Bank. Bank Recommends Phased Increase in Ukraine Gas Price. Retrieved from: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0,,contentMDK:20775037~pagePK: 146736~piPK:146830~theSitePK:258599,00.html
  34. 34. 34 and coal are also expected to rise in the future. In contrast, renewable sources of energy, such as hydropower, geothermal, wind and solar energy and biomass energy, are nearly limitless 2.2.3. European investments in biomass-based energy sector in Ukraine. Ukraine has the highest biomass potential in Europe. It brings many opportunities for investments in local bioenergy production and in the export of bioenergy crops. Here are the possible FDI in the bio-energy projects in Ukraine: Among the European countries investing in the biomass-based energy sector in Ukraine, Germany is the most active one. In 2013 both countries have put their cooperation into a new level with plans to promote the production of biofuels in Ukraine. This collaboration includes creation of pilot bio-energy complexes. Germany is very interested to increase the production of thermal energy and biogas from agricultural waste in Ukraine by providing technical assistance for the development of bioenergy production in Ukraine.33 Such projects are already widely spread in Germany where 5.7% of the electricity is already coming from the biomass in first half of 2012.34 Some European private companies producing alternative fuel already operate in Ukraine. For example, Active energy group, a UK based company, operates in Ukraine since 2011 and is currently one of the European leaders in providing of biomass to the European market. Active Energy Ukraine has contracts for the purchase of wood, which it processes into chip fuel in Ukraine and uses to replenish its supply to power facilities in Poland. Richard Spinks, the chief executive at the Active Energy Group on the Ukrainian market: “The demand for wood biomass is strong and expected to increase. We have the expertise and advantageous geographic locations in Ukraine to procure, process and ship quickly and efficiently.”35 33 Ukrinform. Germany to help Ukraine produce biofuels. Retrieved from: http://www.ukrinform.ua/eng/news/germany_to_help_ukraine_produce_biofuels_294845 34 CleanTechnica . Germany — 26% of Electricity from Renewable Energy in 1st Half of 2012. Retrieved from: http://cleantechnica.com/2012/07/26/germany-26-of-electricity-from-renewable-energy-in-1st-half-of-2012/ 35 Christopher J. Miller. Interfax-Ukraine. (June 4 2013). Active Energy Group acquires biomass exporter Nicofesco Holdings. KyivPost. Retrieved from: http://www.kyivpost.com Acquisition of grain or cattle farms or forestry companies Acquisition of a bolier manufacturer with focus on biomass technologies Privatisation of dictrict heating companies and conversion of fossil-fuell untits to biomass-based units
  35. 35. 35 2.3 The “National Projects” as practical tools of FDI attraction Today Ukraine is facing the task to create a new operating platform for a constructive dialogue between the government, businesses and potential investors on the local and national levels. As a component of the Investment reform introduced by the Ukrainian government in 2010, the ―National Projects‖ initiative represents an attractive tool to improve the investment climate in Ukraine. The ―National Projects‖ are the strategic projects of Ukraine focused on development of priority economic and social sectors by means of attracting foreign direct investments in the infrastructural projects. The President of Ukraine, Viktor Yanukovich, set up the agency responsible for the National Projects which is called the State Agency for Investment and Management of National Projects of Ukraine (Invest Ukraine). Its activity is based on a priority investment funds over the government budget funds and partnership with the world's best companies.36 The ―National Projects‖ are based on the principles:  Project management  Partnership with top-ranked companies The main sources of financing of the ‖National Projects‖ are:  Private investments  International Financial Institutions  Loans and projects financing As of October 2012, Ukraine has eleven ―National Projects‖. The list is the following: 1. ―LNG Terminal‖: sea terminal for liquefied natural gas 2. ―Air Express‖: construction of railway from Kyiv to ―Boryspil International Airport‖ 3. ―Open World‖: introducing 4G technologies into educational management system 4. ―Clean City‖: update system of waste recycling complex 5. ―Affordable Housing‖: construction of affordable housing 6. ―Olympic Hope 2022‖: creation of sports and tourism infrastructure 7. ―New Life‖: presentation of maternity and childhood protection 8. ―Quality Water‖: ensuring Ukrainians with high quality potable water 9. ―Danube Corridor‖: development of transport connection in the Danube region 10. ―Energy of Nature‖: construction of solar hydropower station, production of alternative fuel 11. ―FutureCity‖: formation of strategic plan and project system of the city development.37 36 The National Projects. The Governmental Portal. Retrieved from: www.ukrproject.gov.ua 37 National Projects. Invest Ukraine 2012. Retrieved from : http://investukraine.com/investment- opportunities/national-projects
  36. 36. 36 Among the long-term projects, ―LNG Terminal‖ and ―Energy of Nature‖ are the two most promising opportunities projects for European foreign direct investments. The table below describes the two projects in brief. Project name LNG Terminal Energy of Nature Project summary Construction of a sea terminal for liquefied natural gas (LNG). Develop a bioenergy industry in Ukraine (wind energy, biomass, solar energy, and hydro energy). Project timing Phase I: 2015 Phase II: 2016. Estimated 1.5 years. Level of investment US$ 1.5-2 billion. 7 million Euros. Payback period 8-9 years 5 years The ―National projects‖ offer for investors from around the world unique opportunities to open Ukraine as a country with extraordinary investment opportunities and comfortable investment climate. These development projects have to become a driving force for the development of the economy, and their implementation will be a part of the structural reform of the economy. They are implemented under the innovative technologies and practically form some new industries. Each national project has long-term strategic goals.
  37. 37. 37 3. Potential and risk of the European –Ukrainian collaboration 3.1.Possibility and goal of the EU-Ukraine Association Agreement 3.1.1. Background of the Association Agreement Being the major participant of the Eastern Partnership, Ukraine considers The Eastern Partnership as an instrument for collaboration with the EU, namely within the strategic directions of cooperation such as negotiation on the EU-Ukraine Association Agreement, which is to be the successor agreement to the Partnership and Co-operation Agreement. The Association Agreement it is the first agreement based on political association between the EU and any of the Eastern Partnership countries. The first negotiation on the new EU-Ukraine Agreement including the aspect of Free Trade Agreement (FTA) began in 2007.38 The idea to negotiate a FTA with Ukraine is actually a part of the EU’ policy to create a prosperous European neighborhood environment via closer economic relations. Soon after Ukraine gained a status of a World Trade Organization’s member in February 2008, the negotiation on the Association Agreement were raised up during the EU-Ukraine summit in Paris. The mutual understanding of the text of the Association Agreement was achieved between the leaders of the EU and the President Viktor Yanukovich on 19 December 2011. The initialing of the Association Agreement between Ukraine and the European Union was launched according to the agreements achieved by their leaders during the EU-Ukraine Summit in Brussels on 30 March 2012. The two parties initialed the statements in the text of the Association on establishment of a Deep and Comprehensive Free Trade Agreement.39 The Association Agreement constitutes a wide range of sector cooperation which is focused on progressive reforms. It contains a brand new philosophy of the relations between the EU and Ukraine since it contains new economic and political integration principles. Negotiations on the Association Agreement have been built with a "modular" approach. In particular, the transition negotiation process took place within the following individual workgroups:  Foreign policy and security cooperation;  Field of justice, freedom and security;  Economic, sectoral issues and issues of human development;  FTA. Basically, the draft of the Association Agreement is based on three pillars: 38 Delegation of the European Union to Ukraine. Association Agreement. The European Union and Ukraine have initiated an Association Agreement as part of a joint effort to further strengthen the ties and bonds between them. Retrieved from:http://eeas.europa.eu/delegations/ukraine/eu_ukraine/association_agreement/index_en.htm 39 EU-Ukraine Action Plan. Mission of Ukraine to the European Union. Documents / Ukraine-EU bilateral documents / Main instruments. Retrieved from: http://ukraine-eu.mfa.gov.ua
  38. 38. 38 1. Wide range of cooperation: rule of law, good governance, human rights, core reforms on economic recovery, sector cooperation in energy, transport, environment protection, education, equal rights, SME cooperation. 2. Mobility: liberalizing the visa regime for Ukrainian citizens for short term travel to the European Union. 3. Trade related matters: Deep and Comprehensive Free Trade Area (DCFTA) is an important integral element of the Association Agreement goes that far beyond WTO regulations. DCFTA will create business opportunities between the EU and Ukraine. The DCFTA is much larger than a typical free trade agreement. It considers not only the lifting of tariff and non-tariff barriers but also, more importantly, Ukraine adopting EU legal solutions and standards in this area. The key elements of the DCFTA are the following:  Market access for goods  Trade remedies  Technical barriers to trade  Sanitary and phytosanitary (SPS) measures  Customs and trade facilitation  Establishment, trade in services and electronic commerce  Trade and sustainable development  Mediation mechanism  Transparency  Public procurement  Intellectual property  Competition  Dispute settlement 3.1.2. Ukraine’s interests in the Association Agreement In recent years, the share of the EU market has reached an average of 33% of the total exports of Ukraine. Share of imports from the EU member countries averaged 35.6%. The EU market differs significantly from others by its higher tariff protection especially on agricultural goods and products. Under the agreements of the parties, liberalization will cover more than 97% of tariff lines (or more than 95% of the volume of bilateral trade between the EU and Ukraine). In this case, cancellation fees on importable EU goods will take place in the first year of the agreement (on 99% of tariff lines).40 The establishment of a Free Trade regime with the EU member states would enhance the export conditions of the Ukrainian products to the EU. Indeed, the EU market would become open for Ukraine by removing or reducing import tariffs and quotas. It would also eliminate non-tariff barriers by harmonizing laws, standards and regulations across all economic 40 Ihor Prasolov, Minister of Economic Development and Trade of Ukraine. Panel discussion report ―DCFTA between Ukraine and the EU: prospects for business and investment‖. The First International Annual Business Conference ―ABC Ukraine and Partners‖ on June 13-14, 2013. Retrieved from: http: www.ukraine-partners.org
  39. 39. 39 sectors. It would therefore boost economic growth, increase trade, attract investments and transform the Ukrainian economy to the European standard economy. For Ukraine, the Association Agreement is the most effective tool for large-scale political and economic reforms in the country. In fact, we can consider the Association Agreement as an instrument to achieve the relevant criteria for EU membership. Ukraine as a European State in accordance with the Treaties the EU has a full right to acquire the EU membership status, if the both parties are ready. The relevant provisions supporting the European choice of Ukraine are fixed in the draft of the Agreement. The DCFTA included in the Association Agreement is based on the economic requirements for EU membership. That makes this Free Trade Agreement different and highly important for Ukraine which has future ambitious plans to access to the EU. Ukraine has to adapt its current economy and legislation to the EU standards. Therefore, it is a kind of probation for Ukraine: if, upon the conditions that all the DCFTA requirements are respected, the EU would hardly refuse Ukraine in the membership. 3.1.3. European Union’s interests in the Association Agreement Ukraine is the largest partner of the European Union within the Eastern Partnership initiative but it represents only about 2% of trade for the EU so there is huge potential for growth. It goes without saying that upon the signature of the DCFTA, the EU companies are expected to obtain opportunities of investment in the Ukrainian business and enjoy the absence of custom duties. However, apart from the trade interest and the investment opportunities represented by the Association Agreement, there is another less visible component which is the geopolitical factor. Indeed, Ukraine borders with four EU’s member states: Poland, Romania, Hungary and Slovakia. It is naturally for the EU to be concerned by creating a safe and strategically reliable partnership on its East borders. The EU authorities realized that Ukraine is a key intermediary in the transportation of energy supplies to the EU. A strategically significant oil pipeline Odessa-Brody runs from Black Sea to Brody, with Ukrainian-Polish border. The pipeline is transferring Caspian oil to the Central Europe through the territory of Ukraine. The European Union is interested in reducing the dependence on Russian oil and diversifying the suppliers as due to the unstable relations between Russia and Ukraine. For example, in 2004 and 2010, Russia already blocked the Caspian oil that was aimed to Poland through Ukraine. Concerning the gas transit system, some opinions are shared about the EU vital interest in reforms and modernization in Ukraine. The EU is interested in getting engaged with Ukraine by the Association Agreement as it may give an access to management of the gas transit system together with Russia. ―It is a kind a geopolitical game regarding the modernization of the pipelines; Russia is willing to build more pipelines dispatching Ukraine. If the modernization of Ukraine’s gas transit system proceeds, the EU would be a facilitator for
  40. 40. 40 European investors to join the process.‖41 Balazs Jarabik, from the European Council on Foreign Relations told to New Europe magazine. The EU is aware of the Ukraine’s needs in diversifying its suppliers of gas as the price it pays for Russian gas is more expensive than the price it can pay for the German gas for example. It is also well known that Ukraine's gas transportation network includes extensive underground reservoirs capable of holding over 30 billion cubic meters of natural gas. Consequently, it can be a good gas reservoir for Europe. This agreement bears a power level political character. Ukraine is demonstrating its commitment to the European choice. Europe, as former Chancellor of Austria A. Gusenbauer has said, wants to keep Russia from «getting its hands on Ukraine».42 The Association Agreement between the EU and Ukraine is regarded as a guarantee that Ukraine will not participate in any integration processes in the post-Soviet area, like the Customs Union of Belarus, Kazakhstan and Russia for example. 3.1.4. European Union’s expectations from Ukraine The EU-Ukraine Association Agreement is rather ambitious as it covers a wide range of sector collaboration. The Association Agreement imposes a full respect for democratic freedom, human rights and rule of law. Ukraine hopes to have the agreement signed at the 28- 29 November during the Eastern Partnership Summit, to be held under the Lithuanian EU presidency. However, notwithstanding the mutual interests in Agreement’s ratification, Ukraine still has to prove to the European Union that it is ready to sign it. The Ukrainian government is highly expected to pass reforms aimed at improvement of investment climate and preparation for the introduction of the free trade area with the EU. Also, the bills at amending the Constitution of Ukraine, as well as the reform of the judiciary and the Prosecutor’s Office should be adopted. Mostly, there are three important areas in which Ukraine should stimulate efforts to achieve progress for the signing of the agreement. These are:  the reform of the judicial system;  the reform of the electoral law;  the issues of selective justice. In order to sign the Association Agreement and DCFTA, Ukraine was given a list of criteria to respect before the Eastern Partnership Summit in November 2013. These criteria were named after the European Commissioner for Enlargement and European Neighborhood Policy Štefan Füle, Füle’s criterias.43 Mainly, the Füle’s List foresees implementing sectoral reforms and efficacy of Ukraine’s anticorruption campaign. 41 Kostis Greipoulos. (24 April 2013). EU-Ukraine play each other on pipeline. New Europe. Retrieved from: http//: www.neurope.eu 42 Natalia Meden. (26 June 2013). What lies behind the idea of the EU-Ukraine Agreement. Strategic Culture Foundation Online Journal. Retrieved from: http://www.strategic-culture.org 43 Milan Leilich. (21 February 2013). The « window of opportunity » for European Integration will be closed by Ukraine. The Ukrainian Week. Retrieved from : http://ukrainianweek.com/Politics/72887
  41. 41. 41 The President of Ukraine, Viktor Yanukovich, reassured the EU authorities saying in July 2013 that the parliament will vote all the necessary laws for the signing of the Association Agreement with the EU before the summit that will be held in November 2013 in Vilnius: ―I hope that these laws will be passed in September, along with the laws amending the Constitution, which have already undergone necessary internal procedures.‖44 Nevertheless, the unsettled matter with former Prime Minister Yulia Tymoshenko’s imprisonment remains a very sensitive point to the EU authorities. The Ukrainian authorities are under intense pressure to release Yulia Tymoshenko. Shall Ukraine, in a name of political freedom and democratic improvements, release Mrs.Tymoshenko before the Summit in Vilnius or not? At which degree this issue may obstruct the possible signing of the Association Agreement? The President of Lithuania, Dalia Grybauskaite, said that the Ukrainian government must find a solution to resolve the problem with jailed former Ukrainian Prime Minister Yulia Tymoshenko for signing the Association Agreement with the European Union. In the beginning of July 2013, she said during a press conference in Vilnius: ―As regards Ukraine, there are still a lot of obstacles. Ukraine has to handle the Tymoshenko case. This is absolutely necessary otherwise we won't be able to move forward towards the signing of the Association Agreement.”45 The German Foreign Minister, Guido Westerwelle, noted in June 2013 a struggle of Ukraine to the reforms for signing of the Association Agreement: “I see Ukraine as an integral part of Europe and as a bridge between East and West. However, Ukraine still has much to do in the reforms process, in particular in the legal and judicial fields.”46 The possibility of signing the Association Agreement in November 2013 will depend on the accomplishment of Ukraine’s commitments to the EU. The European Union expects the amelioration of democracy in the country and the rule of law concerning the imprisonment of the former Prime Minister. If the « tasks » given by the EU would be implemented, the Association Agreement and DCFTA could be signed and obviously it may be win-win contracts. 44 Interfax-Ukraine. (03 July 2013). Yanukovich: Rada will pass European integration bills by deadline. Kyivpost. Retreived from: http://www.kyivpost.com 45 Interfax-Ukraine. (July 04 2013). President of Lithuania Dalia Grybauskaite: Situation with Tymoshenko must be resolved for signing the EU-Ukraine Association Agreement. KyivPost. Retrieved from: http://www.kyivpost.com 46 Interfax-Ukraine. (22 June 2013) .German Foreign Minister hopes for signing of EU-Ukraine Association Agreement in fall. Kyivpost. Retrieved from: http: www.kyivpost.com
  42. 42. 42 3.2.Political reality in Ukraine: its influence on the relations with the European Union. 3.2.1. Ukraine between East and West Nowadays, Ukraine has to take a historic decision weather to sign an Association Agreement with the EU or to join the Customs Union, which is part of the Eurasian Economic Union. Ukraine's choice will determine the country's development over the next decade. Customs Union within the Eurasian Economic Union, including Russia, Belarus, Kazakhstan and Kyrgyzstan soon – is the alliance of a single customs territory, within which there is a duty- free trade. Ukraine proposed only a status of observer in the Customs Union. Official Kiev has repeatedly offered cooperation in the format "3 +1".47 However, the leader members of the Customs Union rejected this proposal. In fact, Ukraine doesn’t want to enter to the Customs Union as a full member because the country’s authorities declared the European integration as a defining vector of Ukraine’s foreign policy. European integration for Ukraine is more a geopolitical project, whereas the Customs Union is primarily an economic project of post Soviet countries. It is obvious that Ukraine’s integration into Western structures would change the strategic balance in Europe. For Russia the priority is to build the Customs Union and further the Eurasian union within the post-Soviet area. Thus, if Ukraine doesn’t join the Customs Union, it is expected that it will not obtain any future economic concessions from Russia. 47 Roman Osharov.( 30 July 2013). Ukraine-European integration or Eurasian alternative. The Voice of America newspaper. Retrieved from : http://www.golos-ameriki.ru/content/ro-russia-ukraine-eu/1713334.html Ukraine’s political and economic orientation depends on the President and government at power. The question to be pro-Western or pro-Russian has been always risen by the Ukrainian government since the fall of the Soviet Union. Clearly, in terms of economic help, Ukraine's biggest financial support has been Russia. However, Ukraine has recently been demonstrating a pro-European direction in its foreign policy. Russia is also one of the top trade partners for Ukraine. The volume of bilateral trade exceeded 50 USD billion in 2011, whereas it was only 6 USD billion with Poland.1
  43. 43. 43 The result, relations between Russia and Ukraine are worsening every day. During last visit late July, Putin met with Ukrainian President Viktor Yanukovych. Along with the issues of gas sales and the new Ukrainian tax on car imports from Russia, on the agenda was the concern of Moscow about rapprochement between Ukraine and the EU. The Russian answer on Ukraine’s foreign policy inspiration concerning the European integration and the Association Agreement negotiation was not waiting for a long delay. On July 29, 2013 Russia imposed a ban over quality concerns on Ukrainian sweets Roshen. Roshen is a brand owned by former foreign minister Petro Poroshenko. Taking into consideration that the Roshen’s principal export markets are: Russia, Kazakhstan, Uzbekistan, Kyrgyzstan, Azerbaijan, Armenia, Moldova, Estonia, Latvia, Lithuania, the United States, Canada, Germany and Israel, it is more probably a politically motivated decision.48 It is a tool of political and economic pressure on Ukraine. It is a demonstrative punishment, a demonstrative flogging of Ukrainian oligarchs who support European integration, a signal for the rest of the businessmen that the same thing could happen with them.49 The Times magazine (31 July 2013). 3.2.2. The risk for Ukraine for signing an Association Agreement with the EU The political conflicts inside the ruling Party of regions at the Ukrainian government don’t cease to stop. The deputy members argue about country’s foreign policy direction, either European or Russian one. Some of the party members claim that a number of points of agreement with the EU, contrary to the Ukrainian Constitution. In fact, there is a very big risk for not ratifying an Association Agreement in November because of inner governmental fights. The deputy, a Party of Regions member Oleg Tsarev in his interview to Forbes Ukraine: ―I have a law firm conclusion that the six-point of the Association Agreement” are contrary to the Constitution of Ukraine. If a group of deputies from the Party of Regions appeal to the Constitutional Court, it will make a decision on the unconstitutionality of the agreement with the EU.”50 This doesn’t imply that Ukraine will not be able to sign the Association Agreement; it might, but not in November 2013, only after the amendments to the Constitution, and it is not a quick process. According to the opponents to the European integration, joining the Customs Union has a lot of benefits. A rejection from European integration in the near future will allow Kiev to get a loan from Russia at 15 USD billion.51 Moreover, a price for Russian gas 48 Interfax-Ukraine. (6 August 2013). Ukraine hopes to start talks with Russia soon. Kyivpost. Retrieved from : http// : www.kyipost.com 49 Ben Hoyle. (31 July 2013). Russian ban on chocolate is soar grapes. The Times Europe. Retrieved from : http://www.thetimes.co.uk 50 Maria Djartovkskaya. Interview with Oleg Tsarev, member of Party of Regions (6 August 2013). Putin can nominate his candidate against Yanukovich on the Presidential elections. Forbes Ukraine. Retrieved from : http://forbes.ua/nation/1356267-sovetnik-azarova-putin-mozhet-vystavit-svoego-kandidata-protiv-yanukovicha 51 Maria Djartovkskaya. Interview with Oleg Tsarev, member of Party of Regions. (6 August 2013). Putin can nominate his candidate to the against Yanukovich on the Presidential elections. Forbes Ukraine. Retrieved from : http://forbes.ua
  44. 44. 44 by Ukraine, often called excessive, may be reduced in the case of Ukraine's accession to the Customs Union. In case of Ukraine refusal to join Customs Union or give up control of its domestic gas network, Moscow will go ahead with the new South Stream pipeline project and isolate Ukraine’s energy economy from Europe, depriving it of any leverage on Russia and forcing it into total dependence on Russia.52 Meanwhile the EU is very concerned about ensuring the proverbial energy independence (from Russia, naturally) not for Ukraine, but for itself. That’s why the EU is very concerned about that Ukraine raising awareness about the energy security. Some European companies very well realized the situation of a strong dependence from Russia and high prices on gas for Ukrainian market. For example, the German company RWE Supply & Trading GmbH has started selling gas to Ukraine. The volume of gas supplied by Germany to Ukraine in the first 7 months (November 2012 – June 2013) was 420 million cubic meters for the 407 USD.53 Currently the European Commission is striving toward the unification of networks, which requires colossal investments in the construction of connecting segments; therefore, the use of Ukraine's already existing capacity for gas storage would be, from the European Commission's point of view, an optimal solution. Because of possibility of the commercial war with Russia and also because of political closure of the Ukrainian parliament, Ukraine might prevent a chance to step toward the European Union. Signing an Association Agreement would represent the failure of its Partnership with Russia and ex-Soviet countries. 3.2.3. The lack of democratic freedom The independence of the judicial system has significantly diminished since Viktor Yanukovych was elected as the President of Ukraine in February 2010. The status of the Ukrainian parliament decreased and the opposition remained fragmented.54 The imprisonment of the former Minister of Interiors Affairs Lutzeko and former Prime- Minister Yulia Tymoshekno became the main problem in the Ukraine’s EU integration plan and an obstacle in European-Ukrainian cooperation in general. The politically motivated criminal case against Tymoshenko, was obviously evidence of a broadly antidemocratic policy that have damaged Yanukovych’s relations with the United States and Europe. For the EU authorities the persecution of political opponents is absolutely unacceptable. In October 2011, Yulia Tymoshenko was condemned to seven years of prison and accused of abuse of power and embezzlement. However, she claimed that her imprisonment was commanded by Yanukovych in order to eliminate a dangerous opponent from political stage 52 Stephen Blank (22 January 2013). Ukraine between East and West. The Ukrainian Week. Retrieved from : http://ukrainianweek.com/World/70377 53 Natalia Meiden. (26 June 2013) .What lies behind the idea EU-Ukraine Association Agreement. Strategic culture foundation. Retrieved from: http://www.strategic-culture.org 54 Oleksandr Sushko. Nations in transit. Ukraine. National Democratic Governance 2013. Freedom House. Retrieved from: http://www.freedomhouse.org/report/nations-transit/2013/ukraine
  45. 45. 45 ahead of 2015 presidential polls. The situation with Yulia Tymoshenko in prison caused a global response of Europe and USA. For example, Ukraine football matches were boycotted by the European leaders during the EURO Football Championship held by Poland and Ukraine in 2012. However, the Ukrainian government zealously claimed that Tymoshenko’s verdict was justified and had no political background. Knowing that the EU authorities expect the progress of democratic reforms for signing the Association Agreement, Viktor Yanukovitch pardoned a jailed opposition leader Yuri Lutsenko. His release was the most significant political event of the first half of 2013. The Western officials welcomed the move, but warned that it might not be sufficient for Ukraine to secure the Association Agreement. The key barrier on the Ukraine's path to the political- association and free-trade agreement with the EU remains the imprisonment of the former Prime-Minister.
  46. 46. 46 Conclusion Finally, significant findings emerge from this study are explaining the thesis’s problematic which stands for the comprehension if Ukraine and the EU can be reliable economic and business partners for each other. This assignment set out to determine importance of the mutual interests and risks in collaboration between the EU and Ukraine. The analysis of Ukraine as an emerging free market country underlines the characteristics of its economic conditions and business environment explaining the country’s major strengths and weaknesses. The results of this research support the idea that Ukraine possesses characteristics, which are attractive for the neighboring European Union. Most attractive characteristics are:  Large emerging market with 47 million populations growing in their purchasing power.  Strategic geopolitical location: second largest country in Europe which lies on the crossroads of the trade routes between Europe, Russia, Central Asia and Middle East.  Key intermediary in the transportation of energy supplies to the EU.  GDP sustainable growth.  Skilled and competitive labor force  Rich natural resources  Membership in several international organizations ( UNO, WTO, OSCE, IMF, World Bank, ERBD, Council of Europe) and close cooperation with others (OECD, NATO, IEA). However, Ukraine’s business climate still remains challenging and includes a lot of constraints. Political instability in the country caused by a race for power inside the government, and also constant changes of the regulatory laws by the Ukrainian government affect a lot the foreign businesses climate. The administrative barriers like corruption, tax difficulties, complicated customs procedures and unpredictable judicial system strongly hinder the business in Ukraine. European credit insurers like Coface and the Office national du ducroire determine the country’s risk assessment as very high due to the trade security weakness and a bad political environment. Nevertheless, this research has shown that the EU-Ukraine economic relations and partnership have developed deeply since the establishment of the official relations in 1998. Ukraine has proved to be a priority partner country, mostly in energetic sphere, within the European Union’s initiatives such as the European Neighborhood Policy and the Eastern Partnership. The EU in its turn is Ukraine’s first largest trade partner and one of the major financial supporter. The trade of manufactured goods and agricultural production predominates. Nowadays, the European Union is the biggest source of FDI inflows into Ukraine. The EU countries that invest the most in Ukraine are Germany, Austria, the Netherlands, France and Cyprus mainly in the process industry and financial activity sector. After Ukraine’s accession to the World Trade Organization in 2008, the economic relations with the EU were enforced. This work introduces a theoretical contribution to discovering existing potential for deepening the collaboration between the EU and Ukraine by analyzing the investment environment in Ukraine at a general level. The empirical findings in this study provide the
  47. 47. 47 EU companies with some recommendations based on a sectorial assessment in two pilot sectors that have been identified as the most promising ones: agribusiness and biomass-based production energy. Suggestions were justified by global trends and future demand as well as by Ukraine’s competitiveness sources. Both sectors have strong existing production capabilities and benefit from favorable nature endowments. Regarding the agribusiness sector, the results of this study confirm additional evidence offering that emerging economy, as Ukraine is, draws a lot of attention for large-scale investment in agricultural sector. This accounts for Ukraine’s rich agricultural resources with fertile land. In addition, the EU agribusiness companies can benefit from significant cost advantage, with production costs estimated at around half of those of other European producers, such as Germany. Agribusiness companies in Ukraine are foreseeing a strong growth of profitability in future years, especially in grain exports. The other sector examination also proves actuality and necessity for the EU member states for investing into Ukraine’s energy based on biomass production and development taking into consideration country’s abundant agricultural and forestry wastes. But still, the transition to these alternative energy sources will depend a lot on the government steps to establish credibility and securing long-term stability demanded by domestic and European investors. Returning to the question posed at the beginning of the thesis, let’s size up the following situation. Actual economic relations between the EU and Ukraine demonstrate determination to have a high-level partnership. A negotiation process launched for signing the advanced EU-Ukraine Association Agreement can also confirm this. A new philosophy seized in this agreement represents qualitatively new level of contact, more advanced, leading to political and economic integration. This integration includes a DCFTA, which envisages an establishment of a deep and comprehensive free trade zone between Ukraine and the EU. This will result into opening to the Ukrainian businesses a market ten times larger than other of the neighboring countries. For the EU, Ukraine, on its part, gives opportunities to become a major trade partner and attractive place for investment where EU companies can enjoy the absence of custom duties. The EU and Ukraine, both members of the WTO, are in a process of development of a high level partnership to extend their economic relations for deeper reasons. In general, it seems that it is a win-win agreement as they both pursue their own political interests. Ukraine sees it as a first step to future EU membership as it is the biggest goal of its foreign policy. On its side, the European Union is interested to have a secure neighbor on its Eastern borders. Ukraine can be a reliable partner to the EU in the energy sector thanks to its gas transportation system and gas storage facilities. That’s why the Association Agreement also contains issues concerning energy efficiency and security of supply. Ukraine’s energy independence directly affects and concerns the EU. The signing Association Agreement may be a defining moment in the history of the economic relations of the EU and its non-member partner Ukraine. Its possible ratification is forecasted coming November, during the Eastern Partnership Summit in Vilnius. However, for implementing the Association Agreement with Ukraine, the EU wants to be sure of its adherence to the European values and democratic standards. The last point is rather sensitive considering the imprisonment of former Ukrainian political leaders, among them the ex-Prime-Minister, Yulia Tymochenko, who was condemned to seven years of prison for abuse of power and embezzlement. The EU authorities expect some progresses in
  48. 48. 48 strengthening democracy, respect for rights of people and freedom of expression. The next few months Ukraine will show how it moves towards the reforms of the judicial system. Even if on the path to the European integration Ukraine risks to be involved into a commercial war with its ―older brother‖ Russia, the engine of the train to Europe has already been started and clearly Ukraine is not going to get off before the final destination. The main limit of this study was the paucity of printed editions and surveys neither in English nor in Ukrainian dated 2013 or 2012 on Ukraine and the European Union economic relationship. Another issue that was not addressed in this study was whether aspiration of the EU authorities and Ukraine’s government corresponds to the population expectation and future hopes of both parties. Future researches should therefore concentrate on the investigation of the upcoming months situation with Ukraine’s accomplishment of the reforms and commitments in front of the EU, which are necessary for signing the Association Agreement and DCFTA. It is recommended that further studies be undertaken in the following area: prospective of the EU-Ukraine relations after signing or failure of the Association Agreement.