Having gained its independence in 1991 Ukraine, with a highly skilled population of 50 million, was universally perceived to be the top candidate for becoming a vibrant economic power once it had embarked on the road of economic transformation. It was not to happen, at least not at once. It took two years of half-hearted reform, election of a new president and inflation hitting some 10,000% a year before the turn-around occurred.
At present Ukraine is making headlines again by being on the cutting edge of economic reform complete with full-scale price liberalisation, rapid privatisation, sound financial policies in place and the support of the IMF, who require that Ukraine completes this year with inflation well under control at a monthly 1.9%.
Although initially slow off the mark, Ukraine has recently been stealing the limelight for the right reasons, starting with its Autumn 1994 ratification of the Nuclear Non Proliferation Treaty and followed by a very positive visit made by President Clinton this summer. Even though still overshadowed by Russia, Ukraine outscores its larger neighbour on many counts. This is particularly the case in terms of raising domestic prices for commodities to near world level prices (thereby reducing state subsidies) and significantly boosting its exports, now mainly oriented towards the West and comprising many high value-added products, to more than half of its GNP.
The high points of the year, to name just a few, include further reinforcement of IMF-inspired strong monetary policies resulting in monthly inflation falling from 75% last November to 4% this July, foreign exchange rules under which convertibility of the national currency was assured, introduction of an equitable company tax system and initiation of a massive privatisation drive aiming to put into private hands 9,000 state enterprises before the year-end. Remarkably, in getting state properties into private ownership, an important watershed has just been passed: it was reported that as of this July 51% of Ukrainian industry was private. This is all the more remarkable considering the stalled economy which the newly-elected President Kuchma inherited in the summer of 1994.
Still to come are more radical reforms, one important factor of which is the introduction of the fully-fledged national currency - the hryvnya - announced to take place this autumn. The consensus is there is no turning back for Ukraine and the only way is forwards.
Tax and Investment
It used to be thought by the Ukrainian government that by giving generous 5 year corporate tax breaks to foreign investors Ukraine could lure more inward investment. As this approach failed to work, Ukraine at the start of 1995 converted to a totally different system of charging company tax thereby levelling the playing field for both national and foreign investors.
Under the law effective 1 January 1995, the base rate is set at 30% charged on net profits with production costs and payroll deductible (as opposed to the former rules taxing employment costs as well). Apart from that, no 5 year corporate tax holidays are any longer available to firms with qualifying foreign investment incorporated after 1 January 1995. Other than that, the foreign investment regime overall has so far been kept intact.
1995 has seen major liberalisation of foreign trade as Ukraine seeks to access the World Trade Organisation whereby export licensing and quotas requirements have been abandoned. At the same time, in a bid to combat capital flight and counter charges of dumping, the government has introduced registration of certain types of exports.
In the most recent development, the President of Ukraine has issued a decree introducing anonymous hard currency accounts thus offering additional scope for managing the financial affairs of representative offices and foreign subsidiaries.
Overall, in the course of the year things have changed for the better. The bold investor is now being rewarded with the pick of the best privatising companies - something which is attracting significant interest from Russian as well as Western investors. That is not however to say that everything goes smoothly in Ukraine, particularly in regard to the frequently changing legislative base, but with the right professional assistance investment in Ukraine is becoming a real possibility.
Coopers & Lybrand in Ukraine provides accounting, taxation, and consultancy advice to Ukrainian companies and the government as well as overseas companies investing in Ukraine. The firm has more than 50 staff in Kiev and is active throughout Ukraine.
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