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 crucial for supporting the recovery and rebuilding efforts, which, in turn, contributes to global stability and prosperity. Ukraine offers a unique strategic investment opportunity with its significant consumer market and strategic geographical location within Europe. Despite the unprecedented challenges from the full-scale invasion, Ukraine has shown remarkable economic resilience and made strides in market access and regulatory alignment with the EU. The ongoing reforms lay the groundwork for substantial economic growth.

Between 2023 and 2024, support for Ukraine’s reconstruction has moved from planning to tangible actions. Investment programmes and insurance mechanisms have been implemented, and Ukraine has used digital technology to improve transparency and governance. Ukraine has completed 90% of the EU-required reforms, and accession negotiations have begun. The private sector has also started investing actively in Ukraine.

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-tier financial institutions like the EBRD, DFC, European Investment Bank, and World Bank offer loan and investment programmes for Ukraine, while MIGA, DFC, EBRD, and the governments of the UK, Germany, France, and Japan provide war risk insurance for investments.

Government of Ukraine Programmes and Initiatives:

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

WHY INVEST?

Extensive Reconstruction Scope: The war has created substantial reconstruction needs across sectors, including infrastructure, housing, energy, and agriculture. Early investors can participate in the initial rebuilding efforts, gaining long-term returns.
High Growth Potential: Post-war Ukraine is expected to experience significant economic growth driven by reconstruction efforts, international support, and structural reforms. Investing now positions investors to benefit from this growth trajectory.
Prime Entry Opportunity: Investing in Ukraine before the war ends positions investors as early movers, allowing them to capitalise on opportunities and establish a foothold in the market ahead of the competition.
EU Accession Prospects: Ukraine’s progress toward EU accession presents a core anchor for further reforms and modernisation. Early investment allows businesses to benefit from aligned standards and regulations, facilitating smooth integration into the European market.

TAX REFORMS IN UKRAINE DURING WARTIME

Ukraine’s journey towards economic stability and EU integration is contingent upon critical reforms and international financial support. These measures aim to boost Ukraine’s economic competitiveness and resilience, both of which are vital for wartime efforts and post-war recovery.

Government proposals, discussed with business representatives, aim to bolster the state budget through taxation, adding over UAH 500 billion for defence, with 60% allocated for military salaries and 40% for critical expenses. The Finance Minister stated that three-quarters of the needed funds will be sourced from internal loans and budget surpluses, primarily achieved through economic de-shadowing. The remaining quarter will be secured through revising tax policies, a necessary response to Russia’s invasion.

The proposed financing plan includes:

• Internal loans and budget surpluses (UAH 361.6 billion), including contributions from government bonds (UAH 220.1 billion) and budget overperformance in the first half of 2024 (UAH 75.8 billion).
• Revising military levies, excises, and other measures (UAH 138.7 billion). This includes raising excise taxes on tobacco and fuel and introducing an excise tax on sugary drinks. The military levy is planned to rise from 1.5% to 5% on personal income and to be introduced to individual entrepreneurs (third group) at a rate of 1% of turnover. The military levy is also expected to apply to specific transactions such as the purchase of bank metals (5%), real estate sales (5%), mobile services (5%), and new car registrations (15%). Additionally, the corporate profit tax rate for banks is expected to remain at 50% for 2024, while for financial companies (excluding insurers) it is planned to be set at 25%.

Businesses acknowledge the need for additional defence resources but highlight the potential burden on compliant enterprises, risking investor withdrawal due to unpredictable and non-competitive conditions compared to those in the shadow economy.

Furthermore, the Ministry of Economy emphasises that macroeconomic stability is essential for economic resilience and recovery. For 2025-2027, it aims to enhance domestic revenue generation while continuing to rely on external donors. In preparing the 2025-2027 Budget Declaration, the government committed to securing additional revenues for defence and implementing reforms to enhance spending efficiency.

Additional measures include combating the shadow economy, introducing excise duties aligned with EU directives, and developing advance tax payment legislation.

Fiscal reforms aim to mobilise an additional 3-4% of GDP in revenues for defence, social protection, and recovery. Medium-term plans involve reforming carbon emissions taxation, reassessing extractive industry taxes, and defining virtual asset taxation principles in line with EU/OECD standards.

The Tax Service reforms will focus on public trust and compliance risk management, with a new compliance risk management system piloted in mid-2024, digital development plans by the end of 2024, and the use of anonymous taxpayer data by 2026.

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 (FX) 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 FX 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 FX 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 FX funds, with interest and fees payable using own or purchased FX, 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 RELATED INSURANCE

 To further guarantee protection and provide investors with reliable mechanisms, the Government of Ukraine has implemented regulations that enable war risk covering and insurance. That said, on 1 January 2024, the Law of Ukraine No. 3497-IX came into force, which authorised the Export Credit Agency (the "ECA") to insure investments in Ukraine against war and political risks. To implement the changes provided for by this Law, on 9 April 2024, the Cabinet of Ministers of Ukraine approved the list of war and political risks, as well as the terms and procedure governing their insurance by the ECA.

War risks include the following insurance risks: (a) military conflict, including war and armed conflict, armed aggression, hostilities, and mass riots; (b) violent change or overthrow of the constitutional order or seizure of state power; (c) terrorist acts and/or sabotage; (d) occupation, annexation.

At the same time, the following insurance risks are classified as political risks: Political risks include the following: (a) state seizure of business property; (b) unjust licence revocation or forced business closure by state authorities, unless due to legal non-compliance; (c) the state’s failure to meet legal, strategic, or contractual obligations; (d) imposition of payment bans or moratoriums; and (e) inability of currency conversion or transfer of currency abroad by a business entity, except in cases specified by the law. 

Terms and Procedure for Insuring War and Political Risks.

Investments and investment loans can be insured against war and political risks subject to the following requirements:

• the investment object (facilities and infrastructure for which an investment loan is granted) must be located on the territory of Ukraine, except for areas where military operations are ongoing as of the insurance contract date and territories temporarily occupied by the Russian Federation, according to the order of the Ministry of Reintegration of Temporarily Occupied Territories of Ukraine;
• the purpose of the direct investment (investment loan) must be to create facilities and infrastructure necessary for the development of the processing industry and export of goods (works, services) of Ukrainian origin;
• goods to be exported as a result of the investment must be fully produced or sufficiently processed in Ukraine in accordance with the criteria established by the Customs Code of Ukraine (subject to exceptions); and
• works and services to be exported as a result of the investment must be performed and provided by Ukrainian resident business entities (subject to exceptions).

An insurance contract can cover one or multiple war and/or political risks. The ECA determines the insurance tariff for each individual contract according to its tariff policies. Other terms of the insurance contract are agreed upon by the parties, subject to the provisions of the law and the ECA's insurance policies.

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