This Review has been undertaken under the aegis of the OECD Investment Committee and as part of the OECD-Eurasia Competitiveness Programme, for which the Swedish International Development Agency and the Polish government have provided financial support. OECD Investment Policy

The 2011 OECD Investment Policy Review of Ukraine assesses the country’s ability to comply with the principles of liberalisation, transparency and nondiscrimination and to bring its investment policy closer to recognised international standards such as the OECD Declaration on International Investment and Multinational Enterprises (MNEs). Based on the OECD Policy Framework for Investment, the Review considers the interaction and coherence of investment policy with other areas such as investment facilitation, trade and competition policy as well as responsible business conduct practices critical for enhancing the investment climate. It also highlights specific challenges faced by Ukraine to attract investment in support of energy efficiency. The Review shows that Ukraine has made progress in developing a legal framework for attracting foreign direct investment (FDI), but implementation problems continue to affect domestic and foreign investors alike and prevent the country from mobilising private investment commensurate with its economic potential and investment needs.

In line with recent world investment trends, Ukraine’s FDI inflows declined considerably in 2009 and picked up in 2010 but remain below pre-crisis levels. Financial services and manufacturing together absorb 62% of the total FDI stock. EU27 countries are the main source of Ukraine’s FDI, representing over 75% of the total stock. Foreign investors participated in a number of privatisation deals, particularly in the metallurgical sector. The 2010 government reform programme stresses the contribution of foreign investment not only as a source of external financing but also as a market transformation and competition-enhancing tool and encourages increased participation of foreign investors in the revamped privatisation process.

Ukraine’s legislation embodies the principle of non-discrimination of foreign investment and general provisions on foreign investment protection. Its legal framework provides for national treatment for firms’ establishment, but despite recent efforts to enhance the country’s business environment foreign investors have often been discouraged by complex, protracted and costly procedures and resulting regulatory uncertainty. Ukraine applies several transsectoral and sectoral restrictions on foreign investment which qualify for the list of exceptions to national treatment and measures reported for transparency in the meaning of the OECD Declaration on International Investment and Multinational Enterprises. Taking into account the existing statutory FDI restrictions, Ukraine’s score under the OECD FDI Restrictiveness Index is higher than the OECD members’ average but lower than the average of non-OECD countries covered by the Index. Ukraine’s score considering formal FDI restrictions as captured by the Index contrasts, however, with a poor perception of its investment climate in most international comparisons which assess actual implementation of existing laws and regulations.

Based on the OECD Policy Framework for Investment (PFI), this chapter analyses the contribution, interaction and coherence of selected policy areas in support of a sound investment environment. It shows that while Ukraine has made progress in several areas covered, notably investment policy transparency and predictability, investment promotion and facilitation and trade policy, more remains to be done in particular with respect to policy implementation, pol icy dialogue and streamlining of administrative procedures to reduce the risks of administrative discretion and hence the possibility of corruption. The recent establishment of the new State Agency for Investments and National Projects and the reorganisation of the Council of Local and Foreign Investors should permit to enhance the country’s investment promotion activities and improve policy dialogue between the government and investors. Public policies promoting principles for responsible business conduct, such as those embodied in the OECD Guidelines for Multinational Enterprises, contribute to attracting investment in support of sustainable development. But in many relevant areas, both public awareness and responsible business practices are still less common in Ukraine than in other emerging economies.

Ukraine faces specific challenges in attracting energy investment required to reduce its currently high energy intensity, increase its energy production and upgrade its deteriorating energy infrastructure. Energy efficiency efforts and investment have been hampered by distortions in energy price setting and by an energy market structure dominated by state-owned firms. The June 2010 economic reform programme addresses these critical issues and sets objectives for accelerating privatisation in the energy sector and for gradually adjusting energy prices to the market level. Ukraine has developed a basic policy framework in support of environmentally friendly energy resources and technologies, but in the absence of energy price reforms the incentives for such investment have been limited.