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Ukraine: Market Profile

Picture: Ukraine factsheet
Picture: Ukraine factsheet

1. Overview

The government has committed to an ambitious and wide-ranging reform agenda that has resulted in significant fiscal consolidation, a move to a flexible exchange rate, reformed energy tariffs, more transparent public procurement, simplification of business regulations, stabilising and restructuring the banking sector, a package of health reforms, and the establishment of anti-corruption agencies. These reforms will need to be advanced further for Ukraine to achieve a sustainable recovery, a process that the World Bank's 2017-2021 Country Partnership Framework has been established to support. Ukraine needs stronger institutions to bolster the business environment and investment climate; without lowering various barriers to entry and making business-friendly changes, the country will continue to lag its international competitors. Institutional weakness also means that Ukraine is recognised as having one of the world's largest shadow economies, and formalising just a portion of that would benefit recorded economic growth. Despite the ongoing security crisis, Ukraine's proximity to both the European Union (EU) and countries such as Russia and Kazakhstan, its large consumer base and the physical size of the country are key factors that boost its long-term investment attractiveness. Ukraine's agricultural sector, once considered to be the breadbasket of Europe, also has significant potential. The country's main asset is its extensive human capital: a well-educated workforce provides a competitive advantage. Poverty remains above pre-crisis levels, but declined slightly in 2017 owing to the modest economic recovery and wage growth.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

March 2016
Ukraine joined the WTO Agreement on Government Procurement, giving Ukrainian companies the right to participate in public procurement in 45 countries, including EU countries, Canada, Hong Kong, Japan, South Korea, Singapore, Taiwan and the United States. The agreement also required Ukraine to follow WTO rules for public procurement.

June 2017
The 2017-2021 Country Partnership Framework between the World Bank and Ukraine began, with a focus on creating the conditions for fiscal and financial stability that would enable Ukraine to achieve a lasting economic recovery that benefits the entire population.

July 2017
Ukraine’s association agreement with the EU was ratified by all signatories and came into force on September 1, 2017.

July 2018
The Ukraine State Fiscal Service published a guidance letter noting that Ukraine's tax treaty with mainland China applies to all the territory of mainland China where mainland Chinese legislation on taxation applies. As such, the treaty does not apply to territories with a separate tax system, including Hong Kong. Based on this, a Hong Kong resident will be taxed in accordance with the Ukraine Tax Code on income sourced from Ukraine, regardless of whether or not residence certification is provided, because the tax treaty does not apply.

November 2018
The European Court of Human Rights has ruled that Ukraine needs to pay compensation to those whose rights have been violated by the country's moratorium on the sale of farmland.

Germany and Ukraine signed a social security agreement.

March and October 2019
Presidential and parliamentary elections are scheduled.

Sources: BBC country profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Ukraine real GDP and inflation
Graph: Ukraine real GDP and inflation
Graph: Ukraine GDP by sector (2017)
Date last reviewed: March 25, 2019
Graph: Ukraine GDP by sector (2017)
 


e = estimate, f = forecast
Sources: IMF, World Bank

Graph: Ukraine unemployment rate
Graph: Ukraine unemployment rate
Graph: Ukraine current account balance
Graph: Ukraine current account balance

e = estimate, f = forecast
Source: IMF
Date last reviewed: March 12, 2019

4. External Trade

4.1 Merchandise Trade

Graph: Ukraine merchandise trade
Graph: Ukraine merchandise trade

Source: WTO
Date last reviewed: March 12, 2019

Graph: Ukraine major export commodities (2017)
Graph: Ukraine major export commodities (2017)
Graph: Ukraine major export markets (2017)
Graph: Ukraine major export markets (2017)
Graph: Ukraine major import commodities (2017)
Graph: Ukraine major import commodities (2017)
Graph: Ukraine major import markets (2017)
Graph: Ukraine major import markets (2017)

Sources: Trade Map, Fitch Solutions
Date last reviewed: March 12, 2019

4.2 Trade in Services

Graph: Ukraine trade in services
Graph: Ukraine trade in services

Source: WTO
Date last reviewed: March 12, 2019

5. Trade Policies

  • Ukraine has been a member of the WTO since May 16, 2008.

  • Trade bureaucracy and customs delays are a significant hindrance to foreign investors. In recent years, Ukraine’s trade flows have benefitted from low tariffs, which have an average rate of 2.1%.

  • The size of import duties is variable and often depends on whether the item being imported is similar to a domestically produced item, in which case the duty is usually higher. Import tariffs range from 2-50%. Excise taxes can be up to 300%, with alcohol, tobacco, petroleum products and automobiles generally subject to higher excise duty.

  • Tariff charges are mostly lifted for trade between members (Russia, Belarus, Uzbekistan, Moldova, Armenia, Kyrgyzstan and Kazakhstan) of the Commonwealth of Independent States (CIS), with which an free trade agreement (FTA) is in place.

  • In 2015, Ukraine introduced an export ban on pine and unprocessed timber for a period of 10 years. There are export quotas in place for copper slag, ash and residues (waste) containing primarily zinc and raw minerals. There are also licensing requirements for the exports of certain goods containing alloyed ferrous metals, non-ferrous metals and their alloys.

  • Ukraine replaced export quotas on certain agricultural products with export tariffs (9% but not less than EUR17/tonne for wheat, 14% but not less than EUR23/tonne for barley and 12% but not less than EUR20/tonne for maize).

  • There are also import licensing requirements with respect to insecticides (except veterinary medicinal products), fungicides, herbicides, means to prevent germination and plant growth regulators, rodenticides (except veterinary drugs) and similar products (except disinfectants).

  • The Ukraine has imposed various anti-dumping measures on a wide range of products, predominantly in the areas of textiles, vehicles, steel, some electrical goods, wood-fibre boards, and machinery on goods coming from Russia, China and a few other Asian nations to protect domestic industries.

  • In November 2015, the Ukrainian authorities imposed a definitive countervailing duty on the import of cars from Russia. The rate of duty imposed is between 10.4% and 17.66%, depending on the company. The duty is in force from January 2016 for a period of five years.

  • Ukrainian exports have been hurt by Russia’s ban on imports of dairy, chocolate, fruits and vegetables, which has contributed to Russia having fallen behind the EU as Ukraine’s largest export destination in recent years.

Sources: WTO – Trade Policy Review, Fitch Solutions, Global Trade Alert

6. Trade Agreement

6.1 Multinational Trade Agreements

Active

  1. Ukraine-Israel: Signed in January 2019 during Ukrainian President Petro Poroshenko's state visit to Israel. Israel's import profile of Ukrainian goods is largely made up agricultural goods such as wheat, corn, soybean and barley, as well as some metal products (such as raw iron bars). Ukraine's biggest import from Israel is pesticides, which is regulated through the need to obtain licensing for import.

  2. Armenia-Ukraine: This agreement became effective in December 1996. Ukraine's exports to Armenia include meat, dairy products, vegetables and cereals. Armenia's exports to Ukraine include electro-technical products, alcoholic beverages and mineral water.

  3. Azerbaijan-Ukraine: This agreement became effective in September 2006. The goods imported by Ukraine from Azerbaijan are mainly metallurgy products, machine-building products, agro-industrial products and chemical industry products. The main goods exported from Azerbaijan to Ukraine are generally products of the fuel energy industry, chemical industry products and agro-industrial products. The trade turnover between the two countries amounted to USD810 million in 2017 (latest data available).

  4. Georgia-Ukraine: This agreement became effective in June 1996.

  5. Georgia, Ukraine, Azerbaijan, Moldova (GUAM) FTA: This agreement has been in effect since May 2006.

  6. Kazakhstan-Ukraine: This agreement became effective in October 2008. Ukraine's exports to Kazakhstan consist mainly of machinery, mechanical appliances, some cooking products and dairy produce. Kazakhstan's exports to Ukraine consist of mineral fuels, mineral oils and products of their distillation, zinc and articles thereof, iron and steel, and fertilisers.

  7. Kyrgyzstan-Ukraine: This agreement became effective in January 1998. Ukraine's exports to Kyrgyzstan include pharmaceutical products, machinery, sugar and sugar confectionery, and cocoa. Kyrgyzstan's exports to Ukraine consist of raw hides and skins, mechanical appliances, electrical machinery and equipment, and glass.

  8. Tajikistan-Ukraine: This agreement became effective in July 2002. The main items Ukraine exports to Tajikistan are sugar and sugar confectionery, cocoa and products thereof, paper and cardboard, and pharmaceutical products. Tajikistan's exports to the Ukraine consist mainly of fruits and nuts.

  9. Turkmenistan-Ukraine: This agreement became effective in November 1995. The main items Ukraine exports to Turkmenistan are sugar, dairy produce, cocoa and cocoa preparations, and articles of iron and steel. Turkmenistan's exports to the Ukraine consist mainly of mineral fuels, mineral oils and products of their distillation, plastics and articles thereof, cotton, and machinery.

  10. Uzbekistan-Ukraine: This agreement became effective in January 2006. Uzbekistan's imports from Ukraine mainly consist of iron and steel, the products of the light and chemical industries, as well as agricultural products. Uzbekistan supplies to Ukraine various types of engineering products, chemical products, pharmaceuticals and agricultural products.

  11. CIS Free Trade Area: Coming into effect in September 2012, this agreement created a trade area between Russia, Ukraine, Belarus, Uzbekistan, Moldova, Armenia, Kyrgyzstan, Azerbaijan, Turkmenistan, Tajikistan and Kazakhstan. CIS states remain key trade partners, but Russia has suspended the application of the FTA for bilateral trade with Ukraine, meaning that barriers have been raised with the country's largest trade partner.

  12. European Free Trade Association (EFTA)-Ukraine FTA: Signed in June 2010, this comprehensive FTA with the four member countries (Iceland, Liechtenstein, Norway and Switzerland) of the EFTA came into force in June 2012 and includes trade in goods (industrial and processed agricultural goods, fish and other marine products), trade in services, investment, protection of intellectual property rights, government procurement and provisions on competition. Bilateral arrangements on agricultural products between the individual EFTA states and Ukraine also form part of the instruments establishing the free trade area on both sides.

  13. Canada-Ukraine: Upon the agreement's entry into force in August 2017, Ukraine eliminated tariffs on approximately 86% of its recent imports from Canada, with the balance of tariff concessions to be implemented over periods of up to seven years. This includes elimination of tariffs on all Canadian exports of manufactured goods, fish and seafood, and the elimination of the vast majority of Ukraine's agricultural tariffs. Key product areas benefitting from either immediate or eventual duty-free access include beef, pulses, grains, canola oil, processed foods, animal feed, frozen fish, caviar, certain articles of iron and steel, industrial machinery, plastic products, and cosmetics. Tariffs will also be eliminated on fresh and chilled pork, while frozen pork as well as certain pork offal and fat will benefit from an annual duty-free tariff rate quota that exceeds current exports by a large margin. Canada will eliminate tariffs on 99.9% of imports from Ukraine. This includes the elimination of tariffs on all manufactured goods, fish and seafood, and 99.9% of agricultural imports into Canada from Ukraine. Key products from Ukraine that will benefit from this duty-free access include sunflower oil, sugar and chocolate confectionery, baked goods, vodka, iron and steel, apparel, ceramics, and minerals. The trade flows currently are not high, but the agreement will facilitate greater trade.

  14. EU-Ukraine Deep and Comprehensive FTA (DCFTA): This agreement established a free trade area between the EU and Ukraine. A DCFTA is part of each country's EU Association Agreement, and this particular one allows Ukraine access to the European Single Market in selected sectors and grants EU investors in those sectors the same regulatory environment in the associated country as in the EU. The agreement with Ukraine was provisionally applied since January 1, 2016 and formally came into force on September 1, 2017. Ukraine exports to the EU are raw materials (iron, steel, mining products, agricultural products), chemical products and machinery. The main EU exports to Ukraine include machinery and transport equipment, chemicals, and manufactured goods.

Under Negotiation

Ukraine is currently discussing a potential bilateral FTA with Turkey.

Sources: WTO Regional Trade Agreements database, Fitch Solutions, EFTA, Ministry of Foreign Affairs of Ukraine

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Ukraine FDI stock
Graph: Ukraine FDI stock
Graph: Ukraine FDI flow
Graph: Ukraine FDI flow

Source: UNCTAD
Date last reviewed: March 12, 2019

7.2 Foreign Direct Investment Policy

  1. Foreign companies are restricted from owning agricultural land, manufacturing rockets, producing bio-ethanol as well as some publishing activities. The presence of state-owned, often heavily subsidised enterprises in many areas of the economy, particularly energy and mining, is also a deterrent to foreign involvement in those sectors.

  2. There are local content requirements in wind, solar and biomass power plants, certified as completely built-up and compliant with building regulations after July 1, 2013.

  3. In addition, Ukrainian law authorises the government to set limits on foreign participation in strategically important areas. In 2013 Ukraine prohibited foreign ownership of media. There was also previously a moratorium on agricultural land sales to foreign investors (which remained in effect until January 2018).

  4. Ukraine has bilateral investment treaties (BITs) in force with more than 50 countries or economic unions, such as the Belgium-Luxembourg Economic Union. It has signed a further 16 BITs that have not yet come into force and is in negotiations with Algeria over another.

  5. Ukraine signed a Trade and Investment Cooperation Agreement with the United States in April 2008. The agreement established a joint council on trade and investment which addresses a wide range of related issues including market access, intellectual property, labour and environmental laws.

Sources: WTO – Trade Policy Review, ITA, US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Ukraine does not maintain special or free economic zones (SEZs or FEZs)- Ukraine offers generous depreciation rates for most fixed assets, including property, plant and equipment for both foreign and domestic investors.

- Until 2021, newly established taxpayers can benefit from ‘tax holidays’ as long as they have an annual income of UAH3 million (or less) and if they meet a series of additional requirements. These include a payroll featuring at least two statutory minimum wages per employee and involvement in a priority area of the economy that the Ukrainian government is looking to incentivise, such as the export of IT products and services.

- Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company’s charter fund.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2019

  • Value Added Tax: 15%
  • Corporate Income Tax: 18%

Source: State Fiscal Service of Ukraine

8.1 Important Updates to Taxation Information

Transactions performed between a non-resident and its permanent establishment (for example, commercial representative office) in Ukraine are now considered controlled for transfer pricing purposes if their value exceeds UAH10 million (net of indirect taxes) for the corresponding tax (reporting) year.

8.2 Business Taxes

Type of TaxTax Rate and Base
Resident company: Corporate Income Tax (CIT)18% on profits (insurance companies additionally pay 3% on income from certain insurance premiums)
Resident company: Capital Gains TaxTaxed as CIT
Social security contributions (all employers)Locally paid salaries are subject to the unified social tax, borne by the employer at a flat rate of 22% and capped at 15 times minimal salary. Effective from January 1, 2019, the minimum monthly salary will increase from UAH3,723 to UAH4,170, which will in turn increase the monthly employer social security contribution cap from UAH55,845 to UAH62,550 for 2019.
VAT15% on the sale of almost all goods and services, but a reduced rate of 7% applies to medicines and specific medical goods, whereas export of goods and the supply of international transport services are zero rated.
Withholding Taxes (applied to non-residents unless a double taxation treaty provides otherwise)- 15% on dividend income
- 15% on royalties
- 15% on interest

Source: State Fiscal Service of Ukraine
Date last reviewed: March 12, 2019

9. Foreign Worker Requirements

9.1 Foreign Worker Permits

A work permit is normally issued for the period of employment indicated in the employment contract, but for not more than one year. A work permit can be renewed for the same term, for an unlimited number of times and free of charge. The employer bears the costs of about EUR200 per work permit. Regulations on employment conditions and access to basic social services are somewhat discriminative against regular migrant workers, and they are virtually non-existent for undocumented migrant workers.

9.2 Localisation Requirements

Foreigners can only be employed in positions for which no suitable candidate can be found domestically or within the region. Work permits are required for employees of a foreign company performing work or services in Ukraine aiming to fulfil contractual obligations of the foreign company vis-à-vis a Ukrainian contractor (provided that not more that 50% of employees engaged in fulfilling this contract are foreign nationals).

9.3 Visa/Travel Restrictions

Citizens of mainland China and Hong Kong, Australia and New Zealand require a visa, but citizens from some countries, including Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russia and Uzbekistan face no travel restrictions at all. EU citizens and those from Canada, the United States, Japan and the EFTA countries can stay up to 90 days in any 180-day period.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Caa2 (Stable)21/12/2018
Standard & Poor'sB- (Stable)19/10/2015
Fitch Ratings
B- (Stable)08/03/2019

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201720182019
Ease of Doing Business Index
80/19076/19071/190
Ease of Paying Taxes Index
84/19043/19054/190
Logistics Performance Index
N/A66/160N/A
Corruption Perception Index
130/180120/180N/A
IMD World Competitiveness60/6359/63N/A

Sources: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201720182019
Economic Risk Index RankN/A144/202141/202
Short-Term Economic Risk Score43.153.349.2
Long-Term Economic Risk Score40.843.945.7
Political Risk Index RankN/A179/202179/202
Short-Term Political Risk Score41.545.645.6
Long-Term Political Risk Score47.142.642.6
Operational Risk Index RankN/A117/201115/201
Operational Risk Score46.245.746.5

Source: Fitch Solutions
Date last reviewed: March 12, 2019

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
While Ukraine's economy is gradually recovering from the severe economic contraction in 2015, the economic and political situation remain precarious. Serious reforms are under way to address the fundamental problems in the Ukrainian economy. While the country has seen inflation gradually cool, the devaluation of the hryvnia has placed severe pressure on households, leaving savings and purchasing power significantly subdued compared with pre-crisis levels. Ukraine also faces high debt-servicing costs and the banking sector has experienced a sharp deterioration in asset quality on its foreign exchange loan books.

OPERATIONAL RISK
The operating environment in Ukraine has been severely dampened by the weak security situation in the east of the country as well as the accompanying deterioration in trade and diplomatic relations with Russia. However, with the shift in leadership since 2014, some key structural reforms have been undertaken. These reforms include significant fiscal consolidation, moving to a flexible exchange rate, reforming energy tariffs and social assistance packages, making public procurement more transparent, simplifying business regulations and restructuring the banking sector. The country has also moved towards establishing anti-corruption agencies and mandating asset disclosures for public officials. The country’s main assets are its strategic location and extensive human capital. Ukraine’s well-educated workforce provides a significant competitive advantage for firms, particularly if the risk of conflict eases in the quarters ahead. Going forward, Ukraine will need to advance reforms on multiple fronts to achieve sustainable recovery and shared prosperity.

Source: Fitch Solutions
Date last reviewed: March 12, 2019

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Ukraine short term political risk index
Graph: Ukraine short term political risk index
Graph: Ukraine long term political risk index
Graph: Ukraine long term political risk index
Graph: Ukraine short term economic risk index
Graph: Ukraine short term economic risk index
Graph: Ukraine long term economic risk index
Graph: Ukraine long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: March 12, 2019

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Ukraine score46.5
54.948.852.030.5
Central and Eastern Europe Average59.354.260.463.759.1
Central and Eastern Europe Position (out of 11)86888
Emerging Europe Average55.953.857.757.055.2
Emerging Europe Position (out of 31)241524
2128
Global Average49.649.749.949.049.8
Global Position (out of 201)1156510883164

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Ukraine vs global and regional averages
Graph: Ukraine vs global and regional averages
Country
Operational Risk IndexLabour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
Estonia71.1
59.1
76.4
72.1
77.0
Czech Republic70.9
57.7
67.9
73.7
84.5
Poland
69.6
55.6
69.4
75.0
78.4
Lithuania68.4
55.2
71.5
75.6
71.5
Latvia65.8
57.5
67.5
71.5
66.6
Hungary64.0
55.6
62.0
66.9
71.3
Slovakia63.3
49.7
66.5
63.4
73.5
Belarus57.1
56.5
58.5
63.4
49.9
Russia56.5
63.6
58.6
63.0
40.9
Moldova46.6
39.8
51.1
52.2
43.4
Ukraine46.554.9
48.8
52.0
30.5
Regional Averages61.8
55.0
63.5
66.3
62.5
Emerging Markets Averages46.7
48.1
45.5
47.4
46.0
Global Markets Averages49.6
49.7
49.9
49.0
49.8

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: March 12, 2019

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Ukraine

Graph: Major export commodities to Ukraine (2018)
Graph: Major export commodities to Ukraine (2018)
Graph: Major import commodities from Ukraine (2018)
Graph: Major import commodities from Ukraine (2018)

Note: Graph shows main Hong Kong imports from/exports to Ukraine (by consignment)
Date last reviewed: March 12, 2019

Graph: Merchandise exports to Ukraine
Graph: Merchandise exports to Ukraine
Graph: Merchandise imports from Ukraine
Graph: Merchandise imports from Ukraine

Note: Graph shows Hong Kong imports from/exports to Ukraine (by consignment)
Exchange Rate HK$/US$, average
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: March 12, 2019


2017
Growth rate (%)
Number of Ukrainian residents visiting Hong Kong50,977-2.4

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of European residents visiting Hong Kong1,929,824-0.2

Source: Hong Kong Tourism Board
Date last reviewed: March 12, 2019

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Ukrainian companies in Hong KongN/A
N/A
- Regional headquarters
- Regional offices
- Local offices

Source: Hong Kong Census and Statistics Department

11.3 Visa Requirements for Hong Kong Residents

Hong Kong SAR passport holders can enter Ukraine without a visa for up to 14 days.

Source: Embassy of Ukraine to the People's Republic of China
Date last reviewed: March 12, 2019

Content provided by Picture: Fitch Solutions – BMI Research
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