REBUILDING UKRAINE: INVESTMENT AND ECONOMIC MOMENTUM

21/10/2024

Sergii Regeliuk

Partner, Attorney at Law, Head of Dispute Resolution at NAZALI (Ukraine)

Yuliya Shapovalova

Corporate Counsel, Head of Kyiv Office

Olena Karakan

Legal Advisor at NAZALI (Ukraine)

 

ABSTRACT

The article outlines the strategic investment opportunities and challenges in Ukraine as it rebuilds from the ongoing conflict, as well as highlights the potential for substantial returns. Key reforms in tax and governance aim to enhance economic resilience, while private equity and international financial institutions have committed substantial resources. War risk insurance and free trade agreements with countries like Türkiye provide additional security for foreign investors. Early investment is framed as not only profitable but crucial to supporting Ukraine’s recovery and integration into the global market. Nazali Ukraine assists both multinational and domestic companies and private investors in seizing these opportunities.

Keywords: Investment, Tax Reforms, Currency Restrictions, War Risk Insurance, FTA

INTRODUCTION

Investing in Ukraine is not just important; it is an absolute necessity to aid its recovery and reconstruction. This is not merely about Ukraine’s benefit—it’s about contributing to broader global stability and prosperity. Ukraine, despite facing a brutal and large-scale invasion, still manages to offer a compelling investment opportunity due to its significant consumer market and strategic European location. Its resilience is commendable, having shown substantial progress in aligning with EU market standards and regulatory frameworks. The current reforms are not optional; they are essential for economic survival and future growth.

Between 2023 and 2024, talk has shifted to action. Investment programmes and insurance mechanisms are no longer just plans on paper—they are being implemented. The use of digital technology has been crucial in improving transparency and governance, while 90% of the EU-required reforms have been completed. Accession negotiations are underway, and the private sector is finally stepping up and investing.

In the summer of 2024, the Ministry of Economy of Ukraine released the Ukraine Investment Guide[1] and announced the transition of the Ukrainian Business Development Fund into a fully independent development finance institution. Ukraine, together with 31 international partners, launched the SME Resilience Alliance to improve access to finance for small and medium-sized enterprises in the country. The commitments to the alliance amount to over €4.5 billion for new SME programmes.

By and large, nearly $1 trillion[2] has been pledged by international financial institutions (IFIs) and governments for aid and reconstruction. Private equity firms, including BlackRock and JPMorgan Chase, have established Ukraine-focused funds and designated state support programmes.

Top financial institutions like the EBRD, DFC, European Investment Bank, and World Bank are offering loans and investment support, while MIGA, DFC, EBRD, and the governments of the UK, Germany, France, and Japan are stepping in with war risk insurance to protect investors.

The Ukrainian Government’s efforts to attract investment are laid out in the following initiatives:

• The State Reconstruction and Development Agency;
• The Programme of State Support for Investment Projects in Ukraine;
• The Ukraine Development Fund;
• UkraineInvest (Ukraine Investment Promotion Office);
• The Affordable Loans 5-7-9% scheme, alongside Affordable Factoring and Financial Leasing initiatives;
• Public-Private Partnership concessions and related legislative reforms.

These measures are not just for show—they are urgent steps in a race against time to rebuild a nation ravaged by war.

WHY BOTHER INVESTING?

• Rebuilding is Massive: The war has left Ukraine in ruins across almost every sector—crumbling infrastructure, shattered housing, strained energy supplies, and disrupted agriculture. The scale of reconstruction is immense, and it’s clear that the country needs every penny it can get. Early investors have the chance to jump in when the need is greatest, securing lucrative long-term gains while others hesitate.
• Growth is Inevitable: If Ukraine manages to claw its way back from this devastation, the economic growth will be substantial, fuelled by international aid, reconstruction efforts, and overdue reforms. For those willing to get in now, the payoff will be huge. Wait too long, and you’ll miss the surge.
• Get in Before Everyone Else: Investing before the war even ends is not for the faint-hearted, but it’s how you establish yourself ahead of the competition. You’ll be positioning yourself to grab the choicest opportunities while others sit on the sidelines, reluctant to take risks.
• EU Membership Could be a Game-Changer: Ukraine is making real progress towards EU accession, which is set to be a major catalyst for further reform and modernisation. Investing now means aligning with future EU standards and regulations, making the integration into the European market much smoother when the time comes.

TAX REFORMS DURING WARTIME

Ukraine’s struggle for economic stability and EU membership hinges on tough reforms and international aid. These changes are not just desirable; they’re essential for the country to stay afloat during the war and rebuild afterwards. The government has laid out a tax plan to funnel more than UAH 500 billion into defence, with 60% earmarked for military salaries and the rest for other critical needs. According to the Finance Minister, three-quarters of this amount will come from internal loans and budget surpluses, thanks to cracking down on the shadow economy. The rest? That’ll be squeezed out of new tax policies, because Russia’s invasion has left little choice.

The proposed plan breaks down as follows:

• Internal loans and budget surpluses (UAH 361.6 billion): This includes hefty contributions from government bonds (UAH 220.1 billion) and better-than-expected budget performance in early 2024 (UAH 75.8 billion).
• Revised taxes and military levies (UAH 138.7 billion): The government plans to hike excise duties on tobacco and fuel, slap a new tax on sugary drinks, and boost the military levy from 1.5% to 5% on personal income. Even small business owners won’t be spared, facing a 1% turnover tax. And if you think you can avoid it by sticking to non-essentials, think again—taxes on bank metals, real estate sales, mobile services, and new cars are all going up, too. Meanwhile, banks will continue facing a punishing 50% corporate tax rate, with financial companies (except insurers) seeing a 25% rate.

Businesses may accept that more defence funding is needed, but there’s no hiding their frustration. Compliant firms are being stretched thin, while those lurking in the shadows continue to benefit from more favourable conditions. The risk of investor withdrawal is real, given the unpredictable tax landscape.

The Ministry of Economy insists that maintaining macroeconomic stability is non-negotiable for resilience and recovery. From 2025 to 2027, the focus will be on squeezing out more domestic revenue, even as Ukraine continues to rely on external donors. As part of the 2025-2027 Budget Declaration, the government has pledged to find new funds for defence and to tighten spending.

Further measures include tackling the shadow economy, bringing excise taxes in line with EU rules, and rolling out advance tax payment legislation.

The broader fiscal reforms are expected to bring in an extra 3-4% of GDP to support defence, social needs, and rebuilding. In the medium term, there’s talk of overhauling carbon tax regulations, rethinking extractive industry levies, and setting rules for taxing virtual assets to meet EU and OECD standards.

The Tax Service claims it will win back public trust and better manage compliance risks, with a new system being tested from mid-2024, digital transformation plans due by the end of the year, and the use of anonymous taxpayer data by 2026. But whether they can pull this off without driving businesses away is anyone’s guess.

NAVIGATING CROSS-BORDER OPERATIONS IN UKRAINE: KEY REGULATORY INSIGHTS FOR FOREIGN INVESTORS

Since 24 February 2022, in response to the ongoing conflict, the National Bank of Ukraine (NBU) has implemented various restrictions on foreign currency transactions and several financial instrument operations to prevent capital flight, maintain financial stability, and support the stability of the Ukrainian hryvnia. Although these measures initially posed significant challenges for cross-border operations, the NBU progressively eased its foreign currency restrictions between 2022 and 2024. This was done to bolster the country’s economic recovery and stabilise the financial system, thereby allowing foreign investors with greater freedom to engage with the Ukrainian market.

Key Currency Operations Allowed for Businesses in Second Half of 2024:

• Tax Payments to EU Countries. Ukrainian e-commerce businesses registered as VAT payers in EU Member States are now permitted to transfer foreign currency (FC) to pay mandatory taxes and other payments in their country of registration. This regulation supports small and medium-sized businesses that export goods to EU markets.
• Reimbursement for Eurobond Coupon Payments. Companies that have no outstanding currency supervision issues in the past 12 months are allowed to reimburse affiliated non-resident entities for coupon payments made on Eurobonds from their own FC funds.
• Foreign Currency Transfers for Carbon Emission Quotas. State-owned companies can now transfer funds to non-resident entities to purchase carbon emission quotas, particularly for aviation activities. This measure is intended to support Ukraine’s defence procurement and enhance military-technical cooperation with Western partners.
• Payments under Reinsurance Agreements. The NBU has expanded the scope of permissible payments under reinsurance agreements, allowing state-owned companies to make all necessary payments under reinsurance agreements concluded with foreign nuclear pools.
• Dividend Payments. For the first time since the introduction of martial law, Ukrainian companies can now distribute dividends abroad to foreign investors for corporate rights or shares, provided these are accrued for the period starting 1 January 2024. The transfer limit is set at EUR 1,000,000 per calendar month.
• Payments for Intellectual Property Rights Protection. Ukrainian residents can now make payments related to the protection of intellectual property rights, including payments for services rendered by foreign patent offices or attorneys.
• Repayment of Loans/Credits Provided through International Organisations or Foreign Agencies. This includes credits or loans provided with the involvement of international financial organisations, foreign export credit agencies, or foreign states. Agreements with entities that have direct or indirect participation of a foreign state are also eligible.
• Repayment of Specific Overdue Loans and Interests Accrued During Specific Periods.

Foreign investors are now allowed to service debt under specific types of credit and loan agreements. The NBU allows for the repayment of principal and interest on loans or credits received after 20 June 2023, categorised as “New Investments”. This special relaxation was introduced to encourage fresh capital inflows into Ukraine.

Foreign investors looking to capitalise on “New Investments” terms must comply with the clear framework:

• Loans or investments must be transferred from abroad into the resident-borrower’s bank account in a Ukrainian bank after 20 June 2023.
• The annual interest rate on any transaction, excluding repayment of the loan/investment principal, must not exceed 12%.
• For loans under 1 year, principal repayment must come from the borrower’s own FC funds, not borrowed or bought from a resident entity.
• For loans over 1 year, the first year’s principal must also be repaid from the borrower’s own FC funds, with interest and fees payable using own or purchased FC, following NBU procedures.

Creditors that do not meet the eligibility criteria for these “New Investment” opportunities currently have limited options for debt repayment. However, they may consider alternative strategies such as debt-to-equity swaps, reinvestment in Ukraine, or using corporate investment funds as dividends repayment instrument. Foreign investors are encouraged to seek advice from local legal and financial experts to ensure full compliance with the evolving NBU regulations.

WAR RISK INSURANCE

The Ukrainian government has had no choice but to introduce war risk insurance regulations to give investors some semblance of security. On 1 January 2024, Law No. 3497-IX came into effect, allowing the Export Credit Agency (ECA) to offer insurance for investments in Ukraine against war and political risks. Following up on this, on 9 April 2024, the Cabinet of Ministers rubber-stamped the list of risks covered and laid out the terms for insurance by the ECA.

The risks are extensive, as one might expect in a war-torn country. War risks include: (a) military conflict, such as war, armed aggression, and mass riots; (b) violent upheaval, including coups and seizures of power; (c) acts of terrorism and sabotage; and (d) occupation and annexation. Political risks are just as grim: (a) state confiscation of business property; (b) arbitrary licence revocation or forced business closure by state officials (unless it’s justified by law); (c) the state failing to honour legal or contractual obligations; (d) payment bans or moratoriums imposed by the state; and (e) restrictions on currency conversion or international transfers—unless the law makes an exception.

The insurance scheme is not open to just any investment. Here are the hoops investors need to jump through:

• The investment must be located in Ukraine, but forget about covering anything in active conflict zones or Russian-occupied territories. The Ministry of Reintegration will decide what qualifies as off-limits.
• The investment must directly contribute to building facilities or infrastructure necessary for the processing industry and exporting Ukrainian goods or services.
• Goods produced under the investment must be made or significantly processed in Ukraine according to the Customs Code (though there are exceptions, naturally).
• Any services or work exported must be carried out by Ukrainian businesses (with the usual exceptions).

Insurance contracts can cover multiple war and/or political risks, but don’t expect a standard rate. The ECA sets the insurance tariff for each contract based on its internal policies. The rest of the contract terms are up for negotiation, but must align with the law and the ECA’s rules.

UKRAINE-TÜRKIYE: FREE TRADE AGREEMENT AS FUTURE TOOL TO REBUILD UKRAINE

On 3rd of February 2022, the Free Trade Agreement (FTA) was signed between Ukraine and Türkiye. The ratification notice was published in the Official Gazette of Türkiye on 2nd of August 2 2024[3].

The agreement facilitates greater access for Ukrainian business to the Turkish market, particulalry for industrial and certain agricultural products. Additionally, it aims to attract Turkish investments and rebuild strategies for Ukraine’s economy. One such strategy includes the creation of industrial parks in Ukraine, modelled on Türkiye’s experience.

Regarding support for Ukraine’s domestic metallurgical sector, the country retains the right to impute a customs duty on scrap metals export. Meanwhile, Türkiye is opening its market to Ukrainian metals imposing a zero import duty on 510 out of 840 metallurgical products. Notably, a quota of 411 thousand tons has been established for 167 metallurgical products[4].

Zero Duty Rate.

• over 90% of Ukrainian industrial goods and about 8% of agricultural goods benefit from a 0% duty rate;
• there are transitional periods for certain product groups not initially covered by the zero rate;
• Türkiye will abolish import duties on a further 1.5% of industrial goods and 28.5% of agricultural goods after the transition periods of 3 to 7 years.

Moreover, the FTA will encourage Turkish companies to participate in the implementation of the Türkiye-Ukraine Task Force for the Reconstruction of Ukraine, which was mutually agreed upon in January 2024. The key focus areas of the task force include the restoration of road infrastructure and construction of temporary bridges and overpasses on key routes; development and restoration of water transport infrastructure; protection of critical infrastructure; reconstruction of housing; and aviation-related projects.

It is also noteworthy, that Ukraine has commited to the obligations related to used cars and second-hand products and 3- and 5-year transitional periods for obligations related to motor vehicles, and light industry products.

Regarding products manufactured from Turkish raw materials, they will be recognised as Ukrainian-made, enabling them to be exported duty-free to all European countries in accordance with the EUR1 certificate.

ENCOURAGEMENT

International support bolsters Ukraine’s investment landscape, with war risk insurance and private equity funds offering security for businesses. Ukraine’s push for clean energy and tech reforms, particularly in renewables, positions it as a key player in Europe’s energy transition. Early investors are at the forefront of this shift towards sustainability.

Ukraine’s recovery reflects resilience and future growth, with EU membership goals, economic reforms, and strong global backing fostering a favourable environment. Investing not only offers rewards but also supports Ukraine’s recovery and integration into global markets.

We, at Nazali Ukraine, are helping companies inside and outside Ukraine, both multinational and Ukrainian, in their efforts to operate and succeed in the Ukrainian market across all sectors.

 

[1] Ministry of Economy of Ukraine and Kyiv School of Economics, “Investment Guide Ukraine”, Last Access Date: 9 October 2024

https:// 66673120c02fe81b61d75096_Ukraine Investment Guide 2024 (2)_compressed.pdf (website-files.com)

[2] Ukraine Invest, “Ukraine Reconstruction May Cost $1.1 Trillion”, Last Access Date: 17 October 2024 https://ukraineinvest.gov.ua/en/news/27-06-22-1/

[3] Resmi Gazete, “Türkiye Cumhuriyeti Hükümeti ile Ukrayna Hükümeti Arasında Serbest Ticaret Anlaşması”, Erişim Tarihi: 10 Ekim 2024, https://resmigazete.gov.tr/eskiler/2024/10/20241004M1-1.pdf

[4] Ministry of Economy of Ukraine, “The government approves the Free Trade Agreement between Ukraine and Turkey”, Last Access Date: 11 October, https://me.gov.ua/News/Detail?isSpecial=True&lang=en-GB&title=TheGovernmentApprovesTheFreeTradeAgreementBetweenUkraineAndTurkey